Arreza & Associates

March 11, 2008 BIR RULING [DA-151-08] VAT Ruling 013-04 Arreza & Associates Unit O, 10th Floor, Burgundy Corporate Tower 252 Sen. Gil J. Puyat Avenue Makati City Attention: Atty. Augusto Jose Y. Arreza Gentlemen : This refers to your letter dated July 11, 2007 requesting on behalf of your client, British Rollmakers (China), Ltd. ("BRC" for brevity) for confirmation of your opinion that BRC's rent payments should be net of value added tax (VAT) and BRC's suppliers should not impose the VAT on their sale of goods and services to BRC. As represented, BRC is a multinational corporation organized under the laws of Hong Kong. It is duly registered and licensed by the Securities and Exchange Commission (SEC) under SEC Certificate of Registration No. FS200708040 dated May 24, 2007. BRC is a regional headquarters established in the Philippines pursuant to the provisions of Executive Order (E.O.) No. 226, otherwise known as the Omnibus Investments Code of 1987 and as amended by Republic Act (R.A.) No. 8756. It is also registered with the Bureau of Internal Revenue under Certificate of Registration No. OCN 9RC0000209738 dated June 27, 2007. BRC is in the process of leasing a new office and acquiring/purchasing office equipment, e.g. air-conditioning units. It is your opinion that BRC's rent payments and the purchase price of its office equipment should be net of VAT. In reply, please be informed that Section 108 (B) (3) of the Tax Code of 1997, as amended by R.A. No. 9337 and as implemented by Sec. 4.108-5 of Revenue Regulations (RR) No. 16-2005 provides, viz.: ACcaET "(a) In general. A zero-rated sale of service (by a VAT-registered 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 of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations. (b) Transactions Subject to Zero Percent (0%) 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 (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subject the supply of such services to zero percent (0%) rate; xxx xxx xxx" Under RR No. 16-2005, implementing Section 108 (B) of the Tax Code of 1997, as amended, two (2) requisites must be complied with in order that the services may qualify for VAT 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 (or international agreement); and (2) The exemption effectively subjects such transaction to zero rate. On the other hand, Section 65 of E.O. No. 226, as amended by R.A. No. 8756 provides "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. xxx xxx xxx" Under Article 65 of E.O. No. 226, as amended, 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. Such being the case, and since E.O. No. 226, as amended is a special law, the lease of property and the sale of equipment i.e., air-conditioning units to BRC shall be effectively subject to the zero-percent (0%) VAT rate. IDSETA However, in order for BRC to avail of the zero-percent (0%) rate, its suppliers are required to obtain an approved application for effective zero-rating with the Audit Information, Tax Exemption and Incentives Division pursuant to Section 4.108-6 of RR No. 16-2005 as amended by RR 4-2007. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service