VAT Ruling No. 042-01

July 5, 2001 VAT RULING NO. 042-01 E.O. 273 VAT Ruling No. 040-98 Green Gold International Exports Suite 307 Solmac Building 84 Dapitan cor. Banaue St. Quezon City Attention: Mr . Manuel Kiok General Manager Gentlemen : This refers to your letter dated February 21, 2001 requesting for a ruling that your export sales of Chinese herbal products falls under non-VAT category. It is represented that your company is an importer of Chinese medicinal herbal products; that you promote, advertise and sell the said products via the internet e-commerce; that the buyer's orders, in US dollars, are paid for by international credit cards, e.g., VISA, MASTERCARD or AMEX; that you would secure the Visa, Master Card, and/or AMEX approval of the US Dollar credit charge converted to pesos, such as the case with banks converting dollars to pesos; that once the authorization is granted, you commenced the shipment of the merchandise by air carriers such as DHL or UPS, destined to USA, Canada, Europe (both east and west), Latin America, Australia and East Asia; that international export shipments are covered by individual shipment airwaybills; and that you submit your collection to Visa, Mastercard and AMEX, which in turn, collect and are paid by your foreign buyers in US dollars. In reply, please be informed that our VAT Law, which was first adopted and promulgated under E.O. 273, effective January 1, 1998, in general, adheres to the Destination Principle or the Cross Border Doctrine. Under this Doctrine, 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 Practise and Problems, Allan A. Tait, International Monetary Fund, Washington, D.C., 1988, p. 51) " When considering a VAT, an important decisions 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 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 .") EHDCAI Accordingly, 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, merchandise, goods, 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 the zero percent (0%) VAT. (VAT Ruling No. 040-98) In view thereof, this Office is of the opinion and so holds that your export sale of Chinese herbal products which are paid for by the foreign buyers in US dollars which are converted into pesos and paid to you by international credit cards, are not exempt from VAT but instead subject to VAT at 0% considering that such goods are destined, used or consumed outside the Philippine territory. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group