VAT Ruling No. 009-99

January 21, 1999 VAT RULING NO. 009-99 106 (A) (2) (a) (5); 108 (B) (3)-040-98-009-99 Bases Conversion and Development Authority Officer's Club House (Old Building) Gozar Street corner Lucas Street Villamor Air Base, Pasay City Philippines Attention: Mr . Rogelio L . Singson Chairman Gentlemen : This refers to your letter dated 31 August 1998 requesting, for VAT purposes, a certificate of tax exemption for Camp John Hay Development Corporation (CJHDevCo) for the effective zero rating of their purchases of raw materials, capital goods, equipment and services. It is represented that pursuant to Proclamation No. 420 s. 1994, the John Hay Special Economic Zone (JHSEZ) which covers an area of 288.1 hectares of the former Camp John Hay reservation shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act 7227; that the Bases Conversion and Development Authority (BCDA) awarded a 25-year lease to CJHDevCo for the development of the tourism estate of the JHSEZ; and that as per Certificate of Registration of CJHDevCo, it was granted all the applicable benefits under R.A. 7227 as well as all other applicable regulations that may be promulgated by proper authorities. In reply, we hereby confirm that the incentive provisions found in of R.A. 7916, the act creating the Special Economic Zone is likewise applicable to JHSEZ by direct provision of the law. Section 23 thereof provides that "Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987." Likewise, under Article 77(2) of the Omnibus Investments Code, it is provided that "Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone, shall be considered as export sale and the exporter thereof shall be entitled to the benefits allowed by law for such transaction." In relation thereto, Section 106(A)(2)(a)(5) of the Tax Code of 1997 provides that export sales by VAT-registered person shall be subject to zero percent (0%) rate and that the term 'export sales' include "those considered as export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987 and other special laws". llcd Accordingly, the sales of goods (raw materials, capital goods, equipment and other merchandise) by VAT-registered suppliers in the Customs Territory to JHSEZ registered enterprises, such as the CJHDevCo, shall be treated as export sales subject to zero percent (0%) VAT. However, this is subject to the condition that a prior permit for zero rating is first obtained pursuant to Section 4.107-1(d) of Revenue Regulations No. 7-95, as amended. Without an approved application for effective zero-rating, the transaction shall be merely considered exempt, in which case the VAT-registered seller shall not be entitled to the benefit of input tax relative to the transaction. However, with respect to the supply of services to CJHDevCo, the same shall be governed by the following provisions of laws and regulations: Section 108(B)(3) of the Tax Code of 1997 (formerly Section 102, NIRC) provides that: "(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." The above-quoted provision of law is implemented by Section 4.102(C) of Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services. Effectively zero-rated sales of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemption from indirect taxes under subpar. (b), Nos. (3), (4) and (5) of this section." (Emphasis supplied). VAT is a form of indirect tax. But there is no existing provision under Republic Act No. 7916 nor in Republic Act No. 7227 that enterprises registered pursuant to the provision of the said laws may be considered exempt from indirect taxes. Hence, strictly speaking, the sales of services to such enterprises may not legally qualify as effectively subject to zero percent (0%) VAT under the above quoted provisions of Revenue Regulations No. 7-95. Our VAT law, which was first adopted and promulgated under E.O. 273, effective January 1, 1988, basically adhered to the destination principle of the VAT system, viz: "When considering a VAT, important decisions 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 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, or 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."] LLpr Accordingly, the onus of taxation under our VAT System is in the 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. (Sections 105 and 108, Tax Code of 1997). There is no controversy with respect to the sales of goods since the law and regulations expressly provided for the VAT zero-rating of such transactions. However, for the sales of services, a distinction must be made whether the buyer of services would qualify for effective zero-rating following the destination principle of the VAT system. There are different types registered enterprises under Republic Act No. 7916 and under Republic Act No. 7227. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones and Tourist/Recreational Centers. Of the foregoing classification, only those under the Export Processing Zone are the ones whose products are generally destined, used or consumed abroad. (BIR Ruling No. 040-98 dated November 23, 1998) Considering that CJHDevCo is engaged in the development of the tourism estate of Camp John Hay Special Economic Zone and not registered as an export enterprise, it follows that its activities are geared for consumption within the Philippines. Hence, its suppliers of services may not qualify for effective zero-rating and accordingly, the VAT component of such service would be passed on to CJHDevCo as part of its cost. This Office is currently drafting the Revenue Regulations which would lay down in detail the implementation of the tax incentive provisions governing the John Hay Special Economic Zone pursuant to Proclamation No. 420. In the meantime, CJHDevCo may use this ruling as basis in its dealing with Customs Territory suppliers/contractors. cdll Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)