VAT Ruling No. 049-00

October 30, 2000 VAT RULING NO. 049-00 Sec. 108 (B) (2) 005-99 Manila International Airport Authority Ninoy International Airport Metro Manila Attention: Mr . Antonio P . Gana General Manager S i r : This refers to your letter dated April 8, 2000, requesting for a ruling on the following issues: "(1) Are the transactions affecting international airlines using airport facilities and leasing certain airport properties not subject to VAT provided they pay their bills in foreign currency? "(2) Do they fall within the purview of the provisions of Revenue Regulations No. 5-96? It is represented that Manila International Airport Authority (MIAA) levies certain fees and charges for the use of airport facilities, services and for the lease of properties; that MIAA is imposing the 10% VAT on airport users and concessionaires; that foreign-currency denominated transactions, particularly those pertaining to billings to international airlines, when paid in foreign currency are considered "zero-rated transactions" thus not subject to VAT; and that the settlement of billings in local currency are subjected to VAT. In reply, please be informed that our VAT law, which was first adopted and promulgated under E.O. 273, effective January 1, 1998, is basically a Consumption Type VAT System and, in general, follows the destination principle or Cross Borded Doctrine. 1. Under the VAT System, VAT exemption and VAT zero-rating are distinguished as follows: ". . . zero-rating should be used when authorities really wish to ensure that a product is to be free of VAT. Using as exemption for VAT means that the tax is borne by the trader, and if the trader sells to public, he must pass on the tax on input to the public in his PRICE or cut payments to his factors of production (capital or 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." (VAT Tax International Practice and Practice and Problems, Allan A. Tait, International Monetary Fund, Washington, D.C., 1988, p. 51) "When considering a VAT, an important decision 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)." 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 ten percent (10%) VAT whereas those destined, used or consumed outside the Philippines are subject to zero percent (0%) VAT. (Sections 105 and 108, Tax Code of 1997) Section 108(B) Tax Code of 1997, is implemented by Section 3(b) of Revenue Regulations No. 7-95, as amended by Section 4.102-2(b) of the Revenue Regulations No. 5-96, as follows: "Section 3. Zero rating . (a) . . . xxx xxx xxx (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 (2) Services other than repacking goods for the other persons doing business outside the Philippines of goods which are subsequently exported, as well as services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. The sales of services subject to zero percent (0%) VAT under Section 108(B)(2) of the Tax Code of 1997 are limited to such sales which are destined for consumption outside the Philippines. Inasmuch as the situs of services rendered is within the Philippines and it is here where such services are used or consumed, therefore, MIAA'S sale of services must be subject to the 10% VAT rather than the 0% VAT, regardless of whether is compensation for services rendered be paid in foreign currency. 2. Based on the abovementioned provisions, transactions affecting international airlines using export facilities and leasing certain airport properties notwithstanding foreign currency denominated transactions are subject to 10% VAT and therefore do not fall within the purview of the Revenue Regulations No. 5-96. (VAT Ruling No. 005-99 dated January 13, 1999). TSaEcH Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group