BIR Ruling [DA-016-06]

January 20, 2006 BIR RULING [DA-016-06] 108 (B) (2); R.R. 5-96; VAT Ruling No. 003-2002 WSP Asia (Philippines), Inc . 30th Floor "One San Miguel Avenue" Ortigas Center, Pasig City Attention: Mr. Baldomero Bongalon, Jr. Consultant Gentlemen : This refers to your letter dated October 27, 2005 requesting confirmation of your opinion that the service fees paid by overseas companies for the engineering designs and drawing services are subject to value-added tax at zero percent (0%) rate pursuant to Section 108(B)(2) of the Tax code of 1997. It is represented that WSP Asia (Philippines), Inc. (WSP for brevity), is a domestic corporation organized and existing under the laws of the Philippines. Sometime in December 2003, WSP submitted three (3) separate proposals to provide engineering designs and drawings services to its non-resident foreign clients, WSP Hong Kong Ltd., WSP Buildings Limited (UK), and WSP Middle East all of which are foreign corporations duly registered under the laws of HongKong, United Kingdom and United Arab Emirates respectively, with no permanent establishments here in the Philippines. Under the above-mentioned proposals, WSP shall submit or render the following services among others, to wit: 1. Detailed design of civil and structural engineering works for various projects; 2. Detailed design of Mechanical, Electrical and Fire Engineering works for various projects; and 3. Computer drafting of engineering drawings associated with the above and other projects. For and in consideration of the above-mentioned engineering designs and drawing services which are transmitted/delivered to WSP's clients abroad, WSP received service fees based on actual time charges, in HongKong Dollar, British Pounds and US Dollar respectively, which are all considered acceptable foreign currencies and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). aTAEHc In reply, please be informed that Revenue Regulations No. 5-96 amending Sec. 4.102-2(b)(2) of Revenue Regulations No. 7-95 provides, viz: "SEC. 4.102-2. Zero-rating. (a) . . . (b) Transactions subject to zero percent (0%) rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) . . . (2) Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration of which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." The foregoing provision has been reworded in Sec. 4.108-5 of Revenue Regulations 16-2005 (Consolidated Value-Added Tax Regulations of 2005). However, the same substantially applies to the facts presented under consideration. Thus: "SEC. 4.108-5 Zero-Rated Sale of Services . . . . (b) Transactions Subject to Zero Percent (0%) VAT Rate . The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: xxx xxx xxx (2) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. xxx xxx xxx" Accordingly, services by a resident to a non-resident foreign client, such as engineering services shall be accorded automatic VAT zero rating without necessity of applying for and securing prior approval of zero-rating. (VAT Ruling No. 003-2002 dated February 6, 2006) This ruling is being issued on the basis of the foregoing 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.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue