VAT Ruling No. 012-99

January 14, 1999 VAT RULING NO. 012-99 Sec. 106-108-000-00-012-99 Hon . Melito S . Salazar Undersecretary, Department of Trade & Industry and Vice Chairman & Managing Head BOARD OF INVESTMENT 385 Gil J. Puyat Avenue Makati City Dear Undersecretary Salazar : This refers to your letter of 07 September 1998 concerning your request for streamlined procedures in determining the transactions of PEZA/BOI-registered enterprises which may legally enjoy the benefit of the zero percent (0%) value added tax (VAT) under Section 106 and 108 of the National Internal Revenue Code (NIRC) of 1997. Records show that representatives from the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) conducted on 27 May 1998 a Consultative Meeting with Revenue Officers Ricardo A. Santos and Alfredo P. Santos of this Office to determine a more expeditious procedure in the grant of BIR Permit to zero rate, for VAT purposes, certain transactions made by BOI/PEZA registered enterprises. The BOI and the PEZA now seek the agreement of this Office with the procedures outlined in the Minutes of the said Consultative Meeting. Basically, the proposal is that a Masterlist of BOI and PEZA registered enterprises whose transactions may qualify for the zero percent (0%) VAT shall be drawn by the BOI and PEZA and that the transactions made by the said enterprises shall henceforth be treated qualified for the zero percent VAT. In reply, please be informed that this Office shares the concern of the BOI and PEZA towards a relatively expeditious procedure in the grant of BIR Permit for the application of zero percent (0%) VAT upon certain transactions of the said registered enterprises. Under the VAT Law, zero rating of transactions means total exemption from the value added tax because it has the effect of making purchases of goods and services by BOI/PEZA registered enterprises totally VAT-free. Consequently, the suppliers of goods and services shall be entitled to a refund of value added taxes (i.e., input taxes) previously paid in the production of such goods and services so purchased by such enterprises. For this reason, utmost care and strict interpretation of the law in granting a BIR Permit to zero rate certain transactions is of paramount importance if only to safeguard the revenue. In view thereof and in lieu of the suggested procedures outlined in the aforementioned Minutes of the Consultative Meeting for which the final agreement of this Office is being sought for, this Office is amenable to the following procedures: 1. MASTERLIST OF QUALIFIED BOI/PEZA-REGISTERED ENTERPRISES. The BOI and the PEZA shall submit to this Office, through the VAT REVIEW COMMITTEE, (a) a list of qualified BOI/PEZA-registered enterprises; and (b) documentary evidence duly authenticated by the BOI/PEZA showing that the purchases of goods and services by such registered enterprises qualify for the zero percent (0%) VAT, pursuant to the provisions of the VAT law and its implementing regulations. 2. BIR EVALUATION OF THE MASTERLIST. This Office shall determine from the said MASTERLIST of BOI/PEZA registered enterprises, based on the aforesaid documentary evidence, whether or not the enterprise's purchase of goods or services may qualify for the zero percent (0%) VAT. 3. BIR PERMIT. This Office shall issue BIR Permit to zero rate purchases of goods and services from VAT-registered suppliers to be made by such qualified registered enterprises. Such Permit, which this Office shall issue in the form of a MASTERLIST, shall be valid for a period of one (1) year from date of issuance thereof. Said Masterlist shall be renewable annually with the submission by the BOI and/or PEZA of its proposed or updated masterlist within 30 days before the expiration of the BIR-approved masterlist. This approved MASTERLIST OF QUALIFIED REGISTERED ENTERPRISES shall be issued by this Office through the BOI and the PEZA. The BOI and the PEZA shall see to it that all the said qualified registered enterprises are duly informed and furnished with a certified copy thereof. VAT-registered suppliers of goods and/or services may transact with the said BOI/PEZA-registered enterprises without any further need of securing from the BIR any individual permit to zero rate such transaction . 4. LIMITATIONS. Only the transactions provided for under this paragraph shall be embraced by the procedures herein prescribed. Other cases shall accordingly be governed by a prior application by every VAT-registered supplier for an individual BIR Permit to zero rate any of its proposed transaction with a BOI/PEZA-registered enterprise. Section 106 (A) (2) (a) (5), NIRC of 1997, provides that, on sales of goods by VAT-registered suppliers, " Those considered export sales under Executive Order No . 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws " shall be treated as " export sales ". The Omnibus Investments Code also provides that certain domestic sales of goods shall be treated export sales. Hence, such transactions may qualify for the zero percent (0%) VAT, pursuant to Section 106 (A)(2), of the Tax Code of 1997. For purposes of this letter: PURCHASES OF GOODS BY PEZA-REGISTERED ENTERPRISES.- This Office recognizes the zero percent (0%) VAT status on the purchases of merchandise by PEZA-registered enterprises from VAT-registered suppliers in the Customs Territory, i.e., outside the Zone, pursuant to the aforesaid provisions of the Tax Code, in relation to Article 77(2) of the Omnibus Investments Code. as follows: "Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone shall be considered as export sales and the exporter shall be entitled to the benefits allowed by law for such transactions" PURCHASES OF GOODS BY BOI-REGISTERED ENTERPRISES. - ARTICLE 23 of the Omnibus Investments Code provides: "ART. 23. . . . Provided further, That without actual exportation the following shall be considered constructively exported for purposes of this provision: . . ." However, the provisions of the above article notwithstanding, the benefit of the zero percent (0%) VAT shall only be extended to the cases enumerated hereunder: 1. Sales of goods to " Bonded Manufacturing Warehouses of BOI-registered export oriented manufacturers "; 2. Sales of goods to " Export Processing Zones " i.e., PEZA-registered manufacturer-exporters (note that this is also embraced by the above mentioned ART. 77(2) of the Omnibus Investments Code); 3. Sales of goods to " BOI-registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products ." The other cases provided for under the said Article 23 may be granted a BIR Permit for VAT zero rating only upon prior application by every VAT-registered supplier of goods, on a case to case basis, and after determination by the BIR that his transaction with a BOI-registered enterprise may in fact legally enjoy the benefit of the zero percent (0%) VAT. PURCHASE OF SERVICES BY PEZA-REGISTERED OR BOI- REGISTERED MANUFACTURER-EXPORTER. - Sale of service by a VAT-registered person to a PEZA/BOI-registered manufacturer-exporter may be extended the benefit ,of the zero percent (0%) VAT to the extent that the latter is engaged in export activities in accordance with the " Cross Border Doctrine " enunciated in BIR Ruling No. 032-98 dated November 5, 1998. The said ruling pertains to the case of Shimizu Phil. Contractors, Inc. in which it was held that their purchase of services is entitled to zero-rating ". . . considering that their export products are destined for us or consumption outside the Philippines and such export products must be free from VAT which otherwise are indirectly passed on by suppliers of . . . services " For your guidance attached herewith is a copy of the said ruling. This Office is not ready to adopt a similar procedure vis-a-vis the other cases as provided under Section 106 of the NIRC, or in relation to other constructive exports provided for under Article 23 of the Omnibus Investments Code, as follows: 1. On sales of goods a. Export products sold by a BOI-registered export producer to another export producer, or to BOI-registered export trader, provided that such sales shall be treated export sales when the same have been actually exported by such buyer; b. Sales to foreign military bases, diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not; 2. On sales of services. a. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); b. Services performed by sub-contractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. because, in general, whether or not such sale of goods or services may legally be treated as "export sales" may only be determined after such sale had taken place. Under such situation, the proper claimant for the zero percent (0%) VAT and for the refund of input taxes attributed to the zero rated sales (i.e., export sales) properly rests upon the actual exporter. It is hoped that with the new guidelines as herein adopted, the procedures for recognizing VAT zero-rating will be faster and simpler. Kindly coordinate with the VAT Committee of this Office for any further questions and/or concerns you may have concerning this subject. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue