VAT Ruling No. 039-01

June 28, 2001 VAT RULING NO. 039-01 R.R. 7-95 VAT-9-98 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Atty . George J . Lavadia Principal Tax Services Gentlemen : This refers to your letter dated June 15, 1999 requesting for a ruling in behalf of your client, Futaba Corporation of the Philippines (FCP) , that the royalty payments made by FCP to Futaba Corporation of Japan (FCJ) is exempt from value-added tax, both during the period that it is enjoying Income Tax Holiday and during the period that it is under the 5% final tax on gross income earned. It is represented that FCP is a corporation organized and existing under Philippine laws and is a wholly-owned subsidiary of FCJ; that it is registered with the Philippine Economic Zone Authority (PEZA) under Republic Act No. 7916 on a pioneer status as a manufacturer and exporter of vacuum flourescent displays as well as component parts and related-products thereof; that as an ecozone export enterprise under pioneer status, FCP is granted ITH incentive for a period of six (6) years pursuant to Section 23 of RA No. 7916; that after the lapse of the ITH period, it shall pay 5% preferential tax on gross income earned, which tax is in lieu of all national and local taxes in accordance with Section 24 of RA No. 7916; that on the other hand, FCJ is a corporation organized and existing under the laws of Japan; that it has developed and is commercially manufacturing vacuum flourescent displays and the related parts and products, and owns and controls certain patents and technical information relating thereto; that on May 1, 1996, FCP and FCJ entered into a ten-year Technical Assistance and Licensing Agreement whereby the latter shall furnish technical information and grant a license to use the patents to manufacture and sell such vacuum flourescent display and license to use its trade mark "FUTABA" on licensed products; that in consideration for the licensing and technical information FCP agreed to pay to FCJ royalties for all licensed products sold or otherwise disposed of by or for FCP during the term of the Agreement at the rate of five percent (5%) of "Net Sales" thereof and that as a PEZA registered entity, FCP undertakes its business activities exclusively in a special economic zone and sells its output abroad. In reply, please be informed that the Philippine VAT System adopts the destination principle wherein imports are taxed while exports are given total immunity. This system of taxation, applied to goods crossing the borders, is designed to make our local products competitive in the foreign market. In line with this principle which is the backbone of the Philippine VAT System, the royalties paid by FCP to FCJ is exempt from the VAT whether at the time that it enjoys income tax holiday or at the time that it is subject to the 5% commutation tax. Otherwise, FCP will be required to shoulder the VAT on its inputs which will add-up to the export cost of its products. As a matter of fact, the local sale of VAT suppliers to PEZA-registered enterprises were declared zero-rated to afford full immunity to the export producer. (RMC No. 74-99) It is on this principle that the royalties paid by FCP to FCJ shall be exempt from VAT so that the PEZA locator would be truly relieved from the burden of the indirect tax consonant with the "Cross Border Doctrine" thereby ensuring that the export price of the commodities exported has no VAT component. TcDIEH In view thereof, and considering that your client's foreign licensor is exempt from VAT, your client's aforesaid royalty payments are accordingly exempt from the value-added tax. Consequently, your client is also exempt from the obligation to withhold and remit the 10% value-added tax on its payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 110 of the National Internal Revenue Code, as amended by R.A. No. 7716, and as implemented by Section 4.110-3 of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Enforcement Group