VAT Ruling No. 063-01

September 24, 2001 VAT RULING NO. 063-01 R.A. 7916 VAT Ruling 9-98; 17-2001 & 39-2001 Joaquin Cunanan & Co. 29/F Philamlife Tower Paseo de Roxas, Makati City Attention: Atty. George Lavadia Principal Gentlemen : This refers to your letter dated December 28, 1999, requesting on behalf of your client, Enomoto Philippine Manufacturing, Inc. (EPMI); for a ruling that the lease payments made by EPMI to SB Leasing (Singapore) Pte. Ltd. (SB Leasing), a non-resident Singaporean Corporation, are exempt from value-added tax (VAT). It is represented that EPMI is an enterprise registered with the Philippine Economic Zone Authority (PEZA) and is currently operating at the PEZA-Gateway Business Park in Cavite; that as an ecozone export enterprise, EPMI is granted Income Tax Holiday (ITH) for a period of four (4) years pursuant to Section 23 of R.A. 7916; that it was also granted pioneer status for its manufacture of connector parts only such that the ITH period for this particular line will be for a period of six (6) years; that after the lapse of the ITH period, it shall be exempt from all national and local taxes (except real property taxes) but it shall pay 5% preferential tax on its gross income; that on December 20, 1999, EPMI and SB Leasing entered into an operating lease agreement wherein the former will pay the latter monthly rentals in the amount of JPY6,402,000 for a period of 66 months commencing from the date of the receipt of the property; that EPMI is a registered export enterprise, producing metal moulds and connector parts which are geared for consumption abroad; and that the use of the leased equipment is necessary in producing these products for export. In reply, please be informed that the Philippine VAT System adopts the destination principle wherein imports are taxed while exports are given total immunity. This system of taxation, applied to goods crossing borders, is designed to make our local products competitive in the foreign market. In line with this principle which is the backbone of the Philippine VAT system, the lease payments by EPMI to SB Leasing are exempt from VAT whether at the time it enjoys income tax holiday or at the time that it is subject to the 5% commutation tax. Otherwise, EPMI will be required to shoulder the VAT on inputs, which will add-up to the export cost of its products. As a matter of fact, the local sale of VAT suppliers to PEZA Registered enterprises were declared zero-rated to afford full immunity to the export producer. (RMC-74-99) It is on this principle that the lease payments by EPMI to SB Leasing shall be exempt from VAT so that the PEZA locator would be truly relieved from the burden of indirect tax consonant with the "Cross Border Doctrine" thereby ensuring that the export price of the commodities has no VAT component. (VAT Ruling No. 039-2001) In view thereof, and considering that your client's foreign lessor is exempt from VAT, your client's aforesaid lease 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 lease payments, which otherwise would be due thereon pursuant to the provisions of Section 110 of the National Internal Revenue Code, as amended by R.A. No. 7716, and as implemented by Section 4.110-3 of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations. (Sec. 4.107-1(d), RR 7-95; VAT Ruling No. 039-2001; VAT Ruling No. 017-2001; VAT Ruling No. 9-98 dated February 5, 1998) 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