VAT Ruling No. 018-03

January 29, 2003 VAT RULING NO. 018-03 MEMORANDUM FOR: ASST. COMMISSIONER NORA E. TAMAYO Assessment Service This refers to your memorandum for the Chairman, VAT REVIEW COMMITTEE, dated December 5, 2002, raising the following issues: ISSUE A. "It is an accepted fact that goods sold to entities located in the Special Economic Zone (SEZ) may be diverted to Customs territory especially if the entities are engaged in general merchandising. Shall we treat the above sale as effectively zero-rated?" ISSUE B. "Issuance of a ruling on whether services rendered to the National Power Corporation is subject to zero-rate. Will the ruling to be issued in this case be applicable to all future applications for zero-rating of all Independent Power Producers to the National Power Corporation?" ON ISSUE A In reply, please be informed that the law on Special Economic Zones are embraced under R.A. No. 7227, otherwise known as the " Bases Conversion and Development Act of 1992 " and R.A. No. 7916, as amended, otherwise known as " The Special Economic Zone Act of 1995 ." SPECIAL ECONOMIC ZONES UNDER R.A. NO. 7227 Under R.A. No. 7227 and its Implementing Rules and Regulations, 1 the Subic Bay Freeport (SBF), also referred to as the Special Economic and Freeport Zone (SEZ), is treated as a " Separate Customs Territory ." 2 The term "SBF Enterprise" means " any business entity or concern within the SBF duly registered with and/or licensed by the SBMA 3 to operate any lawful economic activity within the SBF ." 4 "Articles which are admitted to the SBF from the Customs Territory under proper permit shall be considered exported for purposes of the laws and regulations of the Philippines, and shall be considered to be zero-rated and thereby become eligible for drawback, relief from duties and taxes, and any other tax or duty benefit conferred by reason of exportation; provided, that articles which are returned to the Customs Territory from the SBF shall be considered imported for the purposes of the laws and regulations of the Philippines." 5 ". . . foreign articles removed, withdrawn or otherwise disposed of from the SBF into the Customs Territory, shall be subject to the payment of customs duties and internal revenue taxes as ordinary importations in accordance with the provisions of the Tariff and Customs Code of the Philippines, as amended, and the National Internal Revenue Code and other applicable laws. Articles entered or introduced from the SBF into the Customs Territory will be presumed to be foreign 6 unless there is sufficient evidence presented to satisfy customs officials that they are domestic articles as defined in these Rules." 7 "Foreign articles withdrawn, transported, or taken in commercial quantities from the SBF to the Customs Territory without payment of duties and taxes, shall be subject to seizure and forfeiture proceedings pursuant to the pertinent provisions of the Tariff and Customs Code and the National Internal Revenue Code of the Philippines, without prejudice to any criminal and/or administrative actions that may be instituted against the person/persons liable/responsible therefor." 8 The Clark Special Economic Zone (CSEZ) is part of the Special Economic Zones (SEZ) created under Executive Order No. 80, promulgated on April 3, 1993, pursuant to R.A. No. 7227. 9 CSEZ-registered enterprises are entitled to the same fiscal incentives availing to SBF-registered enterprises. 10 SPECIAL ECONOMIC ZONES UNDER R.A. NO. 7916 Under Revenue Memorandum Circular No. 74-99, promulgated on October 15, 1999, pursuant to the provisions of R.A. No. 7916, sale of goods to a PEZA-registered enterprise, by a VAT-registered supplier from the Customs Territory, i.e., outside the ECOZONE, ". . . shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code." 11 "Generally, products manufactured or produced within the ECOZONE are destined for export to foreign countries. While such products, under certain conditions, may also be sold to buyers in the Customs Territory, i.e., outside the ECOZONE, such sales are technically considered as importation by such buyer from the Customs Territory. Since the ECOZONE is technically treated as another separate Customs Territory, the buyer is treated as an importer and is imposed with the corresponding import taxes and customs duties on his purchase of products from within the ECOZONE. " 12 Moreover, "All privileges, benefits, advantages or exemptions granted to special economic zones under Republic Act No. 7227, shall ipso facto be accorded to special economic zones already created or to be created under this Act. The free port status shall not be vested upon the new special economic zones." 13 Thus, sale of goods to the above SEZ-registered enterprises, by VAT-registered suppliers in the Customs Territory, being treated in law as export sales, are entitled to the benefit of the effectively zero percent (0%) VAT, pursuant to Section 106 (A)(2)(a)(5), NIRC of 1997, as implemented by Section 4.100-3, 14 Revenue Regulations No. 7-95. On your apprehension that VAT zero-rated supply of goods to SEZ-registered enterprises may possibly be diverted back to the Customs Territory, please be informed that under the above quoted rules and regulations, the said goods shall not be allowed to enter the Customs Territory unless the buyer, who is treated as importer, paid the corresponding duties and taxes thereon. Otherwise, such goods shall be treated as "smuggled goods" subject to seizure and forfeiture proceedings, pursuant to the provisions of the Tariff and Customs Code and the NIRC of 1997. Accordingly, any internal revenue officer who has actual knowledge of any smuggling of goods from any Special Economic Zone, to the detriment of the duties and taxes prescribed under the said Codes, is duty bound to immediately report the same to the proper authorities and/or cause for the assessment and collection of the said duties and taxes, to insure that no goods may be withdrawn from the SEZ, to the Customs Territory, unless the corresponding taxes and duties prescribed by law have been duly paid thereon. ON ISSUE B Your above mentioned memorandum-inquiry actually referred to supply of electricity to the National Power Corporation (NPC), by Independent Power Producers (IPP), specially the electricity supplied to NPC by CBK POWER CO., LTD. Please be informed that the Secretary of Finance himself, in the exercise of his review power under Section 4, NIRC of 1997, has ruled in his memorandum to the Commissioner of Internal Revenue, dated January 26, 1998, in the case of SAN PASCUAL CO-GENERATION CO., that sale of electricity to the NPC is entitled to the benefit of effectively zero-rated VAT. 15 This ruling applies to all similarly situated cases. cCHETI (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. Promulgated November 3, 1992. 2. Sec. 3 (c), Implementing Rules and Regulations of R.A. 7227. 3. Subic Bay Metropolitan Authority. 4. Sec. 3 (g), id. 5. Sec. 48, id. 6. Sec. 3, id. , provides: "1. Domestic Articles refers to articles which are the growth, product or manufacture of the Philippines and upon which all national internal revenue taxes have been paid, if subject thereto, and upon which no drawback or bounty has been allowed ; and articles of foreign origin on which all duties and taxes have been paid and upon which no drawback or bounty has been allowed, or which have previously been entered into customs territory free of duties or taxes. "m. Foreign Articles refers to articles of foreign origin on which duties and taxes have not been paid, or upon which drawback or bounty has been allowed, or which have not been previously entered into customs territory; or articles which are the growth, product or manufacture of the Philippines on which not all national internal revenue taxes have been paid, if subject thereto, or upon which drawback or bounty has been allowed. " 7. Sec. 47, id. 8. Sec. 52, id. 9. Section 1, E.O. No. 80, provides: "SECTION 1. Creation of the Clark Development Corporation . A body corporate to be known as the Clark Development Corporation (CDC) is hereby authorized to be formed as the operating and implementing arm of the BCDA to manage the Clark Special Economic Zone (CSEZ). "The CDC shall be a subsidiary corporation of the BCDA and shall be formed in accordance with the Philippine corporation law and existing rules and regulations promulgated by the Securities and Exchange Commission pursuant to Section 16 of R.A. 7227. "The CDC shall be subject to the policies, rules and regulations of the BCDA for the CSEZ. " 10. Sec. 5, E.O. No. 80, provides: "SECTION 5. Investments Climate in the CSEZ Pursuant to Section 5(m) and Section 15 of R.A. 7227, the BCDA shall promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in consultation with the local government units and pertinent government departments for implementation by the CDC. "Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under R.A. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted. "The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA." 11. Sec. 3 (1) (a), RMC No. 7499. 12. Sec 2, RMC No. 7499. 13. SECTION 51, R.A. No. 7916. 14. "SECTION 4.100-3. Effectively zero-rated sale of goods and properties . Effectively zero-rated sales of goods and properties shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, e.g. R.A. 7227 or international agreements, e.g: ADB, IRRI. Under these Regulations, effectively zero-rated transactions shall cover local sale of goods and properties to persons or entities who enjoy exemptions from indirect taxes under par. (a) no (3), pars, (b) and (c) of the preceding section." 15. See BIR RULING No. 01599, dated December 12, 1999.