VAT Ruling No. 095-99

September 14, 1999 VAT RULING NO. 095-99 Sec. 108-000-00-095-99 Hitachi Industrial Machinery Philippines Corp . (HIMAP) First Industrial Estate Dasmarias, Cavite Attention: Ms . Charito Rosario A . Sinsin Asst. Manager, Finance & Accounting Gentlemen : This refers to your letter dated September 22, 1997 to our Revenue District Officer, Revenue District No. 54, Trece Martirez City, Province of Cavite, concerning your request for VAT zero-rating of your royalty payments to your parent company, Hitachi Ltd. Japan (HITACHI). It is represented that Hitachi Industrial Machinery, Phil. Corp. (HIMAP) is a domestic corporation organized and existing under the laws of the Philippines; that HIMAP is a PEZA-registered export enterprise with PEZA Registration Certificate No. 95-59; that HIMAP is doing business at the First Cavite Industrial Estate; that HIMAP pays royalties to HITACHI, a non-resident foreign corporation, in connection with a licensing; agreement to use within the Philippines the latter's technology in the manufacture of your products and for which a Technical Collaboration Agreement of Industrial Machinery has been granted on May 7, 1996 by the Bureau of Patents, Trademarks and Technology Transfer, the royalty payment for which is now the subject of the instant query. 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 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 transfer of technology is in connection with the manufacture of products for export. 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 for 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 HITACHI should be, as it is hereby confirmed to be, exempt from VAT. The VAT exemption notwithstanding, royalty payment of HIMAP to Hitachi Ltd. of Japan, a non-resident foreign corporation, remains subject to the 25% income tax on royalties set forth under paragraph (2)(b) of Article 12 of the RP-Japan Tax Treaty. (BIR Ruling No. UN296-94 dated October 19, 1994) 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. (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue