VAT Ruling No. 050-03

December 1, 2003 VAT RULING NO. 050-03 R.A. No. 7227 & 7916 MEMORANDUM FOR: Asst. Commissioner Nora E. Tamayo Assessment Service This refers to your memorandum for the Chairman, VAT REVIEW COMMITTEE, dated September 18, 2002, raising the following issued: ISSUE A. " It is an accepted fact that goods sold to entities located in the Special Economic Zone (SEZ) may be diverted back to Customs Territory especially if the entities are engaged in general merchandising . Shall we treat the above sale as effectively zero-rated ?" ISSUE B. " How will we treat the sale of services to registered SEZ locators which are not export oriented? Will such sales be subject to VAT at zero-rate ?" ISSUE C. " How shall we treat the sale of power by power generating companies? Automatically or effectively zero-rated? (Note : Power Industry Reform Act of 2001 simply states that sales shall be VAT zero-rated) . ON ISSUE A In reply, please be informed that the law on Special Economic Zones are embraced under R.A. No. 7227, otherwise known as the " Bases Conversion and Development Act of 1992 " and R.A. No. 7916, as amended, otherwise known as " The Special Economic Zone Act of 1995 ." SPECIAL ECONOMIC ZONES UNDER R.A. NO. 7227 Under R.A. No. 7227 and its Implementing Rules and Regulations, 1 the Subic Bay Freeport (SBF), also referred to as the Special Economic and Freeport Zone (SEZ), is treated as a " Separate Customs Territory ." 2 The term "SBF Enterprise" means " any business entity or concern within the SBF duly registered with and/or licensed by the SBMA 3 to operate any lawful economic activity within the SBF . " 4 "Articles which are admitted to the SBF from the Customs Territory under proper permit shall be considered exported for purposes of the laws and regulations of the Philippines, and shall be considered to be zero-rated and thereby become eligible for drawback, relief from duties and taxes, and any other tax or duty benefit conferred by reason of exportation ; provided, that articles which are returned to the Customs Territory from the SBF shall be considered imported for the purposes of the laws and regulations of the Philippines . " 5 " . . . foreign articles removed, withdrawn or otherwise disposed of from the SBF into the Customs Territory, shall be subject to the payment of customs duties and internal revenue taxes as ordinary importations in accordance with the provisions of the Tariff and Customs Code of the Philippines, as amended, and the National Internal Revenue Code and other applicable laws . Articles entered or introduced from the SBF into the Customs Territory will be presumed to be foreign 6 unless there is sufficient evidence presented to satisfy customs officials that they are domestic articles as defined in these Rules . " 7 "Foreign articles withdrawn, transported, or taken in commercial quantities from the SBF to the Customs Territory without payment of duties and taxes, shall be subject to seizure and forfeiture proceedings pursuant to the pertinent provisions of the Tariff and Customs Code and the National Internal Revenue Code of the Philippines, without prejudice to any criminal and/or administrative actions that may be instituted against the person/persons liable/responsible therefor ." 8 The Clark Special Economic Zone (CSEZ) is part of the Special Economic Zones (SEZ) created under Executive Order No. 80, promulgated on April 3, 1993, pursuant to R.A. No. 7227. 9 CSEZ-registered enterprises are entitled to the same fiscal incentives availing to SBF-registered enterprises. 10 SPECIAL ECONOMIC ZONES UNDER R.A. NO. 7916 Under Revenue Memorandum Circular No. 74-99, promulgated on October 15, 1999, pursuant to the provisions of R.A. No. 7916, sale of goods to a PEZA-registered enterprise, by a VAT-registered supplier from the Customs Territory, i.e., outside the ECOZONE, ". . . shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec . 106(A)(2)(a)(5), NIRC and Sec . 23 of R . A . No . 7916, in relation to ART. 77(2) of the Omnibus Investments Code . " 11 "Generally, products manufactured or produced within the ECOZONE are destined for export to foreign countries . While such products, under certain conditions, may also be sold to buyers in the Customs Territory, i . e . , outside the ECOZONE, such sales are technically considered as importation by such buyer from the Customs Territory . Since the ECOZONE is technically treated as another separate Customs Territory, the buyer is treated as an importer and is imposed with the corresponding import taxes and customs duties on his purchase of products from within the ECOZONE ." 12 Moreover, " All privileges, benefits, advantages or exemptions granted to special economic zones under Republic Act No . 7227, shall ipso facto be accorded to special economic zones already created or to be created under this Act . The free port status shall not be vested upon the new special economic zones ." 13 Thus, sale of goods to the above SEZ-registered enterprises, by VAT-registered suppliers in the Customs Territory, being treated in law as export sales, are entitled to the benefit of the effectively zero percent (0%) VAT, pursuant to Section 106 (A) (2) (a) (5), NIRC of 1997, as implemented by Section 4.100-3, 14 Revenue Regulations No. 7-95. On your apprehension that VAT zero-rated supply of goods to SEZ-registered enterprises may possibly be diverted back to the Customs Territory, please be informed that under the above quoted rules and regulations, the said goods shall not be allowed to enter the Customs Territory unless the buyer, who is treated as importer, paid the corresponding duties and taxes thereon. Otherwise, such goods shall be treated as "smuggled goods" subject to seizure and forfeiture proceedings, pursuant to the provisions of the Tariff and Customs Code and the NIRC of 1997. Accordingly, any internal revenue officer who has actual knowledge of any smuggling of goods from any Special Economic Zone, to the detriment of the duties and taxes prescribed under the said Codes, is duty bound to immediately report the same to the proper authorities and/or cause for the assessment and collection of the said duties and taxes, to insure that no goods may be withdrawn from the SEZ, to the Customs Territory, unless the corresponding taxes and duties prescribed by law have been duly paid thereon. ON ISSUE B Section 4 (e), Revenue Regulations No. 1-95, provides, among others, that purchase of " services " made by SBMA/CDA registered Ecozone enterprises, from VAT-registered suppliers in the Customs Territory, shall be entitled to the benefit of effectively zero-rated VAT, as follows: "e. Purchases of raw materials, capital goods and equipment and services by the SBMA and SBF accredited enterprises from enterprises in the Customs Territory shall be considered effectively zero-rated for VAT purposes . However, the VAT registered enterprises in the Customs Territory shall apply for effective zero-rating of their sales of goods and services to SBMA and to SBF enterprises pursuant to Revenue Regulations No . 5-87 as amended ." RMC No. 74-99 also provides, in part, that " While all ECOZONE enterprises are not necessarily manufacturer-exporters of products considering that there are also service enterprises registered as ECOZONE enterprises, however, taken as a whole, all their integrated activities eventually translate into manufactured products which are either actually exported to foreign countries, in which case, no VAT must form part of its export price ; or actually sold to buyers from the Customs Territory, in which case, 10% VAT shall be paid thereon by such buyers, consistent with the 'Cross Border Doctrine' of the VAT system ." 15 Hence, sale of service by a VAT-registered person, to a PEZA-registered enterprise ". . . shall be treated subject to zero percent (0%) VAT under the 'cross border doctrine' of the VAT System, pursuant to VAT Ruling No . 032-98 dated Nov . 5, 1998 ." 16 The VAT rules applicable to special economic zones (SEZ) organized and existing by virtue of R.A. No. 7227 equally applies to special economic zones organized and existing by virtue of R.A. No. 7916, because of the ipso facto clause under Section 51, R.A. No. 7916. Moreover, since the law does not limit the said fiscal incentive only to export oriented SEZ-registered enterprises, there is, therefore, no legal basis to make any such distinction. Settled is the rule that: " The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law as it has been enacted . The power cannot be extended to amending or expanding the statutory requirements or to embrace matters not covered by the statute . Rules that subvert the statute cannot be sanctioned ." ( University of Santo Tomas vs . Board of Tax Appeals , 93 Phil. 376) " It is a well-known maxim in statutory construction that where the law does not distinguish, we should not distinguish " ( Robles v . Zambales Chromite Mining Company , 104 Phil. 688). Therefore, supply of services by VAT-registered persons in the Customs Territory, to the said SEZ-registered enterprises, are entitled to the benefit of effectively zero-rated VAT, regardless of whether or not the SEZ-registered enterprise is export oriented . aTcIEH ON ISSUE C Please be informed that the Secretary of Finance himself, in the exercise of his review power under Section 4, NIRC of 1997, has ruled in his memorandum to the Commissioner of Internal Revenue, dated January 26, 1998, in the case of SAN PASCUAL CO-GENERATION CO., that sale of electricity to the National Power Corporation (NPC) is entitled to the benefit of effectively zero-rated VAT. 17 This ruling was issued based on the provisions of the VAT law, in relation to the Charter of the NPC, hence, limited in application. However, Section 6, R.A. No. 9136, known as the "Electric Power Industry Reform Act of 2001," (EPIRA) and its Implementing Rules and Regulations (IRR) provides that ". . . Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by generation companies shall be value added tax zero-rated . . .." Thus, it was held in BIR RULING No. 20-02, dated May 13, 2002, as follows: " Section 6(b), Rule 5 18 of the IRR 19 in relation to Section 4(x) of the EPIRA, 20 however, expressly provides that the sale of generated power by generation companies shall, upon the effectivity of the Act, be subject to zero percent (0%) VAT. Since PSALM, 21 once registered with the ERC 22 will fall within the definition of a Generation Company under Rule 5 of the aforesaid IRR with respect to its sale of generated power, we confirm your opinion that its sale of generated power will be subject to VAT at the rate of zero percent (0%) ." The above quoted statute does not qualify, hence, there is no basis for this Office to make any qualification. It follows, that sale of generated power by generation companies is entitled to the benefit of the zero percent (0%) VAT, pursuant to Section 6, R.A. No. 9136, without any qualification that it is merely entitled to effectively zero-rated VAT. " The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law as it has been enacted . The power cannot be extended to amending or expanding the statutory requirements or to embrace matters not covered by the statute . Rules that subvert the statute cannot be sanctioned . " (University of Santo Tomas vs . Board of Tax Appeals, 93 Phil . 376) It is a well-known maxim in statutory construction that where the law does not distinguish, we should not distinguish" (Robles v . Zambales Chromite Mining Company, 104 Phil . 688) (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. Promulgated November 3, 1992. 2. Sec. 3 (c), Implementing Rules and Regulations of R.A. 7227. 3. Subic Bay Metropolitan Authority. 4. Sec. 3 (g), id . 5. Sec. 48, id . 6. Sec. 3, id ., provides: "l. Domestic Articles refers to articles which are the growth, product or manufacture of the Philippines and upon which all national internal revenue taxes have been paid, if subject thereto, and upon which no drawback or bounty has been allowed ; and articles of foreign origin on which all duties and taxes have been paid and upon which no drawback or bounty has been allowed, or which have previously been entered into customs territory free of duties or taxes. "m. Foreign Articles refers to articles of foreign origin on which duties and taxes have not been paid, or upon which drawback or bounty has been allowed, or which have not been previously entered into customs territory; or articles which are the growth, product or manufacture of the Philippines on which not all national internal revenue taxes have been paid, if subject thereto, or upon which drawback or bounty has been allowed ." 7. Sec. 47, id . 8. Sec. 52, id . 9. Section 1, E.O. No. 80, provides: "Section 1. Creation of the Clark Development Corporation . A body corporate to be known as the Clark Development Corporation (CDC) is hereby authorized to be formed as the operating and implementing arm of the BCDA to manage the Clark Special Economic Zone (CSEZ). "The CDC shall be a subsidiary corporation of the BCDA and shall be formed in accordance with the Philippine corporation law and existing rules and regulations promulgated by the Securities and Exchange Commission pursuant to Section 16 of RA 7227. "The CDC shall be subject to the policies, rules and regulations of the BCDA for the CSEZ." 10. Sec. 5, E.O. No. 80, provides: "Section 5. Investments Climate in the CSEZ . Pursuant to Section 5(m) and Section 15 of RA 7227, the BCDA shall promulgate all necessary policies, rules and regulations governing the CSEZ, including investment incentives, in consultation with the local government units and pertinent government departments for implementation by the CDC. "Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments laws which may hereinafter be enacted . "The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives. The full incentives in the Clark SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA." 11. Sec. 3 (1)(a), RMC No. 74-99. 12. Sec. 2, RMC No. 74-99. 13. Section 51, RA. No. 7916. 14. "Section 4.100-3. Effectively zero-rated sale of goods and properties . Effectively zero-rated sales of goods and properties shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, e . g . RA 7227 or international agreements, e . g . ADB, IRRI. Under these Regulations, effectively zero-rated transactions shall cover local sale of goods and properties to persons or entities who enjoy exemptions from indirect taxes under par. (a) no (3), pars, (b) and (c) of the preceding section." 15. Sec. 2, RMC No. 74-99, dated October 15, 1999. 16. Sec. 3(b), id . 17. See BIR RULING No. 015-99, dated December 12, 1999. 18. "section 6. Generation Charges and VAT. xxx xxx xxx "(b) Pursuant to the policy of reducing electricity rates to End-Users, sales of generated power by a Generation Company shall, from the effectivity of the Act, be zero-rated for the purpose of imposition of value-added tax. Towards this end, the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a Generation Company through all stages of sale until it reaches the End-user. The DOF, through the BIR, shall issue the necessary regulations within sixty (60) calendar days from effectivity of these Rules and Regulations. 19. Implementing Rules and Regulations. 20. "(x) 'Generation Company' refers to any person or entity authorized by the ERC to operate facilities used in the generation of electricity." (Sec. 4, EPIRA) 21. Power Sector Assets & Liabilities Management Corporation. 22. Energy and Regulatory Commission.