If a buyer in the Philippines purchases
goods from a Philippine Economic Zone Authority (PEZA) registered
enterprise, is the purchase subject to value-added tax (VAT)?
Under Section 107 of the Tax Code in relation to Section 26 of
Republic Act No. 7916 (PEZA Law), sale of goods by a PEZA-registered
enterprise to a buyer in the Philippines (i.e., domestic sales) is
considered a “technical importation,” i.e. the buyer is treated as the
importer and the sale shall be charged the corresponding VAT. The
rationale for this tax treatment is that an ecozone is considered a
separate customs territory which creates a legal fiction that it is a
foreign territory, even though located within the Philippines. In
essence, purchases from an ecozone are likened to purchases made from
abroad. Thus, the sale is treated as a technical importation.
Section 4.107-1 of Revenue Regulations (RR)
No. 16-2005 (Consolidated VAT Regulations), in implementing Section 107
of the Tax Code, provides that VAT is imposed on goods brought into the
Philippines, whether for use in business or not. The VAT, which is
based on the total value used by the Bureau of Customs (BoC) in
determining tariff and customs duties, plus customs duties, excise tax,
if any, and other charges, such as postage, commission, and similar
charges, should be paid prior to the release of the goods from customs
custody.
In case the valuation used by the BoC in computing customs duties is
based on volume or quantity of the imported goods, the landed cost shall
be the basis for computing VAT. Landed cost consists of the invoice
amount, customs duties, freight, insurance and other charges. If the
goods imported are subject to excise tax, the excise tax shall form part
of the tax base.
The same rule applies to technical importation of goods sold by a person
located in a special economic zone to a customer located in a customs
territory. In this case, the VAT on importation shall be paid by the
importer prior to the release of such goods from customs custody.
From the foregoing, it is clear that all domestic sales of goods by
PEZA-registered enterprises are considered technical importations where
the buyer is treated as the importer liable for VAT on importation.
On the other hand, Section 2, Rule VIII of the rules and regulations
implementing the PEZA Law provides that domestic merchandise sent from
the restricted areas of the ecozones by PEZA-registered enterprises to
the customs territory shall be subject to the internal revenue laws of
the Philippines as domestic goods sold, transferred or disposed of for
local consumption. Internal revenue laws, in this case, refer to the Tax
Code in relation to the PEZA Law, as mentioned above.
Corollary to this, Section 105 of the Tax Code provides that any person
who, in the course of his trade or business, sells, barters, exchanges
or leases goods or properties shall be liable to VAT imposed in Section
106 of the Tax Code. The phrase “in the course of trade or business”
means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental to it.
Given the foregoing, there was confusion on whether a PEZA-registered enterprise is liable to pay VAT on its domestic sales.
This matter was clarified in BIR Ruling [DA-031-07] dated Jan. 19, 2007.
In this case, a PEZA-registered enterprise imposed and collected 12% VAT
on every sale of metal scrap to a buyer from the customs territory
because it knows for a fact that such sale is subject to VAT. However,
such VAT payment is supposed to answer for the alleged technical
importation that will ultimately be remitted to the government. Thus,
the BoC is no longer required to collect the VAT before the scrap metal
is taken out from PEZA. In such a case, the buyer is paying a total of
24% VAT every time it hauls the same items from PEZA (12% VAT on the
sale and another 12% when the goods are released from customs).
The BIR held that the payment of the VAT should be made by the buyer
directly to the BoC which is the agency tasked to collect VAT on
imports. Accordingly, the PEZA-registered enterprise is not required to
charge VAT on every sale of goods but should be furnished a copy of the
receipt of the VAT payment made by the buyer to the BoC.
This receipt will serve as authority for the buyer to request the
PEZA-registered seller to refrain from imposing VAT on the sale of goods
since the BoC is also collecting the same before the goods are
released.
The same BIR ruling is applicable in cases of goods purchased from other
ecozones (e.g. Subic, Clark) which are also considered technical
importation.
Although the BIR has held in several rulings that sale of goods by a
PEZA-registered enterprise to a buyer in the Philippines is considered
technical importation where the latter shall be responsible for the tax
imposed, the documentation needed for PEZA-registered enterprises to be
absolved from imposing VAT on their domestic sale of goods was then
ambiguous.
With this ruling, however, the issue of double taxation on goods
purchased from PEZA-registered enterprises has finally been resolved.
Conflicting views should have been put to rest.
The views or opinions expressed in this article are solely those of
the author and do not necessarily represent those of Isla Lipana &
Co. The firm will not accept any liability arising from the article.
John Paul M. Vargas is a manager at the Tax Services Department of Isla
Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
john.paul.m.vargas@ph.pwc.com
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