Asecasia Incorporated

April 22, 2009 VAT RULING NO. 006-09 Sec. 4.108-5 (a); RR 16-2005; RR 4-2007; DA-376-2006 Asecasia Incorporated 12/f Asian Star Bldg. Filinvest Corporate City Alabang, Muntinlupa City Attention: Hector E. Juliano Accounting Manager Gentlemen : This refers to your letter dated April 23, 2007 requesting for a ruling as to whether or not your VAT zero-rated status may exempt you from the 12% VAT your suppliers impose on their sales to you. ACTIHa It is represented that Asecasia Incorporated ( "Asecasia" for brevity) is a firm engaged in encoding services, rendering services to foreign clients, and is paid by these clients in foreign currency. It is further represented that by virtue of BIR Ruling DA-376-2006, dated June 6, 2006, Asecasia's sales of encoding services to its foreign clients were found to be VAT zero-rated, pursuant to Section 4.108-5 (b) (2) of Revenue Regulations (RR) No. 16-2005. Apparently, Asecasia now claims that since the above encoding services were entitled to VAT zero-rating, its input tax on its purchases from its suppliers only accumulates with no output VAT to offset the former. Furthermore, the only way it could seemingly recover the input VAT on such purchases is through tax refunds. In this regard, Asecasia requests confirmation from this Office that it is also entitled to exemption from the 12% VAT its suppliers pass on to it, especially considering that from July 2005 to January 2007, its accumulated input VAT has already reached P5,400,000.00, with no remedy available to it to offset such amount other than the abovementioned refund. In reply, please be informed that Section 4.108-5 (a) of RR 16-2005, as amended by RR 4-2007, provides that: "SEC. 4.108-5. Zero-Rated Sales of Services. (a) In general A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations. xxx xxx xxx Under DA-376-2006, Asecasia's sales of encoding services to its foreign clients were qualified as VAT zero-rated transactions once said services are paid for in foreign currency and are accounted for through our local banking system. In addition, it is evident from the abovequoted provision that as VAT zero-rated transactions, the input tax on purchases of goods, properties or services related to such sales shall be available as tax credit or refund. This effectively debunks Asecasia's assertion that the only recourse available to it is to claim for tax refund to offset its growing input VAT, considering that Section 4.108-5 (a) of RR 16-2005 expressly provides for tax credit as another option in this regard. DHAcET Moreover, Asecasia is liable to pay 12% VAT on its purchases of goods and services from its suppliers because said tax is an indirect tax which can be passed on or shifted by the latter as part of the cost of the goods sold/services rendered to it. As discussed above, RR 16-2005 provides for tax credit or refund options for the input VAT on Asecasia's zero-rated sales of encoding services, not VAT exemption. There is also nothing to indicate that the goods, properties or services Asecasia purchases from its suppliers fall within the enumerated VAT-exempt transactions under Section 109 of the Tax Code of 1997, as amended by R.A. 9337. Thus, there is absolutely no ground for Asecasia to claim that it is entitled to VAT exemption on such purchases. Accordingly, this Office denies your request for VAT exemption for lack of legal basis. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner