VAT Ruling No. 018-05

September 13, 2005 VAT RULING NO. 018-05 RMO 9-2000 000-00 EDS Manufacturing, Inc . 18B Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Ms. Ma. Andrea Eleanore Assistant Manager Gentlemen : This refers to your letter dated June 8, 2000, indicating that EDS Manufacturing, Inc. (EMI) is a BOI-registered manufacturer or wiring harnesses that are 100% exported. You now request for some clarifications regarding the implementation of Revenue Memorandum Order No. 9-2000, to wit: (a) whether a copy of the BOI registration may be used in lieu of the required BOI Certification that the buyer is a BOI-registered manufacturer/producer whose products are 100% exported; (b) Whether you can continue to apply for a tax credit/refund of unclaimed input tax for the years prior to the implementation of RMO 9-2000; and (c) Whether RMO 9-2000 applies to your payments of royalty to your mother company in Japan. cdtai06 In reply, please be advised of the following: 1. The BOI Certification that the buyer is a BOI-registered manufacturer/producer whose products are 100% exported, and the furnishing of the same to the suppliers, are mandatory in order to benefit from Section 3 of RMO 9-2000 which does away with the requirement of prior approval of the application for effectively zero-rating under Revenue Regulations No. 7-95; only upon its presentation may the supplier recognize such transactions as zero-rated: Provided, however, that the supplier and the BOI-registered buyer are both VAT-registered. The supplier shall then issue a duly registered VAT invoice with the notation "zero-rated" clearly imprinted or stamped thereon, and shall likewise indicate the buyer's BOI registry number and/or reference to the Certification issued by the BOI. DCcAIS 2. RMO 9-2000 simply aims to relieve VAT-registered BOI-registered manufacturers/producers (whose products are 100% exported) from the tedious processes of either prior approval of the application for effectively zero-rating VAT as mandated by Sec. 4.107-1(d) of RR 7-95, or claiming tax refunds or credits of input taxes under Sec. 112 of the National Internal Revenue Code (NIRC) of 1997, regarding their purchases of goods, properties or services from VAT-registered suppliers. It does not in any way preempt their rights to claim refunds of or tax credits for input taxes under Sec. 112, nor to apply and obtain prior approval of effectively zero-rating VAT under Secs. 106(A)(2)(c) and 108(B)(3), all under the Tax Code of 1997. Therefore, you may continue to apply for a refund or tax credit of your unclaimed input taxes from purchases not covered by RMO 9-2000, in conformity with Sec. 112 of the Tax Code of 1997. Likewise, in the absence of the afore-mentioned BOI Certification, you may still apply for prior approval for effective zero-rating VAT pursuant to Sec. 4.107-1(d) of RR 7-95. 3. Under Sec. 108 of the NIRC of 1997, the lease or use of property rights, for which royalty is paid is subject to ten percent (10%) VAT; and under Sec. 114(C) thereof, as implemented by Sec. 4.110-3(b) of RR 7-95 (as amended by Rev. Regs. 8-2002), the payor of royalties to a non-resident is required to deduct and withhold the 10% creditable VAT. However, Sec. 3(10) of RMO No. 9-2000 requires among others that "the supplier must be VAT-registered" in order to qualify for an automatic zero-rated VAT treatment. Considering that the recipient of the royalty is a non-resident entity, presumably it is not VAT-registered; hence, RMO 9-2000 does not cover such royalty payment to your mother company in Japan. Indeed the rationale behind RMO 9-2000 is essentially the same as that of Revenue Memorandum Circular No. 74-99, which was been expanded to treat royalty payments by Philippine Economic Zone Authority (PEZA)-registered business establishments operating within the "ecozone" to non-VAT registered non-resident foreign licensor as VAT exempt. (See BIR VAT Review Committee Ruling No. 025-2002). The distinction, however, lies in the fact that such sales of services by non-VAT registered persons to said PEZA-registered business establishments are treated as VAT exempt pursuant to Sec. 109(q) of the NIRC of 1997, which refers among others to transactions which are exempt under special laws; Republic Act No. 7916 (otherwise known as the Special Economic Zone Act of 1995) is a special law which, under Sec. 24 thereof, grants exemptions from national taxes to PEZA-registered business establishments operating within the ecozone, except the payment of the preferential tax rate of five percent (5%) on gross income earned. (See BIR VAT Review Committee Ruling No. 033-96). On the other hand, there is no such provision in Sec. 109 of the NIRC of 1997 which exempts from VAT services rendered by non-VAT-registered persons to enterprises whose export sales exceed seventy percent (70%) of the total amount of production, or even to VAT-registered BOI-registered manufacturers/producers (whose products are 100% exported. This ruling is being issued based on the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different then this ruling shall be considered null and void. aSAHCE Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue