VAT Ruling No. 034-02

May 8, 2002 VAT RULING NO. 034-02 Sec. 108 (B) (4) 000-00 Florama Development Corporation Florama Bldg., cor. Bautista and Emilia Streets Palanan Street, Makati City Attention: Mr. Iluminado M. Estacio President Gentlemen : This refers to your letter dated April 19, 2001 requesting clarification on whether your lessee, Micronesia Manpower Resources Corporation (Micronesia), is exempt from paying 10% VAT on rental. Micronesia is engaged in the deployment of seamen to vessels of foreign principals and as such it has been issued a Zero-rated Certificate by the Bureau. Being a "zero-rated agency", it now claims that it is exempt from the imposition of ten percent (10%) VAT on rentals. In reply, please be informed that pursuant to Sec. 4-102-2(c) of Revenue Regulations 7-95, as amended, effective zero-rated treatment shall be accorded to sales made by VAT-registered persons to entities who were granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to local sale of services to persons or entities who enjoy exemptions from indirect taxes which, among others, includes services rendered to vessels engaged exclusively in international shipping. Sec. 4.107-1(d) of the same Regulations further provides that for such transactions to be accorded with the 0%-VAT treatment, the same shall require prior application for effective zero-rating from the Bureau. It is on the basis of these provisions that Micronesia was issued Zero-VAT Certificate by the Bureau inasmuch as its deployment of seamen to vessels of foreign principals may well be considered as services rendered to vessels engaged in international shipping which is subject to effective 0%-VAT rating. For the treatment of input taxes incurred by corporations such as Micronesia which have been accorded effectively zero-rated treatment on their sales of goods and services to persons which have been granted exemption from indirect taxes, Section 112 of the Tax Code of 1997, thus, provides "SEC. 112. Refunds or Tax Credits of Input Tax . "(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rate may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax, Provided, however, . . . , That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." Nowhere in the foregoing provision is it stated that Micronesia can refuse the input taxes passed on by its suppliers for its purchase of goods and services. What is clearly stated thereon is its option to have input taxes directly attributable to its sales of services subject to effective 0%-VAT rate be claimed either by the issuance of tax credit certificate or by refund and for an allocation be made with respect to input taxes not directly attributable to its 0%-rated sales transactions. In view thereof, this Office is of the opinion that Micronesia is not exempt from the imposition of 10% VAT on rentals. This Ruling is being issued on the basis of the facts represented. If, upon investigation, it will be disclosed that the facts are different, then this Ruling shall be considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue