New Dynasty International, Inc.

September 13, 2004 VAT RULING NO. 020-04 Sec. 108 (B) (2) VAT Ruling No. 005-99, 079-99 Quasha Ancheta Pena & Nolasco Law Offices Don Pablo Building, 114 Amorsolo St., 1229 Makati City SUBJECT : New Dynasty International, Inc. Gentlemen : This refers to your letter dated September 20, 2001 concerning your request for a reconsideration of VAT RULING NO. 048-2001 dated July 18, 2001 which held that your client, NEW DYNASTY INTERNATIONAL, INC., is subject to the 10% VAT, rather than at zero percent (0%) VAT, on its sale of services to China Airlines as the latter's General Sales Agent in the Philippines. The dispositive portion of the disputed VAT ruling provides: "Section 108(B)(2) of the said Code is only limited to (1) sale of service by a VAT-registered person, to a 'non-resident foreign client;' and (2) restricted to 'project studies, information services, engineering and architectural designs and other similar services.' "Since China Airlines Ltd. is a foreign corporation doing business in the Philippines, it is classified as a 'resident foreign corporation,' pursuant to Section 28 (A) (3), NIRC of 1997. Moreover, your services, as its General Sales Agent in the Philippines, is not embraced among the kinds of services enumerated under the above quoted implementing regulations. Consequently, your sale of service to the said resident foreign corporation, even if paid for in foreign currency that is accounted for according to the rules and regulations of the BSP, is not entitled to the benefit of the zero percent VAT. "It is true that, prior to the promulgation of Revenue Regulations No. 5-96, general sales agents of foreign international air carriers have been ruled as entitled to the benefit of the zero percent VAT (i.e., VAT RULING No. 033-91, 29 May 1991, supra ; see also VAT RULING No. 104-90, 03 May 1990). However, these rulings have been abandoned and revoked upon the effectivity of Revenue Regulations No. 5-96. "Section 108(B)(4), NIRC of 1997 pertains to service rendered by a VAT-registered person, to "vessels engaged exclusively in international shipping." Section 118 of the said Code classifies International Carriers into (1) 'International Air Carriers and (2) 'International Shipping Carriers.' It follows, your sale of service to China Airlines Ltd., which is an international air carrier, is not embraced under Section 108(B)(4) of the Code, because this law is limited only to International Shipping Carriers.' 'Under the familiar rule of statutory construction of expressio unius est exclusio alterius , the mention of one thing implies the exclusion of another thing upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334335)' "In view of the foregoing, your aforementioned sale of service to China Airlines Ltd., as its General Sales Agent in the Philippines, even if paid for in foreign currency that is accounted for according to the rules and regulations of the BSP, became subject to the 10% VAT pursuant to Section 102(a), old NIRC (now Sec. 108(A), NIRC of 1997), upon effectivity of Revenue Regulations No. 5-96." Your disagreement with VAT RULING No. 048-2001 is premised on the following: 1. That, it violates the destination principle of our consumption VAT system, also called the Cross Border doctrine, in that goods, property or services that are destined, used or consumed abroad shall not be subject to VAT; 2. That, it does not conform to the logical and legal interpretation of Section 108(B)(2) and (4) of the NIRC of 1997, as there appears to be no basis for discrimination against international air carriers ( vis--vis international shipping lines) simply because the law literally mentions "international shipping;" and 3. That, it is not in conformity with several rulings already issued by the Bureau of Internal Revenue on similar factual situations. HSIADc ON YOUR CONTENTIONS NOS. 1 AND 2 ABOVE. Please be informed that in VAT RULING No. 044-98, dated November 26, 1998, in the case of the Philippine Airport and Ground Services, Inc. (PAGS), the Commissioner of Internal Revenue ruled that certain services rendered by a VAT-registered person to the aircrafts of foreign international carriers may be entitled to the benefit of the zero percent (0%) VAT because of the Cross Border Doctrine of the VAT System, as follows: "It is represented that your client is engaged in the business of providing baggage and cargo handling, as well as other ground services to aircrafts of various International Airline Companies landing at the NAIA , and that your client is paid in foreign currency which is duly accounted for in accordance with the rules and regulations of the Bangko Sentral Ng Pilipinas." "xxx xxx xxx." ". . . our VAT law is basically a Consumption Type VAT System and, in general, follows the destination principle or Cross Border Doctrine. Under the VAT System, VAT exemption and VAT zero-rating are distinguished, as follows: '. . . zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his price or cut payments to his factors of production (capital and labor). This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero rate.' (Value Added Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C., 1988, p. 51) 'When considering a VAT, important decisions to be made by a country concerns what regime to adopt for international trade: the origin principle (exports taxable, imports exempt), or the destination principle (export exempt, imports taxable).' (Value-Added-Tax VAT by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz .: 'the country taxes all value added, at home and abroad, or goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable. This is comparable with the consumption type VAT.') "Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT." "Accordingly, the services of your client to international air carriers of various International Airline Companies which are destined for use or consumption outside the Philippines since the same are directly connected to international flights of the aforesaid international air carriers are subject to zero percent (0%) VAT pursuant to Section 108(B), NIRC, as amended by R.A. Nos. 7716 and 8241, renumbered by R.A. No. 8424, and as implemented by Section 3(b) of Revenue Regulations No. 7-95, as amended by Section 4.102-2(b) of Revenue Regulations No. 5-96." VAT RULING No. 044-98, Not Applicable To New Dynasty International, Inc. In the case of VAT RULING No. 044-98, PAGS rendered services to the aircrafts of various international airline companies with landing rights in the Philippines. However, in the contested VAT RULING No. 048-2001, your client (New Dynasty International, Inc.) does not render services to the aircrafts of its foreign principal (China Airlines, Ltd.). Its services are, instead, rendered to China Airlines, Ltd ., as the latter's General Sales Agent (GSA) in the Philippines. Thus, your client and PAGS are not similarly situated. ON YOUR CONTENTION NO. 3. Your contention that VAT RULING NO. 048-2001, in the case of your said client, does not conform with rulings heretofore issued vis--vis General Sales Agent of foreign international air carriers, is not accurate. On the contrary, the General Sales Agent in the Philippines of such foreign international air carriers had been ruled subject to the 10% VAT (rather than the 0% VAT), as follows: In VAT RULING No. 005-99, dated January 13, 1999, in the case of Gulf Express Corporation, as the General Sales Agent of Gulf Air Co. in the Philippines, in applying the Cross Border Doctrine of the VAT System, it was ruled: "The sale of services subject to zero percent (0%) VAT under Section 108(B)(2) of the Tax Code of 1997 are limited to such sales which are destined for consumption outside of the Philippines. DAETcC "As sales agent of GULF AIR COMPANY, an international airline company, GEC is paid commission for services rendered in the Philippines in behalf of its foreign principal. The situs of services rendered is within the Philippines and it is here where such services are used or consumed. Therefore, GEC's sale of services must be subject to the 10% VAT rather than the 0% VAT, regardless of whether its compensation for services rendered be paid in foreign currency actually or constructively remitted ." In VAT RULING No. 079-99, in the case of Pilipinas International Marketing Services, Inc., it was also ruled: ". . . on the assumption that your primary activity is that of telemarketing, and that you act as agents in the Philippines for Japanese corporations, your services, out of which you will be paid in foreign currency, would essentially be performed in the Philippines. Under Section 108 of the Tax Code of 1997, there is levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services performed in the Philippines. Our VAT law is basically a consumption type VAT system and follows the Destination Principle or Cross-Border Doctrine, under which goods, property or services destined to be used or consumed in the Philippines are subject to the 10% VAT while those destined, used or consumed abroad, are accorded the benefit of zero-rating. ( VAT Ruling No . 031-99 dated March 18, 1999 )." In view of the foregoing, we regret to inform that your request for the reconsideration of VAT RULING No. 048-2001, in the case of your client, NEW DYNASTY INTERNATIONAL, INC., cannot be granted for lack of legal basis. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue