BIR Ruling [DA-154-06]

March 27, 2006 BIR RULING [DA-154-06] R.A. 8756; DA-047-2001 Alba Romeo & Co . Certified Public Accountants 7th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Gentlemen : This refers to your letter dated December 13, 2005 requesting on behalf of your client, BEIERSDORF SINGAPORE PTE. LTD. (Beiersdorf), for confirmation of your opinion that payments made by Beiersdorf to all its supplier of services (media advertisers, consultancy and the like) which are being paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), are subject to zero-percent (0%) VAT rate. It is represented that BEIERSDORF SINGAPORE PTE. LTD. is a non-resident foreign corporation duly organized and existing under the laws of Singapore; that it is registered with the Securities and Exchange Commission as a representative office established for the purpose of promoting and disseminating information about the parent company; that Beiersdorf is involved in purely marketing activities; that all expenses incurred in the Philippines are paid for directly by Beiersdorf Singapore by the issuance of a check in U.S. dollars. In reply thereto, please be informed that Section 2 of RA No. 8756 defines Regional Area Headquarters (RAHQ) as an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines, while Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines in the Asia-Pacific Region and in other foreign markets. Accordingly, the registration of BEIERSDORF SINGAPORE PTE. LTD. as a RAHQ which does not earn or derive income in the Philippine but merely acts as a medium to disseminate information and product promotion of its head office is exempt from Philippine income tax under Section 28(A)(6)(a) of the Tax Code of 1997. (BIR Ruling Nos. 047-01 dated September 28, 2001; 053-00 dated October 30, 2000) In addition, Section 109(p) of the Tax Code of 1997 provides that " services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines" shall be exempt from value-added tax. SacDIE However, whether or not the RAHQ actually derives income and should, by definition, be considered not a RAHQ is a question of fact that this Office shall and will not rule on. Further, Section 4.108-5(b)(2) of Revenue Regulations No. 16-2005 implementing Section 108(B)(2) of the Tax Code of 1997, as amended by R.A. 9337 provides that: "SEC. 4.108-5 Zero Rated Sales of Services . (a) . . . (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." BASED ON THE FOREGOING, since BEIERSDORF is not the entity rendering the service but is recipient of the services from suppliers that render or perform services other than manufacturing, processing or repacking to an entity (BEIERSDORF) 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, which are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, said services fall squarely within the purview of Section 108(B)(2) of the Tax Code of 1997, as amended by R.A. 9337, and are, therefore, subject to zero percent VAT. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service