BIR Ruling [DA-064-97]

February 6, 1997 BIR RULING [DA-064-97] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue, Makati Metro Manila Attention: Atty . J . A . Osana Tax Division Gentlemen : This refers to your letter dated December 9, 1997, requesting confirmation of your opinion that services rendered by local subcontractors to UHDE GmbH of Germany (UHDE) is subject to 0% VAT rate pursuant to Section 102 (b) (2) of the Tax Code in relation to Revenue Regulations No. 5-96 and that UHDE Philippine branch which is not a party to the contract is not subject to VAT on service subcontracted to and rendered by the local subcontractors to UHDE and that UHDE is not subject to VAT on services actually rendered by the local subcontractors. aisadc It is represented that UHDE is a company incorporated in the Federal Republic of Germany; that UHDE has entered into a Contract for Engineering, Procurement, Supply of Equipment and Commissioning of a Polypropylene Plant with Petrochemical Corporation of Asia Pacific (Petrocap), a company incorporated in the Philippines; that UHDE subcontracted all the works such as civil engineering, piping and steel construction and electrical installation to local subcontractors who are paid by UHDE in foreign currency inwardly remitted and accounted for in accordance with the Bangko Sentral ng Pilipinas rules and regulations; that UHDE in turn bills Petrocap for the services rendered by the local subcontractors; that the subcontract agreement with local subcontractors for the civil engineering work, piping and steel construction was entered into long before the establishment of UHDE Philippine branch; that the activities of UHDE Philippine Branch are limited to certain administrative services. In reply, please be informed as follows: 1. Section 102 (b) (2) of the Tax Code enumerates the services that are zero-rated and includes services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. The provision is implemented by Revenue Regulations No. 5-96, which clarified that for zero-rating to apply to sale of services in the Philippines which were paid in acceptable foreign currency, the payor or the buyer of the service should be a non-resident. Considering the foregoing and since the service contract was entered by UHDE a German company, the services of the Philippine subcontractors is considered rendered to a non-resident. Thus, your opinion that the services by the Philippine subcontractors in favor of UHDE is VAT zero-rated is hereby confirmed. 2. In BIR Ruling No. 159-89 dated April 7, 1989, the National Power Corporation (NPC) awarded a contract to Siemens, a German corporation, for the supply and rehabilitation of a power plant of NPC. The scope of the work under the contract consists of the design, manufacture, supply, installation of equipment, facilities for replacement and complete overhaul of existing equipment/facilities including the supervision, commissioning start-up, performance test and the instructions covering the rehabilitation of the plant. Siemens subcontracted the installation and supervision services to a local subcontractor. Siemens did not rendered any service in the Philippines. The BIR stated that: "Considering that Siemens AG does not have permanent establishment in the Philippines to which its business profits/income is attributable, payments received by it under its contract with the National Power Corporation are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 25 (b) (1) of the Tax Code, as amended. Moreover, since Siemens is not engaged in the sale of goods and services in the Philippines, it is not subject to the value-added tax." Considering the foregoing, your opinion that UHDE Philippine Branch which is not a party to the contract is not subject to VAT on service subcontracted to and rendered by the local subcontractors is hereby confirmed. 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. cdtech Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)