VAT Ruling No. 046-99

April 12, 1999 VAT RULING NO. 046-99 R.A. 7227 032-98 046-99 Elector Masters Corporation 431 M. Martinez St.,Mandaluyong City Attention: Ms . Betty SB . Dacanay Accountant Gentlemen : This refers to your letters of January 28 and March 9, 1999 requesting, in effect, for information whether your sales to CACHO HERMANOS, INC .may qualify for the zero percent (0%) value added tax. llcd Documents submitted with your said letter show that Cacho Hermanos, Inc. is registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise and a holder of SBMA Certificate No. 93-0013, issued on March 27, 1998 pursuant to the provisions of R.A. No. 7227 and that, as such, it is entitled to tax exemption privileges under Section 12 (b) and 12 (c) of the said law, as implemented by Sections 43, 45, 46 and 49 of its implementing rules and regulations. In reply, please be informed that Section 12 (b) and (c) of R.A. No. 7227 provides: "(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; cdlex "(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone .In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to be base areas. "In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;" In general, as a duly registered Subic Bay Freeport Enterprise, no taxes, local or national, may be imposed upon CACHO HERMANOS (SUBIC), INC. vis-a-vis its transactions within the Ecozone. At the same time, our VAT Law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, 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 Practice 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 (export exempt, imports taxable)." (Value-Added Tax (VAT) by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz.:"t he country taxes all value added, at home and abroad, or goods that leave 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.(VAT RULING NO. 032-98, dated November 5, 1998) In view of the foregoing, intra zone sales of goods and services by the aforesaid Ecozone registered enterprises which are directly or indirectly destined for use or consumption outside the Philippine territory shall be totally free of the VAT (i.e., without any VAT component) whereas those destined for use or consumption within the Philippine territory shall be embraced by the provisions of the NIRC, hence, subject to the 10% VAT. Thus, in case of sale of goods by the said zone enterprise to persons in the Customs territory (i.e., outside the Zone), such persons are treated as importer, hence, subject to Customs duties and taxes, pursuant to Sec. 12 (b) of R.A. 7227 (supra). Your sales of goods and services to your aforesaid zone enterprise customer is subject to zero percent (0%) VAT, pursuant to the aforementioned Cross Border Doctrine of the VAT System in order that the sale transactions of registered zone enterprises which are destined for use or consumption outside the Philippine territory shall be entirely free of the VAT component. Conversely, their sales of goods to persons in the Customs territory (i.e., within the Philippines but outside the Zone) shall be subject to the 10% VAT, as follows: (a) In case of sale of goods , the buyer shall be treated as importer and shall be subject to Customs duties and import taxes, pursuant to Sec. 12(b) of R.A. No. 7227. (b) Sale of services by a zone registered enterprises to persons in the Customs territory shall not be treated embraced by Sec. 12 (a) and (b) of R.A. No. 7227, hence, subject to the provisions of the NIRC. For this reason, such sale shall be subject to the 10% VAT, pursuant to Section 108 of the NIRC. Any zone registered enterprise engaging in this type of transaction shall register with the BIR for VAT purposes and shall issue vat-registered invoices for the said taxable transaction. prcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue