VAT Ruling No. 008-99

January 19, 1999 VAT RULING NO. 008-99 Sec. 108-044-98-008-99 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated March 9, 1996 requesting confirmation of your opinion that the telecommunications, information processing and transmission, and all related services rendered by your client, Societe Internationale de Telecommunications Aeronautique (SITA) to its members, which are international airline companies, are entitled to the zero percent (0%) value-added tax under Section 102(b)(4), old NIRC, as amended, now Section 108 of the Tax Code of 1997. It is represented that SITA is a cooperative society composed of international airline companies; that it operates as a non-profit entity for the exclusive benefit only of its members, that the size of participation of any member in the capital of the society will be proportional to its participation in the shared expenses attributable to the services supplied by SITA; that SITA operates a branch in the Philippines as a non-stock and non-profit entity to service exclusively its members operating in international air transport in the Philippines; that it is a VAT-registered entity, that its member airline companies are billed by the SITA head office based on their participation vis-a-vis the services supplied by SITA through the said branch; that the head office then remits to the branch the respective local participation cost of the member airline companies; that SITA renders telecommunication, information processing and transmission and all related services to member airline companies only. In reply, please be informed that our VAT Law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, in general, adheres to the Destination Principle or the Cross Border Doctrine. Under this doctrine, VAT exemption and VAT zero-rating are distinguished as follows: ". . . zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his PRICE or cut payments to his factors of production (capital and labor). This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero-rate." (Value-Added Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C., 1988, p. 51) "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade: the origin principle (exports taxable, imports exempt), or the destination principle (export exempt, imports taxable)." (Value-Added Tax (VAT) by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz: "the country taxes all value added, at home and abroad, on goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable. This is comparable with the consumption type VAT.") Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. In view thereof, your opinion that SITA's rendering of services to its aforementioned member international airline companies is entitled to the zero percent (0%) VAT is hereby confirmed, pursuant to the "Cross Border Doctrine" which is the underlying principle of our VAT System, considering that the said services are destined to, used or consumed outside the Philippine territory. (see BIR RULING NO. 044-98, dated November 26, 1998, in the case of PHIL. AIRPORT AND GROUND SERVICES, INC.) LibLex This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group