Applying for zero-rated VAT

Sonnets Food and Catering Services wants to know if there is a need to apply for zero-rated VAT on its sale of services.

Sonnets is a VAT registered single proprietorship based at the Mactan Economic Processing Zone in Cebu. The company provides meals for LEAR Corp. (formerly known as United Technologies Automotive (Phils), Inc.), which is also located at MEPZ. Because it is registered with the Philippine Economic Zone Authority, LEAR is subject to the 5% tax on gross income earned, in lieu of all taxes (except real property taxes) under RA No. 7916 as amended by RA No. 8748.

Under its contract with LEAR, Sonnets provides meals at P18 per meal per employee. The P18 contract price was computed by LEAR by considering the cost or price of meat, vegetables, labor and overhead and a 15% mark-up. The computation does not include the payment of a 10% VAT.

The billing and collection of what LEAR employees owe Sonnets is directly done by LEAR and Sonnet and does not progress from LEAR to its employees to Sonnets. The weekly billing is based on the daily projected head count of department managers. In case of discrepancies between the projected and the actual head count, the billing is always based on the larger count.

When paid, Sonnets issues LEAR official receipts stamped "zero-rated sales".

In selling its services to LEAR Corp., Sonnets Food and Catering services does not need any permit to be entitled to the zero VAT benefit.

Revenue Memorandum Circular No. 974-99 provides that:

"…any sale of goods, property or service made by a VAT-registered supplier from the Customs Territory by any registered enterprise operating in the ecozone, regardless of the latter’s PEZA registration, is legally entitled to the zero percent VAT. All sale of goods or property to such enterprise made by a VAT-registered supplier from the Customs Territory shall be treated subject to zero percent VAT, pursuant to Section 106(A)(2)(a)(5), NIRC, in relation to ART 77(2) of the Omnibus Investment Code, while all sales of services to the said enterprise made by VAT-registered suppliers from the Customs Territory shall be treated effectively subject to the zero percent VAT, pursuant to Section 108(3), NIRC, in relation to the provisions of RA 7916 and the "Cross Border Doctrine" of the VAT system.

"This circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent VAT for sales made to the ecozone enterprises and shall serve as sufficient compliance to the requirements for prior approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as the date of issuance of this circular."

It is understood, however, that Sonnets should use and issue only a duly registered VAT invoice on which the word, "zero-rated", is imprinted to cover the zero-rated sales. Such invoices are covered by Section 4.108-1 of Revenue Regulations No. 7-95, otherwise known as the Consolidated Value-Added Tax Regulations.

(VAT ruling No. 47-2001 dated July 16, 2001. This ruling is issued on the basis of represented facts. However, if upon investigations, it will be disclosed that the facts are different, then this ruling shall be considered null and void).