VAT Ruling No. 013-99

February 8, 1999 VAT RULING NO. 013-99 106 (A)-055-98-013-99 Selma Apparel Corporation Cavite Export Processing Zone Attention: Mr . Soon Bae Lee Treasurer Gentlemen : This refers to your letter dated August 10, 1998 requesting for the issuance of VAT-Exemption Certificate for the purpose of VAT-ZERO rating of its transactions with its local suppliers/purchases. It is represented that Selma Apparel Corporation (Selma) is a PEZA-registered export enterprise under Certificate of Registration No. 90-027 operating in the Cavite Export Processing Zone; that, said company is included in the PEZA master list which was endorsed to the Bureau of Internal Revenue on January 23, 1998, for the purpose of VAT zero-rating of its transactions with its local suppliers; as such, this ruling is requested in order to invoke its right of VAT exemption on its purchases of goods and services from local suppliers. In reply, please be informed that Section 23 of Republic Act No. 7916 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 ". Under Article 77(2) of the Omnibus Investments Code, " 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 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 ". Accordingly, the sales of goods by customs territory suppliers to Selma which is a PEZA-registered export enterprise located at the Cavite Export Processing Zone may qualify for effective zero-rating 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 the 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. llcd With respect to the sales of services by customs territory suppliers, the same may likewise be entitled to effective zero-rating under the destination principle of the VAT System. (VAT Ruling No. 055-98 dated December 2, 1998). The requirement for an approved application by service contractors for the effective zero-rating is likewise applicable. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)