VAT Ruling No. 091-99

September 14, 1999 VAT RULING NO. 091-99 Sec. 108-DA-012-99-091-99 Digitel Telecommunications Philippines, Inc . 110 E. Rodriguez Jr. Avenue Bagumbayan, Quezon City 1110 Attention: Atty . Joel D . Peneyra Manager, External Affairs Gentlemen : This refers to your letter dated April 15, 1999 requesting a ruling on whether the sale of telephone services to Omni Aviation Corporation (Omni), a duly registered Clark Special Economic Zone (CSEZ) enterprise is exempt from the imposition of the 10%-VAT or subject to VAT at the rate of zero percent (0%). It is represented that Digitel Telecommunications Philippines, Inc. (Digitel) is a VAT-registered corporation duly authorized to provide land-based telephone services in Regions I to V; that, Digitel sought to collect from Omni the 10% VAT for services rendered such as installation charges, monthly rental fees, and toll call charges; that, Omni, however, claims exemption from VAT and in support thereof presented its Certificate of Tax Exemption No. 94-29 dated February 1, 1994 issued by the Clark Development Corporation which states that it is " entitled to tax and duty free importation of capital goods equipment raw materials and supply and household and personal items " pursuant to Section 15 of RA 7227 and Section 5 of Executive Order No. 80. Premises considered, opinion of this Office is now sought on how to treat Omni's claim, whether such sale of services is considered VAT-exempt transaction or one that is subject to the rate of zero-percent (0%). In reply, please be informed that the VAT issue with respect to the sale of goods by VAT registered taxpayers to enterprises registered and operating within the Special Economic Zones in accordance with provisions of RA 7916 and RA 7927 has long been settled in the previous VAT rulings which have been issued on the matter which held that such goods brought into the zone are considered export sales pursuant to Article 77(2) of the Omnibus Investments Code (EO 226)and therefore shall be subject to the 0%-VAT rate in accordance with Section 106(A)(2)(a) of the Tax Code of 1997 in order to qualify for such effectively 0%-rated status on such sale, prior application for zero-rating must first be obtained from the Bureau pursuant to Section 4.107-1 (d) of Revenue Regulations No. 7-95, as amended. (VAT Ruling No. DA 013-99 dated February 8, 1999) However, with respect to the sale of service to such Ecozone enterprises, there is no provision under RA 7916 nor in RA 7227 exempting such enterprises from indirect taxes that may be passed on to them by the VAT-registered sellers of service. As such, the "Cross Border Doctrine" or the "Destination Principle" has been adopted-in determining whether or not such sale of service may qualify for 0%-VAT. Under this principle, sale of service by a VAT-registered person to a PEZA/BOI-registered manufacturer-exporter may be extended the benefit of zero percent (0%) VAT to the extent that the latter is engaged in export activities considering that its " . . . export products are destined for use or consumption outside the Philippines and such export products must be free from VAT which are indirectly passed on by suppliers of . . . services ". (VAT Ruling No. DA-012-99 dated January 14, 1999). Provided, however, that the requirements of prior application for effective zero-rating under Section 4.107 1 (d) of Revenue Regulations No. 7-95, as amended, as mentioned above shall likewise be applicable. cdll In this particular case, except for the Certificate of Tax Exemption which pertains to the tax and duty free exemption of Omni with respect to importation of goods and equipment, there is no showing that Omni is an enterprise engaged in export activities which may entitle it to the 0%-VAT rate on its purchases of services from VAT-registered taxpayers. In view thereof, this Office is of the opinion that the sale of services by Digitel to Omni consisting of installation charges, monthly rental fees, and toll call charges shall be subject to the ten percent (10%) VAT imposed under Section 108(A) of the Tax Code of 1997. This ruling is being issued on the basis of the facts 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