VAT Ruling No. 078-91

September 9, 1991 VAT RULING NO. 078-91 Acme Tools Manufacturing Co. Inc. 145 Yakal St., Makati, Metro Manila Attention: Mr . Benjamin Yu Asst . Vice President Gentlemen : This refers to your letter dated April 15, 1991 requesting information whether your sales to the Philippine National Oil Company-Energy Development Corporation may be considered VAT-exempt. cdll It is represented that PNOC-EDC purchased from you stud bolts and nuts for use in its geothermal operations. That, according to PNOC-EDC, its purchases may be considered Vat-exempt based on the provisions of Presidential Decree No. 1442. Please be informed that P.D. No. 1442 is "An Act to promote the exploration and development of geothermal resources" in the Philippines. Under this law the Government may contract to another person ( i.e., to a Service Contractor) the exploration and development of geothermal resources. The Service Contract executed under this law may provide that the Service Contractor may enjoy tax exemption privileges as provided under Section 4 thereof. However, please be informed that while the PNOC-EDC is a Service Contractor pursuant to P.D. No. 1442 and while this law has not been repealed or amended by the general repealing laws under P.D. Nos. 1931 and 1955 or under Executive Order No. 93, because embraced by the non-impairment clause of the Constitution, P.D. No. 1442 does not exempt Service Contractors from "indirect taxes". Rather, Section 4(a) thereof only exempts Service Contractors from tax on their importation of machinery and equipment, spare parts and materials required for their geothermal operations, i.e., exemption from import taxes for which they may otherwise be "directly liable". Said exemption does not include the 10% VAT on their local suppliers because this tax is a direct liability of suppliers of goods and services and which are only indirectly passed-on by such suppliers to their customers, hence, in the nature of indirect tax. In the hands of such customers (e.g., the PNOC-EDC) the 10% VAT paid by suppliers on their sales (direct tax) and passed-on indirectly to their customers as part of the invoice price (indirect tax) loses the character of a tax. Rather, to such customers, it is no longer a tax but only a mere part of the purchase price. (See PHIL. ACETYLENE CO. VS. CIR. CTA Case No. 708, Sept. 17, 1965). In view thereof, please be informed that your sales to the PNOC-EDC are subject to the 10% VAT, pursuant to Section 100(a), NIRC, the provisions of P.D. No. 1442 notwithstanding. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue By: EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge