VAT Ruling No. 061-98

December 15, 1998 VAT RULING NO. 061-98 Sec. 108-000-00-061-98 Mitsuwa Philippines, Inc. Lot 4, 6 & 8, Block 22, Phase IV Cavite Economic Zone Rosario, Cavite Attention: Mr . Kanji Hashimoto Factory Manager Gentlemen : This refers to your letter dated March 12, 1998 requesting for reconsideration of the decision of the BIR-Regional Director of San Pablo City denying your request for VAT zero-rating on the royalty payment you made to your parent company for the technological transfer and production assistance rendered in your favor. It is represented that Mitsuwa Philippines, Inc. (MPI) is a PEZA-registered entity under PEZA Registration Certificate No. 94-65 which was issued on September 12, 1994; that MPI was formed to engage in the manufacture and export of plastic injected products; and that MPI entered into a technological transfer and production assistance agreement with its parent company, Mitsuwa Chemical Company, Ltd. (MCCL), wherein MPI gives a three percent (3%) royalty payment for the technological transfer and production assistance rendered to MPI. In reply, please be informed that the sale or exchange of services is subject to the 10% VAT under Section 108 of the Tax Code of 1997. The same Code defines the phrase "sale or exchange services" as including "the supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person". (Section 108(A)(5), Tax Code of 1997). The 10% VAT payable to the non-resident person, such as your parent company, Mitsuwa Chemical Ltd. of Japan, is to be withheld by Mitsuwa Philippines, as the payor pursuant to Section 114(C) of the Tax Code of 1997, thus: ". . . Provided, further, that the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. "The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." The tax privilege granted by Republic Act No. 7916 (PEZA Law), i.e. the 5% preferential tax rate in lieu of all national and local taxes, covers only exemption from direct taxes. Since VAT is a form of indirect tax and considering further that there is no provision under RA 7916 expressly exempting the payor from VAT withholding, it follows that your royalty payment is subject to 10% VAT. Accordingly, we affirm the decision of the BIR Regional Director, San Pablo City denying your earlier request for the VAT zero-rating of your royalty payments. LexLib This ruling supersedes all previous rulings inconsistent herewith. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue