BIR Ruling [DA-162-04]

April 5, 2004 BIR RULING [DA-162-04] 108 (B) (2) VAT 013-03 ESEC (Philippines) G/F Plaza B, Northgate Avenue Northgate Cyberzone, Filinvest Corporate City, Alabang Muntinlupa City Attention: Ms. Belinda A. Co Finance & Admin Manager Gentlemen : This refers to your letter dated February 11, 2004 stating that ESEC Philippines, Inc., is a corporation organized and existing under the laws of the Philippines; that on the other hand, ESEC (Asia Pacific) Pte. Ltd., is a corporation organized and existing under the laws of Singapore with registered office at 2 Kaki Bukit Avenue 1 No. 02-05 Singapore 417938; that a Commission Agent Agreement was entered into by and between ESEC Philippines, Inc., as the Agent and ESEC (Asia Pacific) Pte. Ltd., as the Mandator; that the Mandator is engaged in the business of manufacturers, dealers and maintainers of semiconductor devices and in particular in distributing equipment, systems and related spare parts for Die Bonder, Wire Bonder, Micron and Factory Integration; that the Mandator has entered into a buy sell Agreement within the ESEC Group in which it has taken over the function of a distributor; that the Mandator and Agent wish to agree on the further worldwide sales and distribution activities within the ESEC Group in terms of an agency relationship; that the Agent is well introduced in Mandator's Philippine market and has special knowledge in the Products and the business in which Mandator is active; that pursuant to said Agreement, Mandator granted to the Agent the exclusive right to perform marketing and sales support services in connection with the sale of Mandator's Products to third parties in the territory; and that all commissions due under the said Agreement shall be payable in Singapore Dollars. In connection therewith, you now request for an opinion that marketing services rendered by ESEC Philippines, Inc., as Agent, to ESEC (Asia Pacific) Pte. Ltd., a non-resident which are paid for in foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), is subject to zero-percent (0%) VAT pursuant to Section 108(B)(2) of the Tax Code of 1997. In reply thereto, please be informed that Section 108(B)(2) of the Tax Code of 1997 provides that "Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . "(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) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). "xxx xxx xxx" Our VAT law is basically a consumption type VAT system and follows the Destination Principle of Cross-Border Doctrine, under which goods, property or services destined to be used or consumed in the Philippines are subject to the 10% VAT while those destined to be used or consumed abroad, are accorded the benefit of zero-rating. ( VAT Ruling No. 031-99 dated March 18, 1999 ) The supply of services is entitled to the benefit of the zero-rating because of the basic principle underlying a Consumption Type/Destination-Type VAT, adhering to the Cross Border Doctrine wherein the onus of taxation is in that country where the goods, property or services, supplied by a VAT-registered person, are destined, used or consumed. Since the sale of services by ESEC Philippines, Inc. to a non-resident, ESEC (Asia Pacific) Pte. Ltd., is governed by Section 108(B)(2) of the Tax Code of 1997, as implemented by Section 4.1-2-2(b)(2) of Revenue Regulations No. 7-95, the same is entitled to the benefit of the zero percent (0%) VAT without need of any prior application to the BIR for zero rating, otherwise required under Section 4.107-(d), Revenue Regulations No. 7-95. Such prior application is required only for effectively zero rated sale of service as enumerated under Section 108(B)(3) of the Tax Code of 1997, as implemented by Section 4.102-2(b)(3)(4) and (5). Accordingly, the sale of services by ESEC Philippines, Inc., is entitled to the benefit of the zero percent (0%) VAT in accordance with the above quoted law and regulations. 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. AICHaS Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group