VAT Ruling No. 010-05

July 28, 2005 VAT RULING NO. 010-05 Section 106 (A) (2) (a) (5) 028-00/8-21-00 SGV & Co . 6760 Ayala Avenue Makati City Attention: Atty. Romulo S. Danao Partner, Tax Services Gentlemen : This refers to your letter dated December 22, 2004 requesting on behalf of your clients, Lapanday Agricultural Development Corporation (LADC for brevity) and Lead Export and Agro Development Corporation (LEAD for brevity),for confirmation of your opinion that the sale of bananas by LADC and LEAD to Fresh Asia Produce Company International, Inc. (FAPCI for brevity) qualifies for automatic VAT zero-rating under existing laws and regulations. The facts, as you represent, are as follows: LADC is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with registered office and principal place of business at Maryknoll Drive, Pampanga, Davao City. It was registered on September 28, 1992 with the Board of Investments (BOI for brevity) as are expanding export producer of fresh Cavendish bananas on a preferred non-pioneer status. LEAD is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with registered office and principal place of business at Datu Abdul, Panabo City, Davao del Norte. It is likewise registered with the BOI as a non-pioneer enterprise engaged in the production/manufacture and export of Cavendish bananas. On the other hand, FAPCI, is a company registered with the BOI as an export trader of fresh fruits and other agricultural products, with principal place of business at A&E Building, Diamond Village, Mamay Road, Lanang, Davao City. It was certified by the BOI as a 100% exporter on October 5, 2004. LADC and LEAD sell Cavendish bananas to FAPCI, which products are in turn exported by FAPCI. TSADaI LADC, LEAD and FAPCI are all VAT registered enterprises. You now request for confirmation of your opinion that the sales of LADC and LEAD to FAPCI qualify for automatic VAT zero-rating under Section 106(A)(2)(a)(5) of the National Internal Revenue Code of 1997 (NIRC of 1997 for brevity) as implemented by Sections 4.100-2-(a)(5) and 4.100-3 of Revenue Regulations No. 7-95 (RR 7-95 for brevity), and Article 3 of the Omnibus Investments Code (EO 226 for brevity). Hence, no prior application for VAT zero-rating is required for such sales to be considered as subject to 0% VAT. In reply, please be informed that Section 106(A)(2)(a)(5) of the NIRC of 1997 provides that: "Section 1.06. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax . xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales . The term "export sales" means: xxx xxx xxx (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987 ,and other special laws." (Emphasis supplied.) Implementing the above provision, Section 4.100-2(a)(5) of RR 7-95 provides as follows: "Section 4.100-2. Zero-rated sales . xxx xxx xxx The following sales by VAT-registered persons shall be subject to 0%: (a) Export Sales " Export Sales " shall mean: xxx xxx xxx (5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws . . ." xxx xxx xxx Article 23 of EO 226 defines the term " Export Sales " as " the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer or the net selling price of export product sold by a registered export producer to another export producer or export trader that subsequently exports the same: Provided, that sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents ..." (Emphasis supplied.) TAacCE Hence, since the sales of LADC and LEAD (both BOI-registered export producers) to FAPCI (a registered 100% export trader) fall within the definition of export sale under EO No. 226, such sale is the export sale contemplated by Section 106(A)(2)(a)(5) of the NIRC of 1997, as implemented by Section 4.100-2 (a)(5) of RR 7-95, which is subject to VAT zero-rating. The rules on automatically zero-rated versus effectively zero-rated VAT sales are provided in RR 7-95. Section 4.100-3 of RR No. 7-95 enumerates those sales considered as effectively zero-rated. It provides: "Under these Regulations, effectively zero-rated transactions shall cover local sale of goods and properties to persons or entities who enjoy exemptions from indirect taxes under par. (a),no. (3),pars. (b) and (c) of the preceding section." In VAT Ruling No. 028-00 dated August 21, 2000, wherein a company registered with the BOI as an export trader engaged 100% in export sought clarification of the automatic VAT zero-rating characterization of its purchases of products for export, this Office had occasion to rule that: "[P]ursuant to Revenue Memorandum Order (RMO) No. 9-2000, sales of goods, properties or services by VAT-registered suppliers to BOI-registered exporters shall be treated as automatically zero-rated sales, without need of prior approval from this Office, provided that supplier and the BOI-registered buyer are both VAT-registered taxpayers and provided further that the buyer is classified as 100% exporter by the Board of Investments (BOI) ." Considering that LADC, LEAD and FAPCI are all VAT-registered taxpayers and considering further that FAPCI has been certified by the BOI as a 100% exporter, the sales of LADC and LEAD to FAPCI, therefore, qualify for automatic VAT zero-rating provided that all the other conditions set forth is Section 3(4) and (5) of RMO 9-2000 are strictly complied with i.e., (1) the BOI-registered buyer shall furnish each of the suppliers with a copy of the aforementioned BOI Certification which shall serve as authority for the supplier to avail of the benefits of zero-rating for its sales to said BOI-registered buyers, and (2) The VAT-registered supplier shall issue for each sale to BOI-registered manufacturer/exporters a duly-registered VAT invoice with the words "zero-rated" imprinted thereon in compliance with Section 4.1.08-(1) of RR 7-95. The supplier must likewise indicate in the VAT invoice the name and BOI-registry number of the buyer. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. CIcTAE Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue