VAT Ruling No. 062-98

December 15, 1998 VAT RULING NO. 062-98 Sec. 108 (A)-10-98-062-98 Domestic Shipowners Association (DSA) Ground Flr. Standford Tower Condominium 1870 M.H. del Pilar Street Malate, Manila Attention: Mr . Raul A . Tanchoco President Gentlemen : This refers to your letter dated May 27, 1998 concerning your request for the reconsideration of BIR Ruling No. 10-98 dated February 10, 1998. The facts, as represented, on the basis of which the aforesaid Ruling was issued show that, domestic carriers are contracted by agents of international carriers engaged exclusively in international shipping for the carriage of goods or cargoes from one point in the Philippines to another; that under the set up a shipper arranges with an international carrier for the latter to transport the goods or cargoes from the Philippines to another country; that a bill of lading is issued by the international carrier to cover the entire transaction; that to enable the international carrier to carry the goods, sometimes there is a need to carry the goods to the ports in Manila; that charges for the transshipment of the goods are for the account of the foreign principals and are paid by the latter through agents in the Philippines; that the agents bill the principals for such services; that the foreign principals remit the payments to the agents who, in turn, pay the domestic carrier rendering the service; that the local agents merely act as a conduit of the foreign principal for whose account the expenses are incurred; that based on the foregoing representation, it is your opinion that the services of the said domestic carriers qualify for the zero percent value-added tax (VAT), pursuant to Section 108(b)(4) of the Tax Code, as amended, the pertinent portion of which provides: " (b) Transactions Subject to Zero-Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to 0% :... (4) Services to vessels engaged exclusively in international shipping ";that your request for application of the zero percent VAT on the aforesaid services of the said domestic carriers has been denied in BIR Ruling No. 10-98, as follows: "... the VAT zero-rated services contemplated in the above-cited provision refers to services with respect to international vessel itself such as crewing , repair , catering , and other similar arrangements . It cannot apply to the carriage of goods and cargoes in domestic routes ." Hence, your request for reconsideration. In reply, please be informed that our VAT Law, which was first adopted and promulgated under E.O. No. 273, effective January 1, 1988, in general, adheres to the Destination Principle or the Cross Border Doctrine. Under this doctrine, 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) "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 exempt),or the destination principle (export exempt, imports taxable)." (Value-Added Tax (VAT) by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz.:"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.") Accordingly, 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 to zero percent (0%) VAT. Thus, unless otherwise expressly provided for by law, sale of services, such as those rendered to vessels engaged exclusively in international shipping business, may be treated qualified for the zero percent VAT provided the use or benefit derived from such services crosses the Philippine territory, in accordance with the Cross Border Doctrine, which is the underlying principle of our VAT System. For this reason, this Office is amenable to apply the zero percent (0%) VAT on the transshipment services rendered by the aforesaid domestic carriers to the aforementioned international carriers with respect to transshipment of goods or cargoes from a Philippine port to a foreign port of entry (i.e., zero percent (0%) VAT only for outbound transshipment of goods or cargoes). Conversely, Inbound Transshipment of goods or cargoes shall be subject to the 10% VAT, pursuant to Section 108(A) of the Tax Code of 1997. LibLex This ruling modifies BIR Ruling No. 10-98 dated February 10, 1998 insofar as transshipment services by domestic carriers are concerned. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue