BIR Ruling [DA-167-06]

March 27, 2006 BIR RULING [DA-167-06] DA-456-2004; Sec. 6, R.A. 9337; Sec 4. 108-5 (b) (2) and 109-1 (B) (u), R.R. 16-2005 Zobella & Co . Suite 1008-1009, Paragon Plaza Mandaluyong City Attention: Celia O. Angeles Office Administrator Gentlemen : This refers to your letter dated November 8, 2005 requesting for a ruling as to whether or not the sale of services to your foreign clients can be considered as zero-rated VAT transactions. It is represented that Zobella & Co . (" Zobella " for brevity) is a VAT-registered firm engaged in the business of patent and trademark registration and maintenance and other related services for clients who are mostly foreign-based. It is further represented that Zobella bills these foreign clients in foreign currencies and receives payments through local banks. Subsequently, Zobella asks the depository banks to convert these payments to Philippine pesos. You now pose the question of whether or not Zobella's services to such clients are subject to VAT zero-rating. In reply, please be informed that Section 6 of Republic Act (RA) No. 9337, as implemented by Revenue Regulations (RR) No. 16-2005, provides that: "(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: xxx xxx xxx "(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside of 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 Bangko Sentral ng Pilipinas (BSP);" In addition, Sec 4. 108-5 (b) (2) of RR 16-2005 states that: "(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; Since the services rendered by Zobella to its non-resident foreign clients consist of patent and trademark registration, maintenance and other related services, and that the fees are to be paid by the latter to Zobella in foreign currency and accounted for in accordance with the rules and regulations of the BSP, this Office confirms your opinion that the fees received by Zobella from its foreign clients qualify for automatic zero-rated value-added tax (VAT) pursuant to Section 108 (B) (2) of the Tax Code as amended by RA 9337. TDaAHS As regards Zobella's conversion of payments received from its foreign clients, the conversions from foreign currency to Philippine Pesos through local banks are regarded as VAT-exempt transactions pursuant to Section 109 (u) of the same Code. However, banks through which these currency exchanges are done are subject to percentage tax on their gross receipts in accordance with Section 4.109-1 (B) (u) of RR 16-2005. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service