VAT Ruling No. 043-03

October 13, 2003 VAT RULING NO. 043-03 Sec. 27, 110, 112, 236, NIRC RR 7-95, RMC 74-99, 9-2000 RA 7916, 7227, EO 226 Crismina Garments, Inc. 6F EBC Building, G. Puyat Ave. cor. Makati Avenue, Makati City Attention: Ms. Teresita S. Opea Officer-External Accounting Gentlemen : This refers to your letter filed last August 25, 2000 stating that you are a domestic corporation engaged in the manufacture and export of garments with production centers registered with the Philippine Economic Zone Authority (PEZA) based at Bataan pursuant to Republic Act No. 7916, Clark Special Economic Zone (Clark) under RA 7227, and the Board of Investments (BOI) under Executive Order No. 226; that your BOI-registered factory is in Metro Manila; that your products in the three (3) different establishments are all exported and, in view thereof, you have posed the following issues for resolution and/or confirmation: "1. Do we have to pay the annual VAT registration of P500 for each location/branch? "2. What is the registration as far as the PEZA and Clark factories are concerned? VAT? Non-VAT or other registration? "3. Are we required to file VAT returns as VAT exempt? If so, we have to indicate only the words "VAT EXEMPT". "4. Since we have also our BOI-registered factory here in Manila, as zero-rated sales for which input taxes can be claimed as TCC/VAT REFUND, we file our quarterly VAT with sales and purchases showing input taxes which we use for application for TCC. "5. For Income Tax purposes, under PEZA we use 5% on gross income. How about our Pampanga, Clark registration? Are we qualified to file for 5% gross income taxation? Under our registration, we are exempted and we have a certificate of registration stating this 5% tax on gross income. Is this governed by RR 1-95 Sec. 4(f) wherein we can generate income within the Customs Territory of up to 30% of total income from all sources? "6. Since we have three registrations, do we have to have 30% limit for BOI sales over the total PEZA and Clark for us to avail of 5%? Please note that we are 100% exporter that I think our Clark operations is qualified to avail of the 5% not considering the 30% limit. "7. For our suppliers to avail of zero rating, do they have to apply for zero rated sales to us? If so, where? Can they not implement it with the use of RR 7-95 and RR 74-99 plus the certificate of our registration? Please be informed that the above queries are hereby answered as follows: 1. Section 236(B) of the Tax Code of 1997 provides that " An annual registration fee in the amount of Five hundred pesos (P500) for every separate or district establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year thereafter on or before the last day of January . . ." A perusal of the terms of your registration with PEZA and Clark disclosed that you are entitled to the preferential tax of 5% on gross income earned in lieu of all other taxes and fees, national or local. Hence, with respect to your establishments registered therein, you are exempt from the P500 annual registration fee but you should register nonetheless. However, for your BOI-registered business, you are liable to the registration fee imposed under Section 236(B); 2. Considering that your operations at the PEZA and Clark are subject to the 5% tax on gross income earned in lieu of all other taxes, national or local, including the value added tax, it follows that the VAT regime under the National Internal Revenue Code (NIRC) does not apply. Accordingly, your establishments thereat should have a NON-VAT registration status. Your BOI-registered garments manufacturing and exports business located in Manila is, however, a VAT-registrable business activity; 3. For your PEZA and Clark operations, considering that they are outside VAT coverage, there is no need to file separate VAT returns therefor with the words "VAT-EXEMPT" inscribed thereat. Considering, however, that you have a VAT-registered business in Manila, you are required to file quarterly VAT returns with the Revenue District Office (RDO) where you are registered as a VAT person (Sec. 114, Tax Code of 1997). Your sales figures from your PEZA and Clark operations may then be reported under the "EXEMPT SALES" space of the consolidated VAT return; 4. Your statement that since you also have your BOI-registered factory in Manila, with zero-rated sales for which input taxes can be claimed as TCC/VAT refund, you file together with your VAT returns a summary list of your quarterly sales and purchases showing input taxes which you use for your application for TCC, is hereby confirmed; (Sec. 110, NIRC) 5. For income tax purposes, your operations at PEZA and Clark are subject to the 5% tax on gross income earned in lieu of all taxes, national and local, pursuant to Republic Act Nos. 7916 and 7227. However, your operations in the Customs Territory, in the absence of showing that it is entitled to an income tax holiday (ITH) under its BOI registration, is subject to the ordinary corporate income tax at the rate of 32% on taxable net income or to the 2% minimum corporate income tax (MCIT), whichever is higher, as imposed under Section 27 of the 1997 Tax Code; SIcEHD 6. Your query on whether you have to limit to 30% your sales for your BOI-registered activities in the Customs Territory in relation to your total company sales, in order to entitle your PEZA and Clark operations to the 5% preferential tax rate, is answered in the negative. Section 4(f) of Revenue Regulations No. 1-95, implementing the tax incentive provisions of the Bases Conversion Development Act, refers only to the sale of the items produced in the secured area (Clark) such that if not more than 30% of the production thereat is sold to the Customs Territory, then the entire sales therefrom qualify for the 5% tax on gross income, otherwise, the entire sales by your Clark establishment shall be subject to the internal revenue tax laws of the Customs Territory. On the other hand, with respect to your PEZA-registered establishment at Bataan, if its sales to the Customs Territory exceeds the threshold of 30%, its income derived from such excess sales shall be imposed with the normal income tax pursuant to the provisions of Title II, NIRC (RMC 74-99); 7. The general rule is that except for direct export sales, all other exporters are required to apply in order to qualify for VAT zero-rating (Sec. 4.102. RR 7-95). Thus, your suppliers of raw materials and packaging supplies and/or contractors or subcontractors of services are required to apply for effective zero rating. However, pursuant to Revenue Memorandum Circulars No. 74-99 and 9-2000, suppliers of goods and services to PEZA and other ECOZONE registered enterprises, as well as to BOI-registered enterprises certified to by the BOI as exporting 100% of their annual production, automatically qualify for VAT zero-rating without the need of filing an application. This ruling is based on the foregoing facts as represented. However, if upon investigation, the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group