VAT Ruling No. 046-02

August 5, 2002 VAT RULING NO. 046-02 RMC No. 74-99 000-00 NEC Technologies Philippines, Inc. (NTEP) Mactan Economic Zone (MEZ) Lapu-Lapu City, Cebu Attention: Mr. Toshimi Hirahara, Director/Treasurer Gentlemen : This refers to your letter, dated November 13, 2001, requesting for a ruling that your employees' purchase of medicines from VAT-registered drugstores may be treated entitled to the benefit of the zero percent (0%) value added tax (VAT). It is represented that NTEP is a PEZA-registered Japanese multinational enterprise, doing business at the Mactan Economic Zone; that, as such, it is entitled to the benefit of the 5% special tax, computed based on gross income earned, in lieu of all taxes, national and local, except the real property tax, pursuant to the provisions of Republic Act No. 7916, as amended by Republic Act No. 8748; that, part of its medical benefits program is the reimbursement of cost of medicines purchased by its employees, up to a maximum of P3,000.00 per employee, per annum; that, any "unused" balance is forfeited and not forwarded or carried over to the next fiscal year; and that, it strictly monitors all requests for refund through a data base program. In reply, please be informed that while, in general, VAT-registered suppliers of goods, properties and services doing business in the Customs Territory (i.e., outside the Economic Zone) may be entitled to the benefit of the zero percent (0%) VAT on their sales to PEZA-registered enterprises, pursuant to Revenue Memorandum Circular No. 74-99, promulgated Oct. 15, 1999, in relation to the provisions of R.A. No. 7916, however, this fiscal incentive does not extend to the PEZA-registered enterprise's compensation income payments to its employees, whether paid in cash or in kind; whether paid directly, in the form of salaries and allowances; or paid indirectly in the form of employees' fringe benefits, in cash or in kind. The said fiscal incentive constitutes total exemption of the PEZA-registered enterprise from being indirectly passed on with the 10% VAT by its VAT-registered suppliers, hence, entitles the latter to a refund of all its input taxes attributable to its VAT zero-rated sales. This privilege is granted by law only to PEZA-registered enterprises; it cannot be legally extended to its employees, whether directly or indirectly. Being in the nature of a tax exemption, it is strictly construed against the claimant: ". . . a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The rule on strictissimi juris equally applies. So that, any doubt . . . should be resolved in favor of the taxing authority . . ." 1 In view thereof, your aforementioned request cannot be granted for lack of legal basis. cHaCAS Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue