VAT Ruling No. 008-92

January 23, 1992 VAT RULING NO. 008-92 NIRC Sec. 100, 106 Precedent Ruling 000-00 Honorable Tomas I. Alcantara Undersecretary, Department of Trade & Industry and Vice- Chairman & Managing Head Board of Investments Industry and Investments Building 385 Gil J. Puyat Avenue (formerly, Buendia Ave. Ext.) Makati, Metro Manila Dear Undersecretary Alcantara : Referring to your letter dated January 5th, instant, received by this Office on January 15th, please be informed that a public hearing was held in this Office in the morning of January 16th in connection with the VAT law on indirect or constructive exports of goods, particularly with emphasis on the proposed revocation of Revenue Regulations No. 2-88 which provides, among others, that: "Sale of raw materials to export-oriented BOI-registered enterprises whose export sales, under rules and regulations of the Board of Investments, exceed seventy percent (70%) of total annual production, shall be subject to zero-rate . . ." for value added tax purposes. (Sec. 2, RR 2-88) The implication of the said proviso follows, viz. , the said suppliers of materials shall only be subject to zero percent (0%) VAT, hence, shall not pay value added tax on their aforementioned sales. In addition, the said suppliers shall be entitled to a refund of their input taxes attributable to the said sales transactions. The aforequoted proviso is premised on indirect export sales made by the said suppliers, i.e. , because their BOI-registered enterprises/buyers shall eventually export their finished products on which the said raw materials were used. On the other hand, Section 100(a) of the NIRC, as amended by the VAT law, limits the term "export sales" only to direct exporters and to local sales but qualified as foreign currency denominated sales. The said proviso of RR No. 2-88 is inconsistent with the VAT law. During the public hearing, your BOI representative in the person of Executive Director Escolastica B. Segovia presented the background of RR No. 2-88; that, it was a joint BIR-BOI effort; that, it was based on a higher government policy consideration; that, while under the VAT law, it is the direct exporter who is entitled to refund of input taxes attributable to his actual exportation, instead of the said suppliers, the said higher government policy consideration required the refund in advance, through the said raw materials suppliers rather than through the said direct exporters of finished goods, in order not to tie up the direct exporters' capital resources. AHcDEI In the said public hearing, this Office explained that the said proviso of RR No. 2-88 has no legal basis under the VAT law; but, nonetheless, because of the government policy consideration, we are temporarily not pursuing our plan to recommend the revocation of the proviso of RR No. 2-88. This Office also informed those present that a solution to this legal problem is already incorporated in the Administration Bill on VAT law refinements presently pending before the Senate for its approval. This proposed amendment would include indirect exports subject to zero percent VAT. Thus, this office also asked the various industries represented by those present in the public hearing as well as your Office, who always has the penchant of endorsing exemptions liberally by mere administrative interpretations, to assist also the BIR towards the final passage of this amendatory law so that those embraced under the said RR No. 2-88 may not, in the future, be again subjected to questions, as we do believe they would be. In a nutshell, we are amenable to temporarily maintain the status quo , viz : 1. In general, for purposes of the term "export sales", only direct export sales and foreign currency denominated sales, shall be qualified for zero-rating. 2. Exception . Sale of raw materials to export-oriented BOI-registered enterprises whose export sales, under rules and regulations of the Board of Investments, exceed seventy percent (70%) of total annual production, shall also be subject to zero rate for VAT purposes, pursuant to Section 2 of RR No. 2-88. 3. In fairness, indirect or constructive export sales arising under Articles 23 and 77, if the sales of suppliers are substantially to exporters and there are proofs of actual exportation and payment in foreign currency may be submitted for processing and shall be acted upon by this Office on a case to case basis and for the same reasons justifying RR No. 2-88. 4. Local sales of goods which, by fiction of law are considered export sales (e.g., the Export duty law considers sales of gold to the Central Bank of the Philippines, as export sale). This transaction shall not be considered export sale for VAT purposes. 5. The amount of input tax refund allowable to the aforementioned suppliers of raw materials to BOI-registered enterprises, pursuant to RR No. 2-88, shall only be restricted to the percentage of export sales of the BOI-registered enterprise, duly established and endorsed by the BOI at the time the supplier of raw materials applied for zero-rating. Thus, if in the said BOI-endorsement, the applicant/supplier will sell raw materials to a BOI-registered enterprise whose export sales, per the BOI endorsement, is only 71% of its annual production, the supplier's input tax refund shall be limited only to his input taxes attributable to the said 71% export sales record of his buyer-BOI registered enterprise. No input tax refund shall be granted to the said supplier to the extent of the balance of 29%. Example : Granting that the supplier's input taxes on sales made to a qualified BOI-registered enterprise amounts to P100.00 and, granting, that the said enterprise's export sales record is only 71%, only 71% of the said input taxes (or P71.00) shall be considered refundable to the said supplier. In tax auditing suppliers' claims for refund of input taxes attributable to sales made to the said BOI-registered enterprises, our tax audit examiner shall determine from the BOI whether or not, during the period covered by sales made to a BOI-registered enterprise, the said enterprise's percentage of export sales record still remained at the rate covered by the aforementioned BOI endorsement. Thus, if during the said period, the said enterprise's export sales record dropped to 70% or below, based on its total annual production, input tax refund shall only be allowed to the extent of the percentage of actually exported portion. Conversely, if the said export sales record of the said enterprise, during the period covered by sales made by the said supplier, had increased, the input tax refund of the said supplier shall be computed, based on the said increased percentage ratio. We want to emphasize that in all cases of indirect export, the supplier of raw materials, to qualify, must show that substantial portion of their sales are to exporters. This should probably be the plus 70% Rule adopted by the BOI and by RR No. 2-88. May we also call your attention and remind you that taxpayers should not be made to expect from or rely on the administrative agencies to extend to them tax exemptions by mere interpretation. The basic tax principle remains that exemptions shall be strictly construed against the taxpayer and it is only Congress who can grant the same by a clear provision of law. All Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn, modified or superseded. IaHAcT Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue