House Research & Development PTE, Ltd. (HRD, for short)

October 13, 2002 VAT RULING NO. 068-02 RMC 74-99 000-00 Eleanor A. Tabuzo 6th Floor, Front Wing, JAKA 6780 Ayala-Avenue Makati City SUBJECT : House Research & Development PTE, Ltd. (HRD, for short) Dear Madam : This refers to your request that the lease of your condominium unit, for the period July 16, 2001 to July 15, 2002, to HRD, a PEZA-registered Ecozone Enterprise, with PEZA Certificate of Registration No. 096-078, be treated entitled to the benefit of the zero percent (0%) value added tax. In support of your request, you have furnished this Office with photocopies of documents pertaining to your contract of lease with HRD, HRD's PEZA registration certificate as well as PEZA's Certification concerning the VAT zero-rating of HRD's transactions with its local suppliers. In reply, please be informed that while, in general, VAT-registered suppliers of goods, properties and services doing business in the Customs Territory (i.e., outside the Economic Zone) may be entitled to the benefit of the zero percent (0%) VAT on their sales to PEZA-registered enterprises, pursuant to Revenue Memorandum Circular No. 74-99, promulgated Oct. 15, 1999, in relation to the provisions of R.A. No. 7916, however, this fiscal incentive does not extend to the PEZA-registered enterprise's compensation income paymentto its employees, whether paid in cash or in kind; whether paid directly, in the form of salaries and allowances; or paid indirectly in the form of employees' fringe benefits, in cash or in kind. The said fiscal incentive constitutes total exemption of the PEZA-registered enterprise from being indirectly passed on with the 10% VAT by its VAT-registered suppliers, hence, entitles the latter to a refund of all its input taxes attributable to its VAT zero-rated sales. This privilege is granted by law only to PEZA-registered enterprises; it cannot be legally extended to its employees, whether directly or indirectly. Being in the nature of a tax exemption, it is strictly construed against the claimant: ". . . a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The rule on strictissimi juris equally applies. So that, any doubt . . . should be resolved in favor of the taxing authority . . . " 1 That, the condominium unit, which you leased to the said PEZA-registered enterprise, is located outside of the Economic Zone shows that the same shall not be used as office or factory by the aforesaid PEZA-registered enterprise (lessee); rather, it appears that the same shall be used as dwelling by its officer/s, hence, in the nature of compensation income payment in the form of fringe benefit. In view thereof, your aforementioned request cannot be granted for lack of legal basis. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. [G.R. No. 108576. January 20,1999.], COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.