VAT Ruling No. 058-99

May 17, 1999 VAT RULING NO. 058-99 Sec. 106 000-00 058-99 Hon . Melito S . Salazar, Jr . Managing Head, Board of Investments 385 Gil J. Puyat Avenue, Makati City S i r : This has reference to your letter dated February 4, 1999 requesting for a confirmation of your opinion that zero-rating shall not be limited to one step transactions, i.e. sale by a person (indirect exporter) to another whose exports exceed 70% of total annual production, but will include sales to the indirect exporter. You represented that SAGARA METRO PLASTICS INDUSTRIAL CORPORATION (SMPIC) is a BOI-registered indirect export producer of plastic products selling to the following direct exporters: 1. Yasaki Torres Manufacturing, Inc. 2. EDS Manufacturing, Inc. 3. JP-Aoki Rubber Phils., Inc. LexLib 4. Laguna Auto Parts Manufacturing, Inc. that all of the above enterprises export more than 70% of their total annual production; that D & L Industries, Inc. sells raw materials to SMPIC forming part of the plastic products which the latter sells as raw materials to the various direct exporters; that pursuant to the provisions of Section 106(A)(2)(a)(5) of the Tax Code of 1997, export sales shall also include "Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws"; that since under Section 23 of E.O. 226, export sales include "sales of export products by a registered export producer to another export producer or to an export trader that subsequently exports the same", it is now your considered view that sales by indirect exporters are treated as export sales provided that there is proof that the products have actually been exported. Thus, you conclude that sales by SMPIC to its buyers which are direct exporters are considered export sales within the definition of E.O. 226 as long as SMPIC can show proof of actual exports either by them directly, or indirectly, through its buyer-exporters, and thus qualify sales of D & L to SMPIC to VAT zero-rating. In reply, we confirm your opinion that sale of raw materials by SMPIC to the direct exporters are treated as export sales and, therefore, subject to 0% VAT pursuant to Section 106(A)(2)(a)(3) of the Tax Code. We regret, however, to inform you that sale of raw materials by D & L to SMPIC, the indirect exporter, will not qualify for zero rating for lack of legal basis and will be subject to the regular VAT rate of 10%. It will be noted that zero-rating is a procedure introduced in the VAT system to enable VAT-registered taxpayers who are afforded immunity from the VAT to recover the taxes paid by them on their inputs. The very reason why exports are zero-rated is to make our local products competitive in the foreign market by ensuring that no tax component forms part of the export price. Since sales of SMPIC is already zero-rated, input taxes attributable to the zero-rated sales can be claimed as a refund. These input taxes are the very taxes passed-on by D & L whose sales are subject to the regular 10% VAT. To require the zero-rating one step back by extending it to sales by D & L to SMPIC, which is not an export trader or export producer, would render nugatory the zero-rated treatment of SMPIC because no input tax can be claimed by it as refund. Accordingly, only sales to direct exporters pursuant to Sections 106(A)(2)(a)(3) and (6) of the Tax Code and Section 23 of E.O. 226 shall be considered as zero-rated. D & L can recover its input taxes by passing on the output tax to SMPIC and the latter can recover the VAT paid on its purchases from D & L as a refund. This ruling is being issued on the basis of the facts 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue