VAT Ruling No. 094-99

September 14, 1999 VAT RULING NO. 094-99 108-000-00-094-99 Joaquin Cunanan & Co . 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Atty . George Lavadia Principal Gentlemen : This refers to your letter dated August 1, 1997 stating that Japan Electronics Philippines, Inc. (JAE), an ECOZONE export enterprise with address at Gateway Business Park, Javalera, Gen. Trias, Cavite, will enter into a Lease Agreement with your client, SB Leasing (Singapore) Pte., Ltd. (SBLPT), a corporation organized and existing under the laws of Singapore, for the lease of certain equipment to be used by the former for the production of its PEZA-registered activities and that for the use of the said equipment, JAE shall pay SBLPT a monthly rental as stipulated in the contract of lease. In connection therewith, you now request confirmation of your opinion to the effect that the rental fees to be received by SBLPT are not subject to the 10% value-added tax (VAT) since JAE is registered with the Philippine Economic Zone Authority (PEZA) as an expert enterprise. In reply, please be advised that under Section 108 of the Tax Code of 1997, the lease or use of property or property rights is embraced within the definition of sale or exchange of services' and is subject to VAT. Under 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 express provision under the PEZA Law granting indirect tax exemption to Ecozone Enterprises, the recognition of zero-rated sale of services is made to rest on 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). The same principle is applicable to the case at hand. It should be noted that the leased equipment will be used or is being used for the production of JAE's PEZA-registered export activities. However, instead of zero-rating which the non-resident supplier cannot avail of the provision for exempt transactions under Section 109 of the Code which provides VAT exemptions for transactions which are exempt under special laws, e.g., R.A. 7916 or PEZA Law, is particularly applicable to the instant case. In the case of payment for lease or royalties to a non-resident owner the responsibility for withholding the VAT and paying the same rest on the payor. However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then its payment of royalties to a non-resident lessor, such as SB Leasing (Singapore) Pte. Ltd., should be, as it is hereby confirmed to be, exempt from VAT. llcd The VAT exemption notwithstanding, royalty or rental payments of SBLPT a resident of Singapore, remains subject to the 25% income tax on royalties set forth under Article 12 (b) of the RP-Singapore Tax Treaty. (BIR Ruling No. 101-95 dated July 5, 1995.) This ruling revokes and/or modifies VAT Ruling No. 061-98 dated December 15, 1998 and all other rulings inconsistent herewith. It is issued based on 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue