VAT Ruling No. 034-98

November 16, 1998 VAT RULING NO. 034-98 Sec. 108 (B) (3)-000-00-034-98 NNA Philippines Co., Inc. Unit 1814 Cityland Herrera Tower 98 Herrera cor. Valero Sts. Salcedo Village, Makati City Attention: Ms . Miriam E . Lecciones Executive Secretary Gentlemen : This refers to your letter dated September 9, 1998 requesting for a ruling as to whether or not the sale of your translation services to enterprises located in the Laguna Technopark and duly registered as PEZA-registered firms are subject to VAT. It is represented that you are a Japanese consultancy firm engaged in translation services serving the information needs of international investors in Asia and the Pacific; that upon incorporation in September 1998, you had initially registered as "NON-VAT" your transactions consisting mainly of the sale of a regularly-circulated newsletter with complimentary compilations and/or magazines; that beginning September this year, you fully expanded to other forms of delivery of translation services consequently compelling you to register as a VAT seller in compliance with the NIRC; that the sale of your translation services delivered thru courier, fax or electronic mail is a local purchase not directly related with your clients' production for which you bill and collect in Pesos; that with respect to your clients who are PEZA-registered firms and Export-Oriented Firms granted tax exemption privileges, you pose the query of whether or not your sale of services to such companies are zero-rated such that you are not obligated by law to collect VAT on their purchase of services from your firm. LexLib In reply, please be informed that Section 108(B)(3) of the Tax Code of 1997 (formerly Sec. 102, NIRC, as amended) provides that: "(B) Transactions subject to Zero Percent (0%) Rate. The following services performed in the Philippines 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 Section 4.102-2(c) of Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services. 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" (Emphasis supplied). VAT is a form of indirect tax. But there is no existing provision under RA 7916, the law which grants to PEZA-registered business enterprises operating within the ECOZONE exemptions from national taxes, that such PEZA-registered enterprises may be considered exempt from indirect taxes. It follows that your sales of services to such enterprises may not legally qualify as effectively subject to zero percent (0%) VAT under the above-quoted provision of Revenue Regulations No. 7-95. LLjur However, under the Value-Added Tax (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 productions (capital and labor). This suggests that countries that generally wish to pass on 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). Our VAT law, which was first adopted and promulgated under EO No. 273 effective January 1, 1988, basically adhered to the Consumption Type VAT Regime and generally follows the Destination Principle or Cross Border Doctrine of the VAT system, hence: "When considering a VAT, an important decision 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 (exports 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 values added, at home and abroad, of 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"). LLpr Thus, the onus of taxation under our VAT system is in that country where the goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services which are destined to, or for use or consumption in the Philippines are subject to the 10% VAT whereas export are zero-rated. (Sections 105, and 108, Tax Code of 1997) 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/Recreation 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, only the sales of goods, property and services to ECOZONE enterprises engaged in export processing business shall be considered qualified for effective zero-rated VAT pursuant to the aforequoted provisions of the law and its implementing regulations, since their export products are destined for use or consumption outside the Philippines and hence, such export products must be free from VAT which otherwise are indirectly passed on by suppliers of goods, property or services. llcd Accordingly, your sales of services to PEZA-registered enterprises may qualify for zero percent (0%) VAT provided, however, that such enterprises is an ECOZONE export producer. This is further subject to the condition that a prior permit for zero rating of your sales to such enterprise is first obtained pursuant to Section 4.107-1(d) of Revenue Regulations No. 7-95. This ruling supersedes any previous ruling inconsistent herewith. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue