VAT Ruling No. 032-98

November 5, 1998 VAT RULING NO. 032-98 Sec. 108 (B) (3)-000-032-98 Shimizu Philippines Contractors, Inc. 5-F Kings Court I Building 2129 Pasong Tamo Street Makati City Attention: Eloy E . Roberto Sr. Manager - Accounting Gentlemen : This is refers to your letter of September 22, 1998 concerning your application for the zero percent (0%) value-added tax on your sale of services to Terumo (Philippines) Corporation (TPC for short) and requesting clarification of BIR Ruling No. 33-96 dated October 30, 1996. It is represented that Shimizu is a VAT-registered firm; that it is engaged in the general construction business; that Shimizu was contracted to build TPC's factory plant located at the Philippine Economic Zone in Sta. Rosa, Laguna; and that TPC is duly registered with the Philippine Economic Zone Authority (PEZA) as an Export Enterprise with Registration Certificate No. 98-035; and that it was held in BIR Ruling No. 033-96 dated October 30, 1996 that sales of services by a VAT-registered person to PEZA-registered business establishments operating within the Philippine Economic Zone shall be entitled to zero percent (0%) VAT. In reply, please be informed that Section 108(B)(3) of the Tax Code of 1997 (formerly Sec. 102, old NIRC) provides that: "(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippine by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." The above quoted provision of law is implemented by Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services. Effectively zero-rated sales of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subpar. (b),Nos. (3),(4) and (5) of this section." (Sec. 4.102-2(c),Rev. Regs. No. 7-95). 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 Fund, Washington D.C.,1988, p. 51) Our VAT law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, basically adheres to the Consumption Type VAT Regime and, in general, follows the destination principle, viz.: "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade; the origin principle (export 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.") 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. prLL There are different types of PEZA-registered enterprises under R.A. No. 7916. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers. Of the foregoing classification of ECOZONE enterprises, those under the Export Processing Zone are the ones whose products are destined to, used or consumed abroad. Following our VAT Regime which adheres to the Consumption Type VAT or the Destination Principle, sales of goods, property and services to ECOZONE enterprises engaged in export processing business shall, accordingly, be considered qualified for effective zero rated VAT pursuant to the aforequoted provisions of the law and its implementing regulations considering that their export products are destined for use or consumption outside the Philippines and such export products must be free from VAT which otherwise are indirectly passed on by suppliers of goods, property or services. LexLib Since TPC is a PEZA-registered Export Enterprise and whose products are destined to, used or consumed outside of the Philippines, your aforesaid sales of services to TPC shall accordingly be entitled to the zero percent (0%) VAT pursuant to Section 108(B)(3) of the Tax Code of 1997. This ruling clarifies BIR Ruling No. 033-96 dated October 30, 1996. Any ruling inconsistent herewith is considered amended or modified accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue