VAT Ruling No. 100-99

September 16, 1999 VAT RULING NO. 100-99 Sec. 108-000-00-100-99 Clarion Manufacturing Corporation of the Philippines 3/F Cacho Gonzales Bldg. 101 Aguirre St., Legaspi Village Makati City Attention: Mr . Kuniaki Nova Accounting Department Manager Gentlemen : This refers to your letter dated March 17, 1999 requesting confirmation of your opinion that your payment for royalties to a non-resident foreign corporation is effectively zero-rated. It is represented that Clarion Manufacturing Corporation of the Philippines (CMCP) is duly registered with the Philippine Economic Zone Authority (PEZA) as an Export Enterprise under Registration No. 89-047; that in addition to its existing incentives provided in the PEZA law, the company obtained certification from the Bureau of Export Trade Promotion as accredited direct exporter under R.A. No. 7844, otherwise known as the Export Development Act; that CMCP has a Technological Assistance Agreement with its parent company, Clarion Company Ltd. (CCL), a corporation organized and existing under the laws of Japan for which CMCP pays royalty in an amount equal to one per cent (1%) of the ex-factory price of the licensed products manufactured and sold; that said royalty payments are due from the use of the Patents and Trademarks in connection with the manufacture of car audio products and accessories to be exported and now the subject of your instant request for zero-rating. 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. 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 use of the Patents and Trademarks is in connection with the manufacture of car audio products and accessories to be exported. However, instead of zero-rating which the non-resident lessor cannot avail of, the provision for exempt transactions under Section 109 of this Code which provides VAT exemptions for transactions that 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 royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor. However, since PEZA-registered export enterprises may not be passed on with nor claim input VAT, then the payment of royalties by CMCP to a non-resident lessor, such as Clairion Company Ltd. (CCL) of Japan, should be, as it is hereby confirmed to be, exempt from VAT. However, the VAT exemption notwithstanding, royalty or rental payments to CCL, a resident of Japan, 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. UN-296-94 dated October 19, 1994). This ruling revokes 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