VAT Ruling No. 028-01

May 22, 2001 VAT RULING NO. 028-01 R.A. 7916 000-00 Polyton Industries Co ., Inc . 3rd Floor, Overseas Mansion I 373 Plaza Sta. Cruz Manila Attention: Mr . George C . Lee Manager Gentlemen : This refers to your letter dated 28 February 2000 requesting information whether you are still required to formally apply for and secure prior approval of this Office before your sales to the following EPZA-registered clients may qualify for and be entitled to the benefit of the zero percent (0%) value-added tax (VAT): 1. MONASTERIA KNITTING, INC. (Bataan EPZA); then Schlager Knitting, Inc. 2. EASTAR EXPORT VENTURES CORP. (Cavite EPZA); 3. K-PHILS., INC. (Cavite EPZA); and 4. S.D. PHILS., INC. (Cavite EPZA) In reply, please be informed that the law pertaining to the Export Processing Zone Authority (EPZA law) has been amended by R.A. 7916, otherwise known as "The Special Economic Zone Act of 1995" (or the ECOZONE). Under Section 4.100-2(c), in relation to Section 4.100-3 of Revenue Regulations No. 7-95, sales by VAT-registered suppliers to PEZA-registered enterprises are qualified for the effective zero percent VAT. In general, a VAT-registered person whose proposed sale transaction may qualify for effective zero percent VAT under Sections 106(A)(2) and 108(B) of the National Internal Revenue Code of 1997 shall, first, formally apply for and secure prior approval of this Office to the effect that his proposed sale transaction qualifies for effective zero percent VAT, pursuant to Section 4.107-I(d), Revenue Regulations No. 7-95, which provides: " Application for effective zero-rating . Except for actual export sale, other cases of zero-rated sales in Sec. 4.100-3 and Sec. 4.102-2(c) shall require prior application with the Revenue District Office for effective zero-rating. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt." The rationale for the aforesaid requirement is to ensure that such sale transaction is, in fact and in law, qualified for and entitled to the benefit of the zero percent VAT. However, since all sale transactions made by VAT-registered suppliers to PEZA-registered enterprises qualify for the zero percent VAT, considering the style of business operations in the ECOZONE, it has been ruled in Revenue Memorandum Circular No. 74-99 dated 15 October 1999, that the said Circular shall serve as a sufficient basis to qualify such sale transactions for purposes of the zero percent VAT, in order to minimize, if not forego, a bureaucratic red tape. The pertinent portion of Section 3(3) of RMC No. 74-99, provides: "SEC. 3. Tax treatment of sales made by a VAT-registered supplier from the customs territory, to a PEZA registered enterprise . "xxx xxx xxx "(3) . . . This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No . 7-95 effective as of the date of the issuance of this Circular ." Accordingly, as a VAT-registered supplier, your sale of goods to any PEZA-registered enterprise shall be treated qualified and thus, entitled to the benefit of the zero percent (0%) VAT without further necessity of any prior application for a BIR permit to zero rate such transaction. However, pursuant to the provisions of Section 108-I(5) of Revenue Regulations No. 7-95, you shall only issue to your PEZA-registered client a duly-registered VAT invoice intended for VAT zero-rated sales, i.e., that "the word 'zero rated' is imprinted on the invoice." Otherwise, the same shall not be entitled to the benefit of a zero-rated VAT transaction. SECATH Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group