VAT Ruling No. 015-00

March 20, 2000 VAT RULING NO. 015-00 R.A. 7227 046-99 Silver Infiniti Corporation Suite 1609 Jollibee Plaza Ortigas Center, Pasig City Attention: Ms . Gina De La Cruz General Manager M a d a m : This refers to your letter dated January 11, 2000, requesting for a Certificate of VAT Exemption for Silver Infinity Corporation. It is represented that Silver Infinity Corporation's main business address is at Bldg. 391 Canal Road, Subic Bay Freeport Zone, Olongapo City; that it is registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise and a holder of SBMA Certificate No. 99-0033, issued on December 15, 1999 pursuant to provisions of R.A. No. 7227 effective until December 15, 2000 and that, as such it is entitled to Vat exemption privileges under Section 12 (b) and 12 (c) of the said law, as implemented by Sections 43, 45, 46 and 49 of its implementing rules and regulations. In reply, please be informed that Section 12 (b) and (c) of R.A. 7227 provides: "(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations or raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; "(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national shall be imposed within the Subic Special Economic Zone . In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of the Subic and other municipalities contiguous to be base areas. (Emphasis ours). LexLib "In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;" In general, as a duly registered Subic Bay Freeport Enterprise, no taxes, local or national, may be imposed upon SILVER INFINITI CORPORATION, vis-a-vis its transactions within the Ecozone. (VAT Ruling No. 046-99 dated April 12, 1999) At the same time, our VAT Law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, in general, adheres to the Destination principle or the Cross Border Doctrine. Under this doctrine, VAT exemption and VAT zero-rating are distinguished as follows: ". . . zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT . Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his PRICE or cut payments to his factors or production (capital and labor) . This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero-rate ." (Value-Added Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C., 1988, p. 51) "When considering a VAT, an important decisions to be made by a country concerns what regime to adopt for international trade: the origin principle (export taxable, imports exempt), or the destination principle ( export exempt, import taxable )." (Value-Added Tax (VAT) 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.") Accordingly, the onus of taxation under our VAT System is in that country where goods, properties and 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. (VAT Ruling No. 032-98, dated November 5, 1998) In view of the-foregoing, Silver Infinity Corporation's intra zone sales of goods and services which are directly or indirectly destined for use or consumption outside the Philippine territory shall be totally free of the VAT (i.e., without any vat component) whereas those destined for use or consumption within the Philippine territory shall be embraced by the provisions of the NIRC, hence, subject to the 10% VAT . Thus, sale of goods by the said zone enterprise to persons in the Customs territory (i.e., outside the Zone), shall be subject to the 10% VAT, as follows: (a) In case of sale of goods , the buyer shall be treated as importer and shall be subjects to Customs duties and import taxes, pursuant to Sec. 12(b) of R.A. No. 7227. (b) Sale of services by a zone registered enterprises to persons in the Customs territory shall not be treated embraced by Sec. 12 (a) and (b) of R.A. No. 7227, hence subject to the provisions of the NIRC. For this reason, such sale shall be subject to the 10% VAT, pursuant to Section 108 of the NIRC. Any zone registered enterprise engaging in this type of transaction shall register with the BIR for VAT purposes and shall issue vat-registered invoices for the said taxable transaction. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group