VAT Ruling No. 010-04

April 16, 2004 VAT RULING NO. 010-04 Sec. 105 & 106 (A) VAT Ruling No. 070-02 e-G Philippines, Inc . Suite 108 Union Square Condominium 145 Fifteenth Avenue Cubao, Quezon City Attention: Mr. Romulo Bernales Chief Operations Officer Gentlemen : This refers to your letter dated August 29, 2003, indorsed to this Bureau by the Office of the President and the Department of Finance, requesting for exemption from value-added tax (VAT) the sale and distribution of your product, e-G msv-4500 (e-G) . It is represented that e-G Philippines, Inc. (e-G Phil) is a newly organized domestic corporation existing under the laws of the Philippines engaged primarily in the business of distribution of DVD players and other electronic machines; that e-G is a state-of-the-art DVD player with a multi-regional 5.1 channel home theatre system and advanced engineering machine with the ability to read up to 150,000 karaoke and jukebox songs in one msv disc; and that e-G is programmed to include educational features and visual images that influence and condition of the thoughts and behavior of Overseas Filipino Workers and foreigners and will entice foreign investments and promote the tourism industry of the Philippines. In reply, please be informed that your request cannot be granted by this Bureau for lack of legal basis. It is clear from Sections 105 and 106(A) of the National Internal Revenue Code of 1997 (NIRC) that sale of goods and services are subject to VAT hereunder quoted, to wit : "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code." "xxx xxx xxx" "The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. "xxx xxx xxx" "SEC. 106. Value-added Tax on Sale of Goods or Properties . "(A) Rate and Base of Tax. These shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. "xxx xxx xxx" Based on the afore-cited provisions, a corporation who, in the course of trade or business, sells goods or properties is liable to the payment of the 10% VAT, subject to the exceptions provided for under Section 109 of the NIRC. While it is incidental that sale of e-G may include governmental functions such as the promotion of the tourism industry or generation of foreign investments in the Philippines, still, the sale is done in the pursuit of commercial or economic activity of e-G Phil, it being primarily a business venture. In other words, it is immaterial that the product for sale may incidentally include a governmental function as long as it is in the course of trade or business of the seller. Such being the case, and since the subject sale is not among those enumerated as exempt transactions under Section 109 of the NIRC, the commercial sale by e-G Phil of its product, e-G , is subject to the 10 percent VAT imposed under Section 106(A) of the NIRC. Be that as it may, as it is your primary intention to sell e-G to Overseas Contract Workers (OFW) and Filipino-Foreigners (FILFO), it is noteworthy that the sale and actual shipment of e-G from the Philippines to a foreign country shall be treated as zero-rated transaction pursuant to Section 106(A)(2)(a)(1) of the NIRC, which provides, viz : "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: "(a) Export Sales. The term 'export sales' means: "(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" Accordingly, while your sales of e-G within the Philippines are subject to the 10 percent VAT, your export sales of e-G to a foreign country, which include but not limited to sales OFW and FILFO residing abroad, shall be subject to VAT at the rate of 0 percent it being considered a zero-rated transaction provided it complies with the other requirements such as: (a) paid for in acceptable foreign currency or its equivalent in goods and services and (b) accounted for in accordance with the rules and regulations of the BSP. Consequently, the passed on VAT (input tax) to your company by local suppliers of goods and services in the manufacture of e-G to be exported may be available as tax credit or refund upon the filing of the necessary application to this Bureau. ( VAT Ruling No. 070-02 dated October 21, 2002 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. ICTDEa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group