VAT Ruling No. 050-98

December 2, 1998 VAT RULING NO. 050-98 105, 108-032-98-050-98 J.P. Tolentino & Co. Certified Public Accountants No. 16, Pelota Street St. Francis Village Cainta, Rizal Attention: Mr . Joaquin P . Tolentino Managing Partner Gentlemen : This refers to your letter dated March 13, 1998 stating that your client, EVERGREEN PHILIPPINES CORPORATION (EPC), is a domestic corporation engaged in the shipping agency, in the Philippines, of an international shipping company based in Taipei, Taiwan; that EPC collects and receives the revenue of its foreign principal from its customers in the Philippines, after deduction therefrom of EPC's agency commission; and that because EPC's compensation for services rendered to its foreign principal is constructively paid for in foreign exchange which is inwardly remitted, it is your opinion that EPC's sale of services to its foreign client may be treated subject to zero percent VAT. In reply, please be informed that actual or constructive inward remittance of foreign exchange payment for services rendered has been amended by R.A. No. 7716, otherwise known as the Expanded VAT Law, which was implemented beginning January 1, 1996. It is sufficient that the foreign exchange proceeds of such sale of services is "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)", pursuant to the provisions of Section 108(B)(1) and (2), NIRC, as renumbered by R.A. No. 8424. It does not necessarily mean, however, that sale of services may be classified subject to zero percent (0%) VAT under the said Section 108 simply because paid for in acceptable foreign currency and accounted for according to the rules of the BSP. In general, unless expressly provided for by law, sales of services by VAT-registered persons, such as that of the services rendered by EPC, may be treated qualified for the zero percent (0%) VAT provided the use or benefit derived from such services crosses the Philippine territory in accordance with the Destination Principle or Cross Border Doctrine, which is the underlying principle of our VAT System. 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 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 (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 exports are zero-rated, pursuant to Sections 105 and 108 of the Tax Code of 1997. (See VAT Ruling No. 032-98 dated November 5, 1998 in the case of Shimizu Phil. Contractors, Inc.) LexLib In view thereof, this Office is amenable to apply the zero percent (0%) VAT on the sale of services by EPC to its foreign principal provided the shipment for which EPC is paid its commission is destined from a Philippine port of entry to a foreign port of entry (i.e., zero percent (0%) VAT only on outbound shipments of passengers, goods or cargoes). Conversely, EPC's commission for inbound shipments shall be subject to the 10% VAT, pursuant to Section 108(A) of the Tax Code of 1997. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue