VAT Ruling No. 044-98

November 26, 1998 VAT RULING NO. 044-98 Sec. 108 (B)-000-00-044-98 Quasha Ancheta Pea & Nolasco Lawyers Don Pablo Bldg.,114 Amorsolo Street Makati City, M.M. Attention: Attys . Alonzo Q . Ancheta and Dennis G . Dimagiba Gentlemen : This refers to your letter dated October 23, 1997 concerning your request for a confirmation of your opinion that the sale of services by your client, Philippine Airport and Ground Services, Incs. (PAGS), to international air carriers owned by various International Airline Companies, landing at the Ninoy International Airport (NAIA), shall be subject to zero percent (0%) value added tax (VAT) pursuant to Section 108(B), NIRC, as amended by R.A. Nos. 7716 and 8241, and as renumbered by R.A. No. 8424. It is represented that your client is engaged in the business of providing baggage and cargo handling as well as other ground services to aircrafts of various International Airline Companies landing at the NAIA, and that your client is paid in foreign currency which is duly accounted for in accordance with the rules and regulations of the Bangko Sentral Ng Pilipinas. llcd In reply, please be informed that our VAT law which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988 is basically a Consumption Type VAT System and, in general, follows the destination principle or Cross Border Doctrine. Under the 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) "When considering a VAT, 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 (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, 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.") 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, goods, property 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 zero percent (0%) VAT. Section 108(B), NIRC, as amended, is implemented by Section 3(b) of Revenue Regulations No. 7-95, as amended by Section 4.102-2(b) of Revenue Regulations No. 5-96, provides as follows: "SEC. 3. Zero rating . (a) ... "(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 "(4) Services rendered to vessels engaged exclusively in international shipping; xxx xxx xxx" The above provision speaks of services rendered to vessels engaged exclusively in international shipping. However, applying the doctrine of statutory construction of ejusdem generis where general terms follow the designation of particular things or classes of persons or subjects, the general term will be construed to include those things or persons of the same class or of the same nature as those specifically enumerated, the same provision, likewise, covers aircraft carrier. Accordingly, the services of your client to international air carriers of various International Airline Companies which are destined for use or consumption outside the Philippines since the same are directly connected to international flights of the aforesaid international air carriers are subject to zero percent (0%) VAT pursuant to Section 108(B), NIRC, as amended by R.A. Nos. 7716 and 8241, renumbered by R.A. No. 8424, and as implemented by Section 3(b) of Revenue Regulations No. 7-95, as amended by Section 4.102-2(b) of Revenue Regulations No. 5-96. dctai Any BIR ruling heretofore issued inconsistent herewith is hereby amended or modified accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue