VAT Ruling No. 025-02

April 25, 2002 VAT RULING NO. 025-02 Sec. 24 of RA 7916 VAT Ruling Nos. 09-98, 17-2001, 39-2001 and 63-2001 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Alexander B. Cabrera Partner Tax Services Department Gentlemen : This refers to your letter dated November 16, 1998 requesting for a ruling as to whether or not royalties paid by a Philippine Economic Zone Authority (PEZA) registered enterprise to a non-VAT registered non-resident foreign licensor relative to a Trademark Licensing Agreement and Technical Collaboration Agreement is exempt from value-added tax (VAT). It is represented and is alleged that Toshiba Information Equipment (Phils.),Inc. (TIEPI) is a corporation duly organized and existing under the Philippine laws; that on September 27, 1997, TIEPI was registered as an export enterprise with the PEZA with Certificate of Registration No. 95-99; that under its Registration Agreement with the PEZA, TIEPI's registered activity is to manufacture Hard Disk Drives, CD-ROM Drives, and Printed Circuit Boards for personal computers; that these products are produced exclusively for export; that pursuant to the Trademark Licensing Agreement, TIEPI is granted a non-exclusive license to use Toshiba Corporation's (Toshiba) trademarks whereas the Technical Collaboration Agreement grants a non-exclusive right to use Toshiba's patents and technical information; and that these licensing agreements are duly registered with the Bureau of Patents, Trademarks and Technology Transfer. In reply thereto, please be informed that the Philippine VAT System adopts the destination principle wherein imports are taxed while exports are given total immunity. This system of taxation, when applied to goods crossing borders, is designed to make our local products competitive in the foreign market. In line with this principle which is the backbone of the Philippine VAT System, the royalty payments by TIEPI to Toshiba are exempt from VAT whether at the time it enjoys income tax holiday or at the time that it is subject to the 5% commutation tax. Otherwise, TIEPI will be required to shoulder the VAT on inputs, which will be added-up to the export cost of its products. As a matter of fact, the local sale of VAT suppliers to PEZA registered enterprises were declared zero-rated to afford full immunity to the export producer. (RMC 74-99) It is on this principle that the royalty payments by TIEPI to Toshiba shall be exempt from VAT so that the PEZA locator would be truly relieved from the burden of indirect tax consonant with the "Cross Border Doctrine" thereby ensuring that the export price of the commodities has no VAT component. (VAT Ruling No. 63-2001). In view thereof, and considering that your client's foreign licensor is a non-VAT registered non-resident foreign licensor, your client's aforesaid royalty payments are accordingly exempt from the VAT. Consequently, your client is also exempt from the obligation to withhold and remit the 10% VAT on its payments and remittances of the aforesaid royalties, which otherwise would be due thereon pursuant to the provisions of the Section 110 of the National Internal Revenue Code, as amended by R.A. No. 7716, and as implemented by Section 4.110-3 of Revenue Regulations (RR) No. 7-95, otherwise known as the "Consolidated VAT Regulations." (Section 4.107-1(d), RR No. 7-95, VAT Ruling Nos. 09-98, 017-2001 and 039-2001) 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group