VAT Ruling No. 017-05

September 12, 2005 VAT RULING NO. 017-05 106 RMC 74-99 Yazaki-Torres Manufacturing, Inc. 1043 Zobel Roxas cor. Bautista Streets Singalong, Manila Attention: Fe H. Biscocho Department Head General Accounting Department Gentlemen : This refers to your letter dated April 6, 2005 requesting for a ruling on the manner by which your company, Yazaki-Torres Manufacturing, Inc. (YTMI), shall treat the input VAT specifically on the period prior to the entitlement of 5% Gross Income Tax (GIT) incentive. It is represented that YTMI was registered on June 10, 2002 with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise. Prior to its registration with PEZA, YTMI has an existing registration with the BOI on a Non-Pioneer status. The major tax incentives of YTMI expired in September 1998, thereafter, it have been paying the normal rate of 32% for its corporate (income) tax and levied the normal taxes and duties for the imported machineries and equipment. In addition, YTMI is VAT registered and its entitlement under BOI for its input VAT on local purchases are realized thru tax credit on the excess input VAT. Under the PEZA registration, the company was granted two major tax incentives which are the 5% GIT on its corporate tax and duty-free importation of capital equipment and machineries. Accordingly, the entitlement to the 5% GIT will commence only upon the start of commercial operation of the YTMI's first expansion project, thus, in the meantime, the company's corporate tax is still under the normal rate of 32%. On June 25, 2002, PEZA issued a certification that YTMI is entitled for "VAT zero-rating" of its local purchases. The start of the commercial operation of the company's first expansion project was on November 22, 2002. DAaHET In the light of the foregoing, you now pose the following queries: 1. When is the start of YTMI's entitlement to incentives involving the commutation of all national and local taxes, including the VAT zero rating incentive? Is it on the same date of our entitlement to the 5% GIT incentive became effective? 2. Prior to the period of the entitlement to the 5% GIT and the commutation of all national and local taxes, how will the company treat its excess input VAT? Can it apply these excess input VAT into tax credit? In reply, please be informed of the following: 1. Under Section 24 of Republic Act No. 7916, otherwise known as the Special Economic Zone Act of 1995, businesses and enterprises within the ECOZONE as defined under Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of the 5% preferential tax based on the gross income earned. This 5% preferential tax on gross income earned is a commutation of all the national and local taxes otherwise due from the businesses and enterprises operating within the ECOZONE. Such being the case, your company may not be legally passed on with the value-added tax otherwise due from its domestic suppliers of goods and services, Revenue Memorandum Circular No. 74-99 was issued providing for the automatic zero-rating of sale of goods/properties and services by VAT-registered sellers from the customs territory to registered ECOZONE enterprises. It is to be noted, however, that while your PEZA registration was dated June 10, 2002, your entitlement to the 5% preferential tax on gross income earned under Section 24 of RA No. 7916 is conditioned upon the start of the commercial operation of your first expansion project which occurred last November 22, 2002. Such being the case, the incentives involving the commutation of all national and local taxes, including the VAT zero-rating incentive on your purchases of goods/properties and services from your VAT-registered suppliers from the customs territory, shall also commence on the date the entitlement to the 5% GIT became effective. 2. Paragraph 2 of Section 4.100-2 of Revenue Regulations No. 7-95 provides that "(A)ny unused input taxes as of the retirement, change or cessation of status as VAT-registered person shall be allowed as credit against any output tax resulting therefrom. The balance, if any, shall, subject to the filing of an application within two years from date of retirement, cessation or change of status, be issued a tax credit certificate which can be used as payment of any internal revenue tax due from him or a tax refund, if he has no pending internal revenue tax liability. 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. HIDCTA Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC Commissioner