VAT Ruling No. 080-99

August 9, 1999 VAT RULING NO. 080-99 Sec. 106 (A) (2) (b) 160-88 080-99 Italasia Premium Plastics, Inc . Km. 21 West Service Road Villonco Road, South Expressway Muntinlupa City Attention: Ms . Andrea Crespi General Manager Gentlemen : This refers to your letter dated May 21, 1999 stating that your company, Italasia Premium Plastics Inc. (Italasia), is a BOI-registered corporation engaged in the manufacture of food-grade toys; that your export exceeds 70% of the total annual production; that you have existing orders which are foreign currency denominated sales and payable through telegraphic transfer, but for consumption locally, and that the downpayment, which was remitted through telegraphic transfer, was already credited to your bank. LexLib Based on the foregoing, you now in effect request for a ruling on the foregoing transaction in relation to your output tax. In reply, please be informed that Section 106(A)(2)(b) of the 1997 Tax Code has provided for the definition of the phrase "foreign currency denominated sale" as follows: "(b) Foreign Currency Denominated Sale . The phrase 'foreign currency denominated sale' means sale to a nonresident of goods except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas." The aforementioned provision is covered by LOI 1355 dated September 24, 1983 which aimed to encourage the patronage of Philippine-made products by providing appropriate incentives to Filipinos abroad, and other non-residents of the Philippines. As set forth in Section 8(b) of Revenue Regulations No. 5-87, as amended, which implemented the original VAT law under E.O. 273 and which was later amended by RA 7716, RA 8241 and RA 8424, respectively, the conditions for 0%-VAT treatment of foreign currency denominated sales are, as follows: "(b) Zero-rated sales of goods . The following sales by VAT-registered persons are zero-rated: (1) Export sales made directly by a VAT-registered person. Export sales made by any person who is not registered under the provisions of Section 107 shall be treated as exempt sales. Foreign currency denominated sales which are referred to as "foreign exchange denominated sales or internal exports in LOI No. 1355 shall be considered as export sales if the following conditions are present: (i) The buyers are Filipinos abroad returning overseas Filipinos or other non-residents of the Philippines; (ii) The goods are assembled or manufactured in the Philippines for household and personal use; (iii) The goods are paid for in convertible foreign currency inwardly remitted through the banking system in the Philippines; and (iv) The sales do not exceed an aggregate foreign exchange value of US $1,000 or its equivalent in other convertible foreign currencies." As may be gleaned from the foregoing, the conditions set forth for foreign currency denominated sale within the purview of Section 106(A)(2)(b) of the 1997 Tax Code are not availing in your case because it is clear that the goods to be purchased from your company which are paid for in foreign currency are intended to be sold to the domestic market, i.e., general public and not to specific individuals or relatives of nonresident Filipino buyers for their household and personal use as contemplated by the provision. Such being the case, your foreign currency denominated sales intended for consumption locally shall remain subject to VAT and can not be treated as foreign currency denominated sales subject to 0%-VAT rate for lack of legal basis. This ruling is issued on the basis of the facts represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Local & Enforcement Group)