VAT Ruling No. 037-98

1998 VAT RULING NO. 037-98 106 (A) (2) (c); 108 (B) (3)-282-88-037-98 Daiichi Properties & Development, Inc. Penthouse, The Taipan Place Emerald Avenue, Ortigas Center Pasig City Attention: Ms . Jennifer M . Lim Financial Controller Gentlemen : This refers to your letter dated September 17, 1998 stating that DAIICHI PROPERTIES & DEVELOPMENT, INC. (DPDI) is a corporation duly organized and existing under Philippine laws; that on January 24, 1996, the Board of the Philippine Economic Zone Authority (PEZA Board) passed Resolution No. 96-019 approving the application of DPDI for (a) the declaration of a fifty-five (55) hectares area in Barangay Maguyam Silang, Cavite as an Ecozone, henceforth to be known as DAIICHI INDUSTRIAL PARK-ECOZONE; and (b) DPDI's registration as Ecozone Developer/Operator of said Ecozone; that, on September 23, 1997, President Fidel V. Ramos issued Proclamation No. 1095 designating the above-mentioned area as a Special Economic Zone to be known as the DAIICHI INDUSTRIAL PARK-SPECIAL ECONOMIC ZONE; that on October 22, 1997, PEZA issued Certificate of Registration No. EZ-97-02 in favor of DPDI conferring upon it the status of Ecozone Developer/Operator of Maguyam, Silang, Cavite; and that as PEZA registrant, DPDI have been granted income tax holiday for a period of four (4) years; that, after the expiration of its 4-year income tax holiday, DPDI shall be exempt from national and local taxes and, in lieu thereof, shall henceforth pay a five percent (5%) Gross Income Tax pursuant to the provisions of R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995. Based on the foregoing, you are now requesting for a ruling on whether (1) you are exempt from 10% VAT on your sale or lease of real property; and (2) whether your suppliers of goods, property and services from the Customs Territory (i.e. from outside the proclaimed boundaries of the Ecozone) may avail of the privilege of zero rating. In reply, please be informed as follows: 1. In accordance with DPDI's PEZA Certificate of Registration and its concomitant Registration Agreement with the PEZA, DPDI has been granted Income Tax Holiday for a period of four (4) years; that, after this 4-year Income Tax Holiday, it shall henceforth be exempt from all national and local taxes and, in lieu thereof, it shall be subject to tax at the rate of five percent (5%), based on gross income earned. In view thereof, please be informed that during this 4-year Income Tax Holiday, DPDI shall only be exempt from income tax. However, DPDI shall be subject to other internal revenue taxes provided under the National Internal Revenue Code, such as, but not limited to, value-added tax. Therefore, DPDI's sales of goods, property and services shall be subject to 10% VAT during the aforesaid 4-year period. 2. Under Sections 4.100-3 and 4.102-2 of Revenue Regulations No. 7-95, implementing Sections 100(a)(2)(C) and 100(b)(3), old NIRC [now Sec. 106 (A)(2)(c) and 108(B)(3), NIRC of 1997], the term "effectively zero-rated sale of goods, property and services" shall only apply to sales made by a VAT-registered person to a person or entity who is exempt from indirect tax , pursuant to the provisions of a special law or international agreement in which the Philippines is a signatory. dctai The special law in this case is R.A. 7916, otherwise known as The Special Economic Zone Act of 1995. There is no existing provision under this law that a PEZA-registered enterprise (such as DPDI) is exempt from indirect tax. Hence, DPDI is only exempt from income taxes during its 4-year Income Tax Holiday. Even after the expiration of this 4-year Income Tax Holiday, DPDI shall only be exempt from all national and local taxes. However, all these taxes to which DPDI shall enjoy exemption refer to direct taxes. On the other hand, the 10% VAT imposed on its purchases of goods, property or services are direct taxes in the hands of its suppliers but indirect taxes in the hands of DPDI since the same are passed-on as part of the cost of its purchases. In BIR Ruling No. 242-88 dated June 6, 1988, it was held: ". . . the value added tax is an indirect tax; hence, it can be shifted to the customer. Once shifted to the customer as addition to the cost of goods sold, it is no longer a tax but an additional cost which the customer has to pay in order to obtain the goods (Philippine Acetylene Co. vs. Commissioner of Internal Revenue, G.R. No. L-19707, August 17, 1967). . . ." Accordingly, DPDI's suppliers of services cannot qualify for zero percent VAT, hence, shall be subject to 10% VAT on their sales to DPDI, pursuant to the provisions of Section 108 of the NIRC of 1997. However, DPDI's purchases of merchandise from suppliers in the Customs Territory, being considered as "export sales" under Article 77(2) of the Omnibus Investments Code of 1987, shall be considered subject to effectively zero-rated VAT, pursuant to Section 106(2)(a)(5), NIRC, as amended and as renumbered by R.A. 8424, and as implemented by Sections 4.100-2(a)(5) and 4.100-3 of Revenue Regulations No. 7-95. It shall be understood, however, that your suppliers in the Customs Territory shall apply with the Revenue District Officer concerned having jurisdiction over your principal place of business for the effective zero-rating of their sale to you of general merchandise pursuant to Revenue Regulations No. 7-95. 3. Since DPDI is a VAT-registered person, the 10% VAT on its purchases of services from suppliers in the Customs Territory shall be available as Input Tax Credit in the hands of DPDI, pursuant to Section 110, NIRC of 1997. LLjur 4. DPDI's sale of goods, property or services to PEZA-registered enterprises may either be subject to the 10% VAT or to the zero percent (0%) VAT, depending on whether the same falls under the "Cross Border Doctrine", as discussed below. 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 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 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, follows the destination principle or Cross Border Doctrine , 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 (exports 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, 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."] Clearly, 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 exports are zero-rated. (Sections 105 and 108; Tax Code of 1997) Finally, under Rule I of the PEZA Rules and Regulations implementing R.A. No. 7916, otherwise known as The Special Economic Zone Act of 1995, PEZA-registered enterprises are classified into different categories, such as Ecozone Export Enterprise, Ecozone Domestic Market Enterprise, Ecozone Utilities Enterprise, Ecozone Facilities Enterprise, Ecozone Developer/Operator, Ecozone Service Enterprise, etc. Following the "Cross Border Doctrine", it is only the sale of goods, property or services to Ecozone Enterprises engaged in the export business that shall be considered qualified for effective zero rated VAT. Otherwise, the transaction shall be subject to the 10% VAT. LexLib Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group