VAT Ruling No. 086-01

December 27, 2001 VAT RULING NO. 086-01 Sec. 108 (B) VAT Ruling No. 044-98 Miascor Aircraft Maintenance Corp. (AIRMAC) MIASCOR Cargo Center Rm. 222 Ninoy Aquino Avenue Paraaque Attention: Ms. Myrna Z. Lentejas Finance and Administrative Manager Gentlemen : This refers to your letter dated January 29, 1999 requesting that your sale of services is subject to VAT at zero percent (0%). It is represented that Miascor Aircraft Maintenance Corporation (AIRMAC) is duly registered with the Board of Investments (BOI) under Certificate of Registration No. CE-98-164 dated December 23, 1998 as a new service exporter in the field of aircraft maintenance services in a non-pioneer status in accordance with the provisions of the Omnibus Investments Code of 1987; that AIRMAC operates as a service exporter whose clients are mostly foreign air carriers calling port at the Manila International Airport (NAIA) and other international airports in the Philippines; and that all transactions are billed in US dollars. In reply, please be informed that our VAT law which was first adopted and promulgated under EO No. 273, effective January 1, 1988 is basically a Consumption Type VAT System and, in general follows the destination principle or Cross Border Doctrine. Under the VAT System, 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 customer the benefits of VAT-free goods and services should be allowed to use the zero rate" (Value Added Tax International Practice and Project and Problems, Allan A. Tait, International Monetary Fund, Washington D.C., 1988, p. 51) " When considering a VAT, 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 by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1996) 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 of VAT".) 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, goods, property 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 zero percent (0%) VAT. Accordingly, the services rendered by AIRMAC to international air carriers are subject to 0% VAT provided under Section 108(B) of the 1997 Tax Code, for the same are directly connected to the international flights of the aforesaid international air carriers. (VAT Ruling No. 044-98 dated November 26, 1998) 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group