VAT Ruling No. 098-99

September 16, 1999 VAT RULING NO. 098-99 Sec. 108-000-00-098-99 Omron Mechatronics of the Philippines Corporation Subic Techno Park, Boton Area Subic Bay Freeport Zone Attention: Mr . Akira Noda Comptroller Gentlemen : This refers to your letter dated April 23, 1998 requesting confirmation of your opinion that your payment for royalties to a non-resident foreign corporation is effectively zero-rated. It is represented that Omron Mechatronics of the Philippines Corporation (OMPC) is a domestic corporation and duly registered as a Subic Bay Freeport Enterprise with Certificate of Registration and Tax Exemption No. 97-0011 on March 6, 1998; that, on the other hand, Omron Corporation, Japan (OCJ) is a non-resident foreign corporation duly organized under the laws of Japan; that OMPC entered into an agreement with OCJ calling for the rendition of various services by the latter in relation to the establishment of Omron in the Philippines; that said services constitute technical advise, assistance or services in connection with technical management or administration of a commercial undertaking, venture, project or scheme which the Tax Code classified as royalties; that in connection therewith, you now request confirmation of your opinion to the effect that the payment for services rendered by a non-resident foreign corporation. such as OCJ, to an SBF-registered enterprise is subject to 0% VAT. 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 SBF-registered 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 R.A. 7227 or the Bases Conversion Development Act granting indirect tax exemption to SBF-registered 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. "Export 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. 7227, is particularly applicable to the instant case. In 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 SBF-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 OCJ should be, as it is hereby confirmed to be, exempt from VAT. The VAT exemption notwithstanding, royalty payments to resident of OMPC to Omron Corporation, Japan, a non-resident foreign corporation, remains 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 VAT 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