VAT Ruling No. 059-01

September 12, 2001 VAT RULING NO. 059-01 Sec. 106 (A) (2) VAT Ruling 27-89 J.B.Y. Tanlimco Sons, Inc . 455 Juan Luna St. Binondo, Manila Attention: Ms . Gloria D . Lim Vice-President Gentlemen : This refers to your letter dated July 4, 2001 requesting in effect for a ruling that your sale of industrial sewing machines to garment manufacturers and exporters is effectively zero-rated in accordance with Section 106 of the National Internal Revenue Code of 1997 ("Tax Code"). It is represented that on November 8, 1988 your company filed an application for zero-rating for your sale of industrial sewing machines to garment manufacturers-exporters. However, your application was denied by this Office in VAT Ruling No. 27-89 dated February 1, 1989 since it was held that industrial sewing machines are not raw materials and its sale cannot therefore qualify for effective zero rating pursuant to Section 2 of Revenue Regulations (RR) No. 2-88. Hence, this request. In reply, please be informed that Section 106(A)(2) of the Tax Code as implemented by RR No. 7-95 on zero-rated sales of goods provides: "(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export sales . The term " export sales " means: xxx xxx xxx (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; xxx xxx xxx (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate." Further, the coverage of effectively zero-rated transactions was clarified under Revenue Memorandum Circular (RMC) No. 17-96, to wit: "Effectively zero-rated transactions shall cover local sale of goods, properties and services to purchasers enjoying exemption from indirect taxes under special laws or international agreements such as: TAIDHa "I. With respect to Goods: "(1) Sale of raw materials or packaging materials to export-oriented enterprise whose direct export sales exceed seventy percent (70%) of total annual production. xxx xxx xxx "(3) Sale to SBMA and CDA registered enterprises pursuant to RA 7927, sale to PEZA registered enterprises pursuant to RA 7916 and sale to ADB and IRRI pursuant to international agreements, etc., and xxx xxx xxx" In RMC No. 74-99, promulgated on October 15, 1999, it has been further clarified that sale of goods, property and services made by VAT-registered suppliers to PEZA-registered enterprises shall qualify for automatic zero-rating, i.e., without necessity of applying for and securing approval of application for zero-rating as provided in RR No. 7-95. Applying the rationale of RMC No. 74-99, Revenue Memorandum Order (RMO) No. 9-2000, dated February 2, 2000, was issued to accord the same privilege of automatic zero-rating with respect to sale of goods, property and services made by VAT-registered suppliers to enterprises duly registered with the Board of Investments (BOI) as manufacturer-exporter and whose manufactured products are 100% exported to foreign countries, subject to certain requirements. On the basis of all of the foregoing, we conclude that your sale of sewing machines to garment manufacturers-exporters shall be subject to the 10% VAT pursuant to Section 106(A)(2) of the said Code. Moreover, it is worthy to note that the zero-rating provided for under Section 106(A)(2)(a)(3) of the Tax Code, as clarified by RMC No. 17-96, applies to sale of raw materials or packaging materials by a VAT-registered entity to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production. Hence, VAT Ruling No. 27-89 dated February 1, 1989 is hereby reiterated to the effect that since industrial sewing machines are neither raw materials nor packaging materials, the aforementioned provision finds no application in the case at hand. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group