Leonardo Vicente & Associates

January 17, 2007 BIR RULING [DA-024-07] Sec. 108 (B) (3), E.O. 226 as amended; BIR Ruling No. DA-402-2006 Leonardo Vicente & Associates Certified Public Accountants Unit 55, Zeta II Building 191 Salcedo St., Legaspi Village Makati City Attention: Mr. Edgardo A. Leonardo Managing Partner Gentlemen : This refers to your letter dated November 09, 2006 requesting for and in behalf of your client, NGL PACIFIC LIMITED (the "Corporation"), for confirmation of your opinion regarding the tax implications of its importation/shipment of a vehicle from the United Kingdom and the value-added tax (VAT) on its purchase of goods and services from local and foreign suppliers. It is represented that NGL PACIFIC LIMITED is a multinational company organized and existing under the laws of Hongkong and was registered with the Securities and Exchange Commission under SEC Registration No. 357 dated April 18, 1983 for the establishment of a regional or area headquarters in the Philippines; that its activities shall be limited to acting as supervision, communications and coordination center for its affiliates, subsidiaries or branches of the region; that it is importing the motor vehicle which is needed and to be used solely for its functions as regional or area headquarters; and that as a regional headquarters, it purchases goods, merchandise and services from local and foreign suppliers. In reply, please be informed that Section 108 (B) of the Tax Code of 1987 provides, viz: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . "(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%) rate: "(1) . . . "(2) . . . "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is signatory effectively subjects the supply of such services to zero percent (0%) rate: xxx xxx xxx." On the other hand Article 65 of E.O. No. 226, as amended by R.A. No. 8756, provides as follows, viz: "Art. 65. Value-Added Tax. The regional or area headquarters established in the Philippines by multinational companies shall be exempted from value-added tax. In addition, the sale or lease of goods and property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code as amended. "Regional operating headquarters shall be subject to the then ten percent (10%) [now 12%] value added tax as provided for under the National Internal Revenue, as amended." Likewise, Article 67 of E.O. No. 226 as amended by R.A. No. 8756, specifically provides that: "Art. 67. Tax and Duty Free Importation of Training Materials and Equipment, Importation of Motor Vehicles. Regional or area headquarters and regional operating headquarters shall enjoy tax and duty free importation of equipment and materials for training and conferences which are needed and used solely for their functions as regional or area headquarters or regional operating headquarters and which are not locally available subject to the prior approval of the Board of Investments. xxx xxx xxx "Regional or area headquarters and regional operating headquarters shall be entitled to the importation of new motor vehicles subject to the payment of the corresponding excise taxes and duties. " (emphasis supplied) Under the aforequoted Section 108 (B) (3), to be eligible for zero-rating, (1) the exemption of the person or entity with whom a VAT-registered person enters into a transaction must be provided under a special law (international agreement); and (2) the exemption effectively subjects such transaction to zero rate. In this case, it is clear from Article 65 of the E.O. No. 226 as amended, that regional headquarters are exempt from VAT and that sale or lease of goods or properties to them are subject to the zero-percent (0%) VAT rate. Such being the case and since the said EO is a special law, the sale of goods and services rendered to NGL PACIFIC LIMITED by local and foreign suppliers shall be effectively subject to the zero-percent (0%) VAT rate. Please be reminded, however, that for the seller of goods, services and property to avail of the zero-percent rate, it is required to obtain an approved application for effective zero-rating, pursuant to Section 4.107.1 (d) of Revenue Regulations 7-95, as amended. (VAT Review Committee Ruling No. 013-2004 dated May 14, 2004) With regard to services rendered to regional operating headquarters by VAT-registered persons, they remain subject to the twelve percent (12%) VAT rate, pursuant to said Article 65. Finally, the importation/shipment of a vehicle from the United Kingdom by NGL PACIFIC LIMITED shall be subject to the payment of the corresponding excise taxes and duties. 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service