REVENUE MEMORANDUM CIRCULAR NO. 51-2007

SUBJECT : Circularization of the Revisions on the New Paradigm in Meeting the Collection Target as Embodied in the Memorandum Issued by OIC-CIR dated July 27, 2007

TO : All Internal Revenue Officers and Others Concerned.
For the information and guidance of all concerned, reproduced hereunder, in its entirety, is the Memorandum of the undersigned, dated July 27, 2007, addressed to all concerned internal revenue officials and employees, relative to the revisions made on the new paradigm in meeting the collection target, as follows:

“MEMORANDUM
“TO : ALL CONCERNED INTERNAL REVENUE OFFICIALS
AND EMPLOYEES
“SUBJECT : REVISIONS ON THE NEW PARADIGM IN MEETING COLLECTION TARGET
“DATE : July 27, 2007
________________________________________________________________________
“To expedite the claims for tax credits or refund, The New Paradigm in Meeting Collection Target, as circularized thru Revenue Memorandum Circular No. 32-2007, is hereby revised to reflect the following changes:

“I. Except for cases falling under the jurisdiction of the Large Taxpayer Service (LTS), claims for cash/TCCs must observe the following processes:

“a. For cases One Million (1M) Pesos and below, the following procedures shall be followed:

Ø Claims of One Million (1M) Pesos and below are to be processed and reviewed by the Revenue District Office having jurisdiction over the claimant with the Regional Director as the approving official.
Ø If in the process, legal questions or questions of law arise, the Revenue Officer assigned shall request for a legal opinion on the issues raised. The Legal Division shall resolve the legal question and issue an opinion on the matter. The Ruling issued by the Legal Division shall form part of the records of the case.

“b. For claims/cases of more than One Million (1M) but not exceeding Ten Million (10M) Pesos;

Ø For claims/cases of more than One Million (1M) but not exceeding Ten Million (10M) Pesos the same shall be filed and processed in the RDO having jurisdiction over the claimant. Review shall be done in the Revenue Region and shall be forwarded to the Assessment Service. The certificates shall be signed by the Assistant Commissioner-Assessment Service (ACIR-Assessment Service) as the final approving official.
Ø If in the process, legal questions or questions of law arise, the Revenue Officer assigned shall request for a legal opinion on the issues raised. The Legal Service shall process and resolve the legal question and issue an opinion to be attached to the docket and shall form part of the records of the case. The docket shall remain in the custody of the Revenue Officer assigned to the case.
Ø In case of conflict between the ruling issued by the Legal Service and the decision/position of Assessment Service, the same shall be resolved by the concerned Deputy Commissioner of Internal Revenue (DCIR)/Commissioner of Internal Revenue (CIR).

“c. For claims above Ten Million (10M) Pesos
Ø All reports/cases with claims exceeding Ten Million (10M) Pesos must be recommended and signed by the ACIR-Assessment Service. The same shall be forwarded to the Office of the Deputy Commissioner for Operations Group (ODCIROG) for final approval.
Ø If in the process, legal questions or questions of law arise, the Revenue Officer assigned shall request for a legal opinion on the issues raised. The Legal Service shall process and resolve the legal question and issue an opinion to be attached to the docket and shall form part of the records of the case. The docket shall remain in the custody of the Revenue Officer assigned to the case. After the issuance of the ruling, the ACIR- Assessment Service shall forward the docket to the Office of the DCIROG.
Ø In case of conflict between the ruling issued by the Legal Service and the Assessment Service, the same shall be resolved by the concerned Deputy or the Commissioner of Internal Revenue.

“II. For claims for cash refunds/ Tax Credit Certificates (TCCs) filed in the Large Taxpayers Service (LTAID I, LTAID II & LTDO) the following rules shall be observed:

Ø All claims amounting to Ten Million (10M) Pesos and below, the same shall be reviewed and approved by the ACIR-LTS or the respective Head Revenue Executive Assistant (HREA) in the absence of the former.
Ø If the amounts involved exceeds Ten Million (10M) Pesos, the final approving authority shall be the CIR.
Ø If in the process, legal questions or questions of law arise, the Revenue Officer assigned shall request for a legal opinion on the issues raised. The Legal Service shall process and resolve the legal question and issue an opinion to be attached to the docket and shall form part of the records of the case. The docket shall remain in the custody of the Revenue Officer assigned to the case. After the issuance of the ruling, the docket shall be forwarded to the office of the CIR for final approval.

“III. For VAT claims filed in the One-Stop-Shop Center of the DOF the following procedures are to be observed:

Ø Claims amounting to Ten Million (10M) Pesos and below filed in the OSS-DOF shall be reviewed and processed by the Assessment Service. The ACIR-Assessment Service shall be the approving official for claims involving these amounts.
Ø Claims exceeding Ten Million (10M) Pesos shall be reviewed and recommended by the ACIR-Assessment Service to the Deputy Commissioner–Operations Group for final approval.
Ø Dockets reviewed by the Assessment Service involving said claims which it would transmit back to OSS-DOF for compliance with certain requirements need not pass through the review of the ODCIR-OG. The ACIR-Assessment Service shall send it back to the originating office for immediate compliance to avoid further delay in the claims.

“IV. For cases decided by courts which require the issuance of TCCs;

Ø The Appellate Division shall prepare the TCCs to be signed by the ACIR-Legal Service as the final approving official.

“All the pertinent audit procedures, memorandum orders, and other issuances for the validation of the amounts claimed for tax credit and refund as well as the approval thereof, and the issuance of the corresponding TCCs or release of check in case of refund, shall strictly be observed.

“In case of revalidation of TCCs:

“Except for cases handled by LTS and Region 8-Makati which follow the rules and procedures under Integrated Tax System, all revalidations, tranfers, utilizations and conversions of TCCs must be reviewed and recommended by the concerned ACIR and shall be signed by the Deputy Commissioner-Operations Group as the final approving official, except those jointly issued by the BIR and the OSS Center which shall be jointly signed by the ODCIR-OG and the Executive Director of the OSS-Center. “All existing issuances not inconsistent herewith shall still be observed and complied.

“Please be guided accordingly.
“LILIAN B. HEFTI (SGD)
“OIC-Commissioner of Internal Revenue”
All internal revenue officials and employees are hereby enjoined to give this
Circular as wide a publicity as possible.
(Original Signed)
LILIAN B. HEFTI
OIC, Commissioner of Internal Revenue

REVENUE MEMORANDUM CIRCULAR NO. 50-2007

REVENUE MEMORANDUM CIRCULAR NO. 50-2007

SUBJECT: Tax Treatment of Sale, Barter or Exchange of Goods or Properties or Sale or Exchange of Services Made by Suppliers from the Customs Territory to Registered Freeport Zone Enterprises in the Subic Freeport Zone (SFZ), the Clark Freeport Zone (CFZ), as well as the Poro Point Freeport Zone (PPFZ), and Vice Versa under Sections 12 and 15 of Republic Act No. 7227, as amended by Republic Act No. 9400.

TO: All Internal Revenue Officers and Others Concerned
________________________________________________________________________
SECTION 1. Scope. – This Circular is issued to clarify the tax treatment of the sale, barter or exchange of goods or sale or exchange of services or lease of properties made by suppliers from the customs territory to the registered Freeport Zone enterprises in the Subic Freeport Zone (SFZ), including the Clark Freeport Zone (CFZ), as well as the Poro Point Freeport Zone (PPFZ), and vice versa pursuant to the provisions of Sections 12 and 15 of Republic Act (RA) No. 7227, as amended by RA 9400, in relation to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, as amended by RA 9337, and implemented by Sections 5, 6, 12, and 13 of Revenue Regulations (Rev. Regs.) No. 4-07 amending Sections 4.106-5, 4.106-6, and 4.108-6 of Rev. Regs. No. 16-2005.

SECTION 2. Background. – Pursuant to Sections 12 and 15 of RA 7227, as amended by RA 9400, the foregoing Freeport Zones shall be operated and managed as separate customs territories. The free flow or movement of goods and capital within, into and exported out of the said Freeport Zones, as well as the implementation of tax incentives and duty- free importations of raw materials, goods, and capital equipment shall be ensured. Being a separate customs territories, the exportation or removal of goods from the said Freeport Zones to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code, the Tax Code of 1997, as amended, and other relevant tax laws of the Philippines.

The Supreme Court reiterated the government’s policy governing Freeport Zones under RA 7227 of “converting into alternative productive uses, former military reservations and their extensions, as well as providing them incentives to enhance the benefits that would be derived from them in promoting economic and social development.”

These Freeport Zones therefore, by legal fiction, are regarded as foreign territories. This legal fiction is necessary to give meaningful effect to the policies of the special law creating the said Freeport zone. (CIR vs. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005 and CIR vs. Toshiba Information Systems (Philippines) Inc., G.R. No. 150154, August 9, 2005) Generally, products manufactured or produced within the SFZ, CFZ, and PPFZ are destined for export to foreign countries. While such products, under certain conditions, may also be sold to buyers in the customs territory, such sales are technically considered as importations by such buyers from the customs territory. Since these Freeport Zones, as defined by law, are considered as separate customs territories, the buyer from the customs territory is treated as an importer and is subject to the corresponding customs duties and import taxes on his purchase of products from within these Freeport Zones.

The Philippine VAT Law adheres to the "cross border doctrine" of the VAT system, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT. Conversely, those goods destined for use or consumption and services to be rendered within the Philippines shall be subject to the 12 % VAT. In explaining the “cross border principle”, the Supreme Court ruled that (U)nder the cross border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an Ecozone, or in this case, a Freeport Zone. (CIR vs. Seagate and CIR vs. Toshiba; ibid) - In another decision (Coconut Oil Refiners Association, Inc., et. al, vs Hon. Executive Secretary Ruben Torres, BCDA, et. al, G.R. NO. 132527, July 29, 2005), the Supreme Court held that the provision on the incentives to SFZ, such as tax and duty- free importations of raw materials, goods and capital equipment, should be interpreted within the context and in a manner that would promote in the fullest manner the policy and object of the Legislature. In this decision, the Supreme Court ascertained the clear legislative intent thus: “For as long as the goods remain within the zone, whether we call it an economic zone or a freeport zone, for as long as we say in this law that all goods entering this particular territory will be duty- free and tax- free, for as long as they remain there, consumed there or re-exported or destroyed in that place, then they are not subject to duties and taxes in accordance with the laws of the Philippines."

The said Supreme Court decision specifically upheld that the establishment of duty- free shops within the SFZ which sell consumer items is still well within the policy enunciated in RA 7227, as long as the goods are not brought out of the zone. Hence, even individuals can be entitled to tax and duty free purchases of goods within the SFZ and for as long as these goods are not brought out of the Freeport Zone.

SECTION 3. Clarificatory Questions and Answers. -

Q1: How will the sale, barter or exchange of goods or properties into the Freeport Zone by suppliers/contractors from the Customs Territory be considered?

A1: Such transactions shall be considered as export sales in accordance with RA 7227, as amended by RA 9400, which provides that the Freeport Zones shall be operated and managed as a separate customs territory. Moreover, Executive Order (EO) No. 226 provides that sales from the Customs Territory to export processing zones are considered as “export sales”.

Q2: What will be the treatment of sale, barter, exchange or lease of goods, properties and sale or exchange of services to a registered Freeport Zone enterprise by sellers/contractors from the Customs Territory?

A2: If the seller is a VAT taxpayer, such sale, barter or exchange shall be subject to VAT at zero (0%) percent. If the seller is a non -VAT taxpayer, the transaction shall be exempt from VAT.

Q3: What is meant by a “zero-rated” sale and an “exempt” sale?

A3:. A zero-rated sale of goods, properties and/or services (by a VATregistered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulations. Under this type of sale, no VAT shall be shifted or passed-on by VAT-registered sellers/suppliers from the Customs Territory on their sale, barter or exchange of goods, properties or services to the subject registered Freeport Zone enterprises. A VAT-exempt transaction, on the other hand, refers to the sale of goods, properties or services or the use or lease of properties that is not subject to VAT (output tax) under Section 109 of the Tax Code of 1997, and the seller/supplier is not allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.

Q4: What is the difference between an automatically zero-rated sale and an effectively zero-rated sale?

A4: An automatically zero-rated sale refers to a sale of goods, properties and services to a Freeport Zone-registered enterprise by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. An effectively zero-rated sale, on the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated.

Q5: What is the coverage of VAT zero-rating?

A5: The zero-rating will cover sale, barter, exchange or lease of all goods, properties and/or services by a VAT-registered seller/contractor from the Customs Territory to a Freeport Zone-registered enterprise and shall include, among others, the following:

a. The sale/supply of ordinary cars, vehicles, automobiles, specialized vehicles or other transportation equipment, provided that these are used exclusively within the subject special Freeport Zones;

b. The lease of properties by VAT-registered lessors, provided that such properties are located within the subject Freeport Zones;

c. The sale/supply of electricity by the National Power Corporation (“NPC”) or by any other VAT-registered seller/supplier from the Customs Territory, to any registered Freeport Zone enterprise engaged in the distribution of power or electricity within the subject Freeport Zones; and
d. The sale/supply of services, provided such services are rendered or performed within the Freeport Zone.

Q6: Since the Freeport Zones are considered as foreign soil and therefore, a separate tax jurisdiction, what is the VAT treatment of sale, exchange, barter or lease of goods, properties and/or services by a Freeport Zone-registered enterprise or Resident within the Freeport Zone?

A6: Such sale, exchange, barter or lease of goods, properties and services within the subject Freeport Zones shall be exempt from VAT. The following transactions are covered under this exemption:

a. All transactions between and/or among two registered Freeport Zone Enterprises or Residents;

b. Consumer goods purchased and consumed within the Freeport Zones;

c. Sale/supply of services, including power or electricity, by a Freeport Zone-registered enterprise or resident within the Freeport Zone, regardless of whether or not the buyer or customer is a registered Freeport Zone enterprise or Zone Resident, provided that said power/electricity or services are rendered, used or consumed within the Freeport Zone ; and
d. The lease of properties owned by Freeport Zone-registered enterprises or Residents, provided that such properties are located within the subject Freeport Zones.

Q7: What is the tax treatment for the income of Freeport Zone-registered enterprises derived from sources in the Customs Territory?

A7: Freeport Zone-registered enterprises may generate income from sources within the Customs Territory of up to thirty percent (30%) of its total income from all sources; provided, that should a Freeport Zone-registered enterprise’s income from sources within the Customs Territory exceed thirty percent (30%) of its total income from all sources, then it shall be subject to the income tax laws of the Customs Territory; provided further, that in any case, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles to the Customs Territory and in the Customs Territory.

Q8: What is the tax treatment of sale, barter or exchange of goods and properties by Freeport Zone-registered enterprises to a buyer from the customs territory? (i.e. from the Freeport Zone into the Customs Territory)

A8: The sale, barter or exchange shall be treated as a technical importation made by the buyer in the customs territory. The buyer shall be treated as the importer and shall be imposed the corresponding import taxes and duties prior to release of the goods or merchandise from Customs custody. Any unpaid taxes thereon, aside from being the prime liability of the buyer-importer, shall constitute a lien on such goods or merchandise imported from the Freeport Zone.

Q9: What is the tax treatment of a sale of service or lease of properties (machineries and equipment) by Freeport Zone-registered enterprises to a customer or lessee from the Customs Territory?

A9: The sale of service shall be exempt from VAT if the service is performed or rendered within the Freeport Zone. The lease of properties, on the other hand, shall likewise be exempt from VAT if the property is located within the Freeport Zone. However, if the properties (machineries and equipment ) leased by the Freeport Zone-registered enterprise is located outside of the Freeport Zone, payments to such enterprise will be considered as royalties and subject to the final withholding VAT of 12%.

Q10: What are the documentary requirements to be submitted by Freeport Zone-registered enterprises to the BIR to be entitled to the tax benefits clarified in this Circular?

A10:
1. Certificate of Registration and Tax Exemption as a Freeport Zone-registered Enterprise;
2. Copies of relevant documentation of the legal status of the business enterprise (Articles of Incorporation, Partnership Agreement, SEC Registration and similar documents) showing, among others, beneficial ownership;
3. If a corporation, partnership or other business enterprise is organized or constituted outside the Philippines, the name, address of the legal agent of the enterprise in the Freeport Zone accompanied by sworn proof of consent of the agent to serve as such;
4. Evidence of the physical location of the business enterprise within the Freeport Zone, such as certificate of title, tax declaration, property deed, lease agreement and similar documents;
5. If previously part of a larger business enterprise doing business elsewhere in the Philippines, evidence of restructuring to exclude all business operations taking place inside the boundaries of the Freeport Zone; and that the unit left to operate inside the Freeport Zone is organized as a separate legal entity.
6. List of assets comprising the investment to be made; and
7. Such other documents as the BIR may require.

SECTION 4. Repealing Clause. — All BIR Rulings or issuances inconsistent herewith, are hereby considered amended, modified or revoked accordingly. All revenue officials concerned are requested to give this Circular as wide a publicity as possible.

(Original Signed)
LILIAN B. HEFTI
OIC-Commissioner of Internal Revenue

REVENUE MEMORANDUM CIRCULAR NO. 44 - 2007

SUBJECT : Clarifying the Taxability of Agricultural Suppliers for Withholding Tax Purposes In Respect to Sales Made to Top 10,000 Corporations And to the Government In Relation to Revenue Regulations No. 3-2004 Which Suspended the Implementation of Withholding Tax on Income Payments Made to Suppliers of Agricultural Products under Section 2.57.2(S) of Revenue Regulations (RR) No. 2-98, as Amended.

TO : All Internal Revenue Officers and Others Concerned.

BACKGROUND:
In Year 2003, certain amendatory provisions were introduced by Revenue Regulations 17-2003 to Revenue Regulations No. 2-98, which impacted the taxability of agricultural suppliers for withholding tax purposes. These amendatory provisions are as follows:

(1) Sec. 2.57.2(M) which imposed withholding tax at rates of 1% (for goods) and 2% (for services) on income payments made by the top ten thousand (10,000) private corporations to their local/resident suppliers of goods and local/resident supplier of services other than those covered by other rates of withholding tax;

(2) Sec. 2.57.2(N) (as subsequently amended by RR 30-2003) which imposed withholding tax at rates of 1% (for goods) and 2% (for services) on income payments made by the government to its local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax; and (3) Sec. 2.57.2(S) (as subsequently amended by RR 1-2004) which imposed withholding tax at rate of 1% on income payments made to agricultural suppliers by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments.

Consequently, in Year 2004, RR 3-2004 was issued suspending the implementation of the provision under Sec. 2.57.2(S) which is the general proviso relating to the imposition of withholding tax on income payments made to agricultural suppliers. Apparently, on the ground of such suspension made, agricultural suppliers desisted from being withheld tax even if their income payments are derived from payors who happen to be covered by Sec. 2.57.2(M) and (N) respectively, citing the suspension made by RR3-2004 as their ground for exemption.

Thus, this Circular is being issued in order to clarify the position of the Bureau on this issue.

A. Taxability of Agricultural Suppliers Prior to RR 3-2004

1. On income payments made by top 10,000 private corporations under Sec.2.57.2(M) of RR 2-98 as amended - Income payments received by agricultural suppliers from these taxpayers are subject to withholding tax but only at the rate provided for by Sec. 2.57.2(S) which is 1%. The withholding tax rates under Sec.2.57.2(M) shall only apply if there is no other tax rates provided in the Regulations which is not the case for agricultural suppliers.

2. On income payments made by government under Sec. 2.57.2(N) of RR 2-98, as amended - Income payments received by agricultural suppliers from these taxpayers are subject to withholding tax but only at the rate of 1% for the same reason above cited.

3. On income payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments under Sec. 2.57.2(S) of RR 2-98 as amended by RR 1-2004 but suspended by RR 3-2004 - Income payments received by agricultural suppliers from the aforementioned payors not otherwise covered by the other provisions of the withholding tax regulations are subject to withholding tax at the rate of 1%.

Example : Mr. Rebullido, is a supplier of agricultural products to the following:

(1) X Supermarket which is included in the top 10,000 private corporations;
(2) City Government of Quezon City; and
(3) Y Mini-Grocery Store which is not included in the top 10,000 private corporations.

Income payments to be received by Mr. Rebullido from the above clients are subject to withholding tax but only at the rate of 1%.

B. Taxability of Agricultural Suppliers Upon the Effectivity of RR 3-2004

1. On income payments made by top 10,000 private corporations under Sec.2.57.2(M) of RR 2-98 as amended - Income payments received by agricultural suppliers from these taxpayers are subject to withholding tax at the rate of 1% as supplier of goods.

2. On income payments made by government under Sec. 2.57.2(N) of RR 2-98, as amended - Income payments received by agricultural suppliers from these taxpayers are subject to withholding tax but only at the rate of 1% for supplier of goods.

3. On income payments made by hotels, restaurants, resorts, caterers, food processors, canneries, supermarkets, livestock, poultry, fish and marine products dealers, hardwares, factories, furniture shops and all other establishments under Sec. 2.57.2(S) of RR 2-98 as amended by RR 1-2004 but suspended by RR 3-2004 - Income payments received by agricultural suppliers from the aforementioned payors not otherwise covered by the other provisions of the withholding tax regulations (i.e., RR 2-98, as amended) are deemed not subject to withholding tax by virtue of the suspension of the imposition of Sec.2.57.2(S) under RR 2-98, as amended by RR 3-2004.

Example : Mr. Rebullido, is a supplier of agricultural products to the following:

a. X Supermarket which is included in the top 10,000 private corporations;
b. City Government of Quezon City; and
c. Y Mini-Grocery Store which is not included in the top 10,000 private corporations.

The only income payments subject to withholding tax are those received by Mr. Rebullido from X Supermarket and that from the City Government of Quezon City. Income payment from Y Mini- Grocery is the item of income payment effectively suspended by RR 3-2004 for withholding tax purposes.

In the light of the above clarification, there is no ground by which agricultural suppliers can claim that they are exempt from the imposition of withholding tax on their sales to top 10,000 private corporations and/or to the government by virtue of the suspension granted by RR 3-2004. In fine, RR 3-2004 did not in any way affect the taxability of agricultural suppliers for withholding tax purposes, insofar as their dealings with the top 10,000 private corporations and/or with the government are concerned.

Hence, all concerned internal revenue officers are hereby mandated to check the withholding tax compliance of the top 10,000 private corporations and of the government in respect to income payments made to agricultural suppliers. All internal revenue officials and others concerned are hereby enjoined to be guided accordingly and to give this Circular as wide a publicity as possible.

(Original Signed)
LILIAN B. HEFTI
OIC-Commissioner of Internal Revenue
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