VAT Ruling No. 015-98

May 22, 1998 VAT RULING NO. 015-98 Sec. 102-000-00-015-98 Dowa Hightech Philippines, Inc. FCIE Barangay Langkaan Dasmarias, Cavite Attention: Mr . Kenjiro Miyake Managing Director Gentlemen : This refers to your letter dated September 18, 1997 wherein it is represented that Dowa Hightech Philippines , Inc . (DOWA) is a corporation established and existing under Philippine law; that it is a duly registered enterprise with the Philippine Export Zone Authority per Certificate of Registration No. 95-11 dated January 24, 1995 as a pioneer enterprise in the production of lead frames and related products; that it entered into a Licensing Agreement with Dowa Mining & Company Limited and Dowa Chemical Company Limited and Saitama Dowa of Japan, in which Dowa was granted an exclusive license to manufacture and sell lead frames using the Licensor's know-how and trademark; that the agreements are registered with the Philippine Bureau of Patents, Trademarks and Technology Transfer; that under the said agreement, Dowa will pay the Licensor's royalties equivalent to 2% of the net sales of the licensed product sold by Dowa in consideration of the license grant; and that the licensors are corporations duly organized under the laws of Japan. You now request confirmation of your opinion that Dowa, which is VAT zero-rated as a PEZA-registered enterprise, may now claim for a refund for its unused VAT input taxes including the VAT input on payment of royalty and is not required to withhold the 10% VAT on royalty payments. In reply, please be informed that under Section 24 of Republic Act No. 7916, businesses and enterprises within the ECOZONE as defined by Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of five percent (5%) preferential tax rate based on gross income earned. The aforementioned 5% preferential tax is a commutation of all national and local taxes otherwise due from businesses and enterprises with the ECOZONE. Such being the case, Dowa is considered exempt from all direct and indirect taxes, hence, may not legally be passed-on with the value-added tax otherwise due from its foreign licensors vis-a-vis the royalty payments. In view thereof, and considering that your foreign licensors are not VAT registered persons, Dowa's royalty payments nevertheless are exempt from the value-added tax. Consequently, Dowa is also exempt from the obligation to withhold and remit the 10% value-added tax on its payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 110 of the National Internal Revenue Code, as amended by Republic Act No. 7716, and as implemented by Section 4.110-3 of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations. Furthermore, you are entitled to file a claim for a refund on the previous VAT withheld and remitted with respect to the royalty payments to your licensors. This ruling is being issued on the basis of the facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue