VAT Ruling No. 057-01

September 5, 2001 VAT RULING NO. 057-01 R.R. 7-95 VAT Ruling No. 9-98 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, 1226 Makati City Attention: Atty . George J . Lavadia Principal Tax Services Gentlemen : This refers to your letter dated June 9, 1999 requesting in behalf of your client, NEC Computer Storage Phils., Inc. (NEC-CSP), for a confirmation of your opinion that its royalty payments to its parent company, NEC-Japan is exempt from Value Added Tax (VAT) both during the period that it is enjoying income tax holiday and during the period that it is under the 5% preferential tax on gross income. It is represented that NEC-CSP is an export enterprise registered with the Philippine Economic Zone Authority and is now currently operating at the Laguna Technopak Special Economic zone; that the said royalty payments are pursuant to a sub-licensing agreement entered into by NEC-CSP with its parent company NEC-Japan; that the original licensing agreement is between IBM-U.S., which is the owner of the technology and NEC-Japan; that as an ecozone export pioneer enterprise, NEC-CSP is granted Income Tax Holiday (ITH) for a period of six (6) years pursuant to Sec. 23 of RA No. 7916; and that after the lapse of the ITH period, it shall be exempt from all national and local taxes, but it shall pay 5% preferential tax on gross income based on the provision of Sec. 24 of RA No. 7916. In reply, please be informed that under Section 24 of R.A. No. 7916, otherwise known as the "Special Economic Zone Act of 1993", businesses and enterprises within the ECOZONE as defined by Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of the five percent (5%) preferential tax based on gross income earned, distributed as follows: (1) three percent (3%) to the national government; (2) one percent (1%) to the local government units affected by the declaration of the ECOZONE; and (3) one percent (1%) for the establishment of a development fund to be utilized for the development of municipalities outside and contiguous to each ECOZONE. The aforementioned 5% preferential tax is a commutation of all the national and local taxes otherwise due from the businesses and enterprises operating within the ECOZONE. Such being the case, your client is considered exempt from all direct and indirect taxes hence, may not legally be passed-on with the value added tax otherwise due from its foreign licensor vis- -vis the said royalty payments. (BIR VAT Ruling No. 033-96 dated October 30, 1996)(BIR VAT Ruling No. 009-98 dated February 05, 1998) The fact that NEC-CSP is enjoying an Income Tax Holiday (ITH) for a period of six (6) years pursuant to Section 23 of RA No. 7916 prior to its being subject to the 5% preferential tax does not change the tax treatment of its royalty payments to its foreign licensor. Consistent with the "Cross Border Doctrine" to which the Philippine VAT system adheres to, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority hence, actual export of goods and services from the Philippines to a foreign country must be free of the VAT. (Revenue Memorandum Circular No. 74-99) Thus, no VAT may be passed-on along with the royalty fee imposed by NEC-Japan to NEC-CSP. CTDacA In view thereof, and considering that your client's foreign licensor is a non-VAT registered person, your client's aforesaid royalty payments are accordingly exempt from the value-added tax. Consequently, your client is also exempt from the obligation to withhold and remit the 10% value-added tax on its payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 114 of the National Internal Revenue Code, as implemented by Section 4.114 of Revenue Regulations No. 2-98, otherwise known as the Consolidated Withholding Tax Regulations. This ruling is issued based on the foregoing facts as represented. If, however, it is disclosed in an investigation that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group