VAT Ruling No. 016-00

March 20, 2000 VAT RULING NO. 016-00 RMC 74-99 100-99 ITW Ampang Industries Philippines, Inc. SFB No. 1 Baguio Ecozone Loakan Road, Baguio City Attention: Ms . Mary Jane P . Gundayao Finance Manager Gentlemen : This refers to your letter dated March 3, 1999 requesting for a ruling on the applicability of certain value-added tax provisions of the Tax Code to your company's business operations. prcd It is represented that your company is a PEZA registered enterprise with two plants/offices one in Baguio Philippine Export Zone Authority and one in the Laguna International Industrial Park; that both offices are registered with the Philippine Economic Zone Authority (PEZA) for the manufacture of semiconductor and electronic related plastic products; that under your registration, your Baguio Office is presently paying the 5% preferential tax rate; that on the other hand, your Laguna Office is currently enjoying its Income Tax Holiday (ITH) incentive as a Board of Investments (BOI) registered enterprise from 1996 to 2000; and as such, you do not pay the 5% final tax on gross income on your activity enjoying the ITH; that you are aware that your company is subject to effectively zero rated VAT and, as such, all VAT payments you make to your suppliers can be claimed back by filing a claim for refund; that starting August 1998, you have stopped paying the VAT for both your Laguna and Baguio Offices for all your purchases of both goods and services; that you informed your suppliers that since you are PEZA registered, you are subject to zero rated VAT: that if the invoice specifies the VAT, you do not pay it outright; that the invoice does not segregate the VAT and the invoice is not stamped zero rated, you extract and deduct the VAT from the price therefrom; that you are of the contention that the destination principle on the VAT applies; and since you are effectively an export company and your products are destined for consumption outside the Philippines, all your purchases are subject to 0% VAT. Based on the foregoing, you then seek clarification on the following points.. 1. From which Agency shall you claim the refund? Is it proper to make separate claims for your Baguio and Laguna Offices? 2. Whether or not your practice of deducting and not paying the VAT on purchases is correct/with legal basis, in the light of the destination principle, even if your suppliers have not yet applied for a certificate of-VAT zero rating or if their application for VAT zero rating is disapproved by the BIR? What is the implication if your supplier has no approved VAT zero rating and that you do not pay them VAT on the purchase? 3. Whether or not the zero rated VAT shall apply to your royalty-payments on a licensing agreement you are finalizing with your Parent Company, Illinois Toolworks, Inc. for the technology transfer and production assistance rendered to your company. In reply, please be informed as follows: 1. It is represented that you are a PEZA-registered enterprise, hence, entitled to the incentives provided for under RA 7916, as amended by RA 8748, otherwise known as "The Special Economic Zone Act of 1995." Accordingly, your VAT-registered suppliers of goods and services from the Customs territory, i.e., your suppliers doing business outside of the special economic zone, are entitled to zero percent (0%) VAT. (See Revenue Memorandum Circular No. 74-99, dated October 15, 1999) 2. It is the supplier of goods and services whose sale transaction qualifies for the zero percent (0%) VAT who is entitled to claim for refund or credit of his input taxes attributable to zero rated sale transaction (Sec. 106(A)(2) and Sec. 108(B), NIRC of 1997). Accordingly, you, as the buyer, are not entitled to claim for the refund or credit of the input taxes attributable to the aforesaid sale transactions. 3. Claims for refund or credit of input taxes attributable to zero rated transactions shall be filed or lodged with the Revenue District Office (RDO) having jurisdiction over the principal place of business of the taxpayer-applicant (Sec. 4.107-1(d), Rev. Regs. No. 7-95). cdlex 4. Your purchases of goods and services from your supplier in the Customs territory entitle the said supplier to apply for effective VAT zero rating of the sale transaction, pursuant to Sec. 4.107-1(d) of Rev. Regs. 7-95. Prior to the promulgation of Revenue Memorandum Circular No. 74-99, the sale transaction otherwise entitled to zero rating shall only be treated exempt from the VAT if there is no approved application for effective zero-rating. 5. However, upon effectivity of Revenue Memorandum Circular No. 74-99 dated October 15, 1999, such suppliers of PEZA-registered enterprises are no longer required to secure from the BIR a prior permit for zero rating in light of the following provisions, viz.: "This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular. " Accordingly, upon effectivity of the said Circular, suppliers of goods and services of PEZA-registered enterprises, in the Customs territory, are no longer required to apply for a prior permit to zero rate their sale of goods and services to PEZA-registered enterprises considering that the aforesaid Circular serves as a sufficient basis to entitle the aforesaid supplier to the benefit of the zero percent (0%) VAT. (Sec. 3(3). RMC 74-99). 6. As a PEZA-registered export producer, your payment of royalties to your non resident parent company for technology transfer and production assistance is exempt from the VAT withholding pursuant to VAT Ruling No. 100-99, dated September 16, 1999, the dispositive portion of which provides: "In the case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor: However, since PEZA-registered export enterprises may not be passed on with nor claim input VAT, then payment of royalties to a non-resident lessor, . . ., should be as it is hereby confirmed to be, exempt from VAT." However, it shall be understood that, VAT exemption notwithstanding, royalty payment shall remain subject to income tax at the rate prescribed under the RP-USA Tax Treaty. 7. A VAT-registered supplier of goods and services whose sale transaction qualifies for the zero percent VAT must issue duly registered VAT invoices showing, among others, "the word 'zero rated' imprinted on the invoice covering the zero rated sales. " (See Sec. 4.108-1(5), Rev. Regs. No. 7-95) cdlex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group