VAT Ruling No. 055-00

November 21, 2000 VAT RULING NO. 055-00 105, 108 (B) 086-99 Philippine Fast Ferry Corporation Pier 4, North Reclamation Area Cebu City 6000 Attention: Ms. Berly B. Tolentino Gentlemen : This refers to your letter dated June 8, 2000 requesting for a confirmation of your opinion that the sub-charter of a vessel in the Philippines by a domestic corporation to another domestic corporation is subject to 10% VAT although the payment of the sub-charter fees are in US Dollars. It is represented that the Philippine Fast Ferry Corporation (PFFC) is a domestic corporation duly registered under the laws of the Philippines engaged in ferrying passengers and cargo between ports of call pursuant to its franchise; that on the other hand, NENACO BVI is a non-resident foreign corporation organized and subsisting under the laws of the British Virgin Islands engaged in shipping; that PFFC and NENACO BVI entered into a contract of charter, wherein NENACO agreed to have its vessel St. Gabriel chartered by PFFC, the consideration of which is payable in US Dollars; that PFFC sub-chartered said vessel to Mt. Samat Ferry Express, Inc. because the volume of passengers of the route plied by St. Gabriel does not warrant its operation; that the charter fees are likewise payable in US Dollars in order to relieve PFFC of the problem of the fluctuation of exchange rate of Pesos to Dollars; and that Mt. Samat operated such vessel within Philippines waters. cTCaEA In reply, please be informed that our VAT law which was first adopted and promulgated under EO No. 273, effective January 1, 1988 is basically a Consumption type VAT System and, in general follows the destination principle of Cross Border Doctrine. Under the VAT System, 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 from 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 customer 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, 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 (exports exempt, imports taxable)." (Value Added Tax by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1996) 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 of VAT.") 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. Based on the foregoing, since the sub-charter of PFFC to Mt. Samat Ferry Express, Inc. transpire in the Philippines, the onus of taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines. Such being the case, we confirm your opinion that the sub-charter of the vessel entered into by the parties are subject to 10% VAT notwithstanding the fact that the charter fees are payable in US Dollars. PFFC is, therefore, required to pay the 10% VAT on the charter fees it receives from Mt. Samat Ferry Express, Inc. Furthermore, we confirm your opinion that since VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer/consumer, therefore, Mt. Samat Ferry Express, Inc. can be made to ultimately shoulder the VAT which may be shifted or passed on to it by PFFC. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group