VAT Ruling No. 074-99

July 27, 1999 VAT RULING NO. 074-99 106 (a) (2) (5) RMC 25-99 059-99 074-99 Isuzu Philippines Corporation 114 Technology Avenue, Laguna Technopark Phase II Bian, Laguna 4024 Attention: Mr . Benjamin T . Subido Gentlemen : This refers to your letter dated September 18, 1998 requesting for clarification regarding transactions of your office with some PEZA registered companies. It is represented that your company, Isuzu Philippines Corporation (IPC) , is an accredited assembler and manufacturer of commercial vehicles and distributes the same through dealers; that when you distribute products to your dealers through wholesale, the VAT is already included in the sales invoice; that some of your dealer's customers are Philippine Export Zone Authority (PEZA) registered companies which have VAT exempt status; that per BIR Ruling No. 034-92 dated March 13, 1992, to be entitled to zero rated VAT, the merchandise sold must be used as raw material of the export zone company; that since the buyer is VAT exempt, your dealers are under no obligation to collect the VAT on the sale of your product; that now you seek clarifications from this Office as to: how should IPC dealers invoice their sales to PEZA registered companies; can they claim credit on their inputs for the VAT in the wholesale price; and, in cases where IPC legally sells directly to PEZA registered companies, how should these transactions be invoiced. In reply, please be informed that under Section 106(A)(2)(a)(5) of R.A. 8424, sales to persons or entities whose exemption under special laws, such as R.A. 7916 or the PEZA law, are considered exports and subject to zero rated VAT. Moreover, under our VAT Law, which was first adopted and promulgated under E.O. 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 ( exports 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, merchandise, goods, 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 the zero percent (0%) VAT. cdll However, Revenue Memorandum Circular No. 25-99 quoting the Memorandum Ruling of this Office dated February 2, 1999 holding that the sale of ordinary automobiles to PEZA or SBMA and other ECOZONE registered enterprises are not entitled to VAT zero-rating, provides: "The definition of what comprises merchandise or goods is found under Section 2(ii) of R.A. 7916, as follows: ii. 'Merchandise or goods' shall collectively refer to raw materials, supplies, equipment, machineries, spare parts, packaging materials or wares of every description to be used in connection with the registered activity of an ECOZONE enterprise. The use of the phrase 'to be used in connection with the registered activity of an ECOZONE enterprise' in describing what comprises merchandise or goods imparts the presumption that the same are somehow utilized in the production activity of an ECOZONE enterprise. This is confirmed by referring to the Rules and Regulations to Implement R.A. 7916. Rule XV thereof which deals with the incentives granted to ECOZONE export and free-trade enterprises, provides, thus: SEC. 1. Exemption from Duties and Taxes on Merchandise . Merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description brought into the ECOZONE Restricted Area by an ECOZONE Export or Free Trade Enterprise to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise whether directly or indirectly related in such activity, shall not be subject to customs and internal revenue laws and regulations of the Philippines nor to local tax ordinances. ... cdll Applying the foregoing provisions, it would now appear that cars or automobiles could not be possibly embraced within the classification of goods or merchandise entitled to the benefit of tax exemption. On the other hand, we find specific reference to the kind of vehicles which may be extended such tax exemption privilege and this can be likewise found in the same Rule XV of the Rules and Regulations to Implement R.A. 7916 in this wise: D. Importation of Specialized Vehicles and Other Transportation Equipment . Specialized vehicles and other specialized transportation equipment, including necessary spare part, directly related to the registered activity of the ECOZONE Export or Free Trade Enterprise, may be imported exempt from customs duties and taxes only upon prior approval of the Board and with proper clearance from the appropriate government agency(ies).Otherwise, ordinary vehicles and other transportation equipment, including necessary spare parts, whenever applicable shall be procured locally. The plain meaning and significance of the above provision need no further construction in arriving at the obvious conclusion that 1) only specialized vehicles may be allowed to be imported free from duties and taxes; and that 2) ordinary commercial vehicles shall be purchased locally which necessarily includes all component duties and taxes. . . . Pursuant to the Rules XV, Section 1(D) of the rules and regulations issued by PEZA to implement the Special Economic Zone Act of 1995 (RA 7916), exemptions from the imposition of value-added tax are being allowed only with respect to importation of specialized vehicles and other transportation equipment that are directly related to the registered activity. For example, a registered construction firm may import specialized vehicles such as pay loader, grader, etc. without the payment of the value-added tax. However, exemption does not extend to importation of service vehicles since the same are not directly related to its registered activity as a construction contractor. As a matter of policy, PEZA is not giving tax incentives for the procurement of vehicles or transportation equipment that are not directly connected with the firms' registered activities in view of the absence of an effective monitoring system to determine whether these vehicles are indeed being utilized by registered enterprise in the conduct of their registered activities." Therefore, although your buyers are PEZA registered exporters enjoying the exemption from VAT, the sale of your commercial vehicles thereto either by IPC dealers or your company itself, are subject to ten percent (10%) VAT. Invoicing of these transactions should conform with the requirements prescribed under Sec. 4.108-1 of Rev. Regs. 7-95. Finally, since your wholesale price is VAT inclusive, IPC dealers are entitled to claim as VAT tax credits the input taxes incurred on the purchases related thereto. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Local & Enforcement Group