VAT Ruling No. 055-98

December 2, 1998 VAT RULING NO. 055-98 108 (B) (3)-033-96-055-98 CCT Constructors Corporation Unit 2-E Corinthian Plaza Condominium 121 Paseo de Roxas, Makati City Attention: Nobuyuki Usui Treasurer Gentlemen : This refers to your letter of September 4, 1998 concerning your request for information whether or not your sales of services to Philippine Economic Zone Authority (PEZA)-registered enterprises may be considered subject to zero percent (0%) value-added tax considering BIR Ruling No. 033-96 dated October 30, 1996. It is represented that you are a domestic corporation primarily engaged in the building construction business; that you also cater to PEZA-registered enterprises situated at the economic zone (ECOZONE) for the construction of their factory buildings; that as a VAT-registered entity, you normally impose 10% VAT on all contracts entered into with your PEZA-registered clients but the latter invoked BIR Ruling No. 033-96 dated October 30, 1996, which held: "Such being the case, since R.A. 7916 is a special law which grants exemptions from national taxes to PEZA-registered business establishments operating within the ECOZONE, except payment of the preferential tax rate of 5% on gross income earned, the sales of goods and services by Customs territory contractors like EEI Corporation Philippines, Inc., shall be effectively zero-rated." In reply, please be informed that Section 108(B)(3), Tax Code of 1997 (formerly Sec. 102, of the Tax Code, as amended) provides that: "(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 "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate." The above-quoted provision of law is implemented by Section 4.102-2c Revenue Regulations No. 7-95, as follows: "(c) Effectively zero-rated sale of services. Effectively zero-rated sales of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Under these Regulations, effectively zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subpar. (b),Nos. (3),(4) and (5) of this section." (Sec. 4.102-2(c),Rev. Regs. No. 7-95). VAT is a form of indirect tax. But there is no existing provision under RA 7916 that PEZA-registered enterprises may be considered exempt from "indirect taxes." The 5% tax on such enterprises, in lieu of all taxes otherwise directly due therefrom, is a direct tax in character. Accordingly, your sales of services to such enterprises may not legally qualify as effectively subject to zero percent (0%) VAT under the above quoted provisions of Revenue Regulations No. 7-95. prLL 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 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) Our VAT law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, basically adhered to the consumption type VAT Regime and, in general, as follows the destination principle, viz.: "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 exempts),or the destination principle (export exempt, imports taxable)." (Value-Added-Tax by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle that: "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.") 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 zero percent (0%) VAT. There are different types of PEZA-registered enterprises under R.A. No. 7916. An ECOZONE may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers. Of the foregoing classification of ECOZONE enterprises, those under the Export Processing Zone are the ones whose products as destined to, used or consumed abroad. Following our VAT Regime which adheres to the Consumption Type VAT or the Destination Principle, sales of goods, property and services to ECOZONE enterprises engaged in export processing business shall, accordingly, be considered qualified for effective zero-rated VAT pursuant to the aforequoted provisions of the law and its implementing regulations, since their export products are destined for use or consumption outside the Philippines and hence, such export products must be free from VAT which otherwise are indirectly passed on by suppliers of goods, property or services. dctai Accordingly, your sales of services to PEZA registered enterprises may qualify for zero percent (0%) VAT provided, however, that such enterprises is an ECOZONE export producer and provided further, that a prior permit for zero rating of your sales to such enterprise is first obtained pursuant to Section 4.107-1(d) of Revenue Regulations No. 7-95. This ruling clarifies BIR Ruling No. 033-96, dated October 30, 1996. Any ruling inconsistent herewith is considered amended or modified accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue .