VAT Ruling No. 085-99

August 10, 1999 VAT RULING NO. 085-99 R.R. 7-95-009-99-085-99 Joaquin Cunanan & Co . 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George Lavadia Principal Gentlemen : This refers to your letter dated May 12, 1999 requesting on behalf of your client, Lima Logistics Corporation (LLC), for a ruling that its payments for construction services to Sumicon Philippines Corporation (SPC) are subject to zero percent (0%) VAT. It is represented that LLC is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Facilities Enterprise under Certificate of Registration No. 98-080-F issued on November 4, 1998; that its registered activities include (a) warehousing operations catering only to PEZA-registered exporters and (b) trading operations which include the importation or procurement from local sources and/or from other PEZA-registered enterprises of electronic and semiconductors parts and components for resale, packing, cutting or altering to customer's specification, mounting and/or packaging for subsequent sale, transfer or disposition directly to PEZA-registered export enterprises; that its LLC's facilities are located at the Lima Technology Center (LTC) Special Economic Zone in Lipa, Batangas; that it is enjoying the tax regime of 5% Gross Income Earned in lieu of all other taxes; that its service supplier, SPC, is a VAT-registered taxpayer engaged in the construction business; that SPC rendered services to LLC for the construction of its warehouse facilities at LTC, the payment for which service is now the subject of the instant query. In reply, please be advised that under the current regulations, the sale of services to Ecozone Enterprises may be considered effectively zero-rated for VAT purposes but subject to the limitation that the sale of service is made to persons or entities who enjoy indirect tax exemption [Section 4.102(C) Revenue Regulations 7-95] Since there is no provision under the PEZA Law granting indirect tax exemption to Ecozone Enterprises, the recognition of zero-rated sale of services is made to rest the Cross-Border Doctrine or Destination Principle of the VAT System, viz: " the country taxes all value added, at home and abroad, for goods, that have as their destination the consumers of that country. Exports are exempt, imports are taxable . . . " (VAT Ruling No. 009-99 dated January 21, 1999). Since the registered warehousing activity of LLC is geared towards providing direct service to exporters at the Zone, not to mention that the same facility shall directly be used in its own trading operations for goods which are ultimately exported, this Office is therefore of an opinion and so holds that such products and service provided by LLC are ultimately destined for use or consumption outside the Philippines and, as such, must be free from Value-Added Taxes which are indirectly passed on by local suppliers. Hence, your payment for the services rendered by SPC may be zero-rated, subject to the condition, however, that the requirement of prior application for effective zero-rating must be complied with, otherwise, the transaction otherwise entitled to zero-rating, shall only be considered exempt. This ruling is being issued on the basis of the 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group