VAT Ruling No. 017-01

April 2, 2001 VAT RULING NO. 017-01 Sec. 24 R.A. 7916 BIR Ruling 033-96 VAT Ruling 009-98 Sanwa Electric Philippines, Inc . Block 2, Lots 1 & 2, First Cavite Industrial Estate Dasmarias, Cavite Attention: Mr . Kenichi Utsumi President Gentlemen : This refers to your letter dated August 23, 1999 requesting for a ruling that the services rendered by a non-resident foreign licensor to a Philippine Economic Zone Authority (PEZA)-registered enterprise like your company be considered effectively zero-rated transactions, and as such, you are not required to withhold the 10% VAT on your royalty payments to the former. It is represented that your company is PEZA-registered enterprise and is engaged in the manufacture of fan motors for heaters, vending machines, refrigerators and related products solely for export; that as a PEZA-registered enterprise, it undertakes its business activities exclusively at First Cavite Industrial Estate, a special economic zone under PEZA; that your company is a wholly owned subsidiary of Sanwa Techno Co., Ltd/(Sanwa), a non-resident foreign corporation organized and operating under the laws of Japan; that your company entered into a Technical Assistance Agreement with Sanwa in which your company was granted a non-exclusive right and license to manufacture and/or assemble small type motors and press die casting using Sanwa's know-how and trademark; that the agreement also provides that Sanwa will provide your company during the term of the agreement, technical instruction and guidance for the use of the technical information for the manufacture of fan motors upon your request; that in consideration of the above services, your company will pay Sanwa royalty payments equivalent to one percent (1%) of the ex-factory price of all products sold to Sanwa and one and half percent (1.5%) of the ex-factory price of all products sold to other customers; and that the agreement also provides that your company shall pay Sanwa Y500,000 Japanese Yen per month for the management guidance during the term of the agreement. In reply thereto, please be informed that under Section 24 of R. A. No. 7916, otherwise known as the "Special Economic Zone Act of 1993", business 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 the five percent (5%) preferential tax rate based on gross income earned, distributed as follows: (1) three percent (3%) to the national government; (2) one percent (1%) to the local government units affected by the declaration of the ECOZONE; and (3) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE. The aforementioned 5% preferential tax is a commutation of all the national and local taxes otherwise due from business and enterprises operating within the ECOZONE. Such being the case, Sanwa Electric Philippines, Inc. 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 licensor vis-a-vis the said royalty payments. (BIR Ruling No. 033-96 dated October 30, 1996; VAT Ruling No. 009-98 dated February 5, 1998) In view thereof, and considering that your foreign licensor is a non-VAT registered person, your aforesaid royalty payments are accordingly exempt from the value-added tax. Consequently, you are also exempt from the obligation to withhold and remit the 10% value-added tax on your payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 114 of the Tax Code of 1997. (BIR Ruling No. 104-98 dated June 29, 1998) This ruling is being issued on the basis of the foregoing 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. cHaDIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group