BIR Ruling [DA-191-06]

March 28, 2006 BIR RULING [DA-191-06] VAT 075-02 C.L. Manabat & Co . 5th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Mr. Richard R. Lapres Tax Manager Gentlemen : This refers to your letter dated August 17, 2005 stating that your client, SGS Gulf Limited, is a corporation organized and existing under the laws of Switzerland with principal office address at the 20th Floor of Citibank Tower, 8741 Paseo de Roxas, Makati City; that SGS Gulf Limited, a multinational company is likewise registered with the Securities and Exchange Commission ("SEC") as a regional operating headquarters ("ROHQ") in the Philippines under Registration Certificate No. A200300049 dated July 4, 2003 pursuant to the Omnibus Investments Code of 1987 (Investments Code), as amended by Republic Act No. 8756 "[t]o engage in general administration and planning; business planning and coordination, sourcing/procurement of raw materials and components; corporate Finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development."; that on September 20, 2003, a Service Agreement ("Agreement") was entered into in Switzerland by and between SGS Societe Generale de Surveillance S.A., a corporation organized and existing under the laws of Switzerland with office address at 1, place del Alpes, 1211 Geneva 1, Switzerland ("SGS Geneva"), and SGS Gulf Limited ("SGS Executing Office" or "SGS Gulf Limited"); that SGS Geneva is a multinational company which entered into pre-shipment inspection agreements with various governments around the world pursuant to which SGS Geneva is contracted or accredited to perform certain pre-shipment inspection and related services on imports and/or export; that to fulfill its obligations, SGS Geneva requires the following services provided under paragraph 1.2.1 of the Agreement: "Business Processing Services to be performed by designated and identified business process functions in and for the SGS Executing Office's country as well as for other countries assigned to it. These additional business process functions may consist of but not limited to: a. Trade coordination; b. Data processing and auditing; c. Valuation and classification of goods; d. Inspection coordination; e. Valuation and classification on non-standard files; and f. Administrative, management and quality services. Furthermore, the fees payable by SGS Geneva to the SGS Executing Office shall be an annual fee equal to: TaDSCA "The Cost of delivering the services described in Section 1.2 of this Agreement plus a margin of 5% (five percent). SGS Executing Office shall send its billing to SGS Geneva through an Intercompany (IDN) and "Service Invoice" which shall indicate the amount due in both Philippine pesos and US dollars at the exchange rate prevailing on the date of billing. "SGS Geneva shall remit full payment in US dollars, by way of foreign inward remittance, to the SGS Executing Office, which shall acknowledge receipt thereof by issuing an "Official Receipt" in favor of SGS Geneva. "The US dollar payment shall correspond to the Philippine peso equivalent on the date of the billing by the SGS Executing Office." Based on the foregoing representations, you now request confirmation of your opinion that the sale of services of SGS Gulf Limited to its foreign affiliate is entitled to the benefit of zero percent (0%) value-added tax ("VAT"). In reply thereto, please be informed that the ROHQ of multinational companies is governed by Book III, of the Investments Code, as amended, and defined as follows, "Regional Operating Headquarters 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." ROHQ's activities in the Philippines shall be limited only to any of the following qualifying services: general administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistics services, research and development services and product development, technical support and maintenance, data processing and communication, and business development. The VAT treatment of the income generating activities of ROHQs is specially defined in the last paragraph of Article 65 of the said law which provides that "Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for in the National Internal Revenue Code." This statutory provision is implemented by the last paragraph of Section 14 of the Implementing Rules and Regulations ("IRR") of the Investments Code, thus, "In general, the regional operating headquarters shall be subject to the ten percent (10%) value-added tax unless otherwise provided under the National Internal Revenue Code, as amended or other existing laws." Section 4.108-5(b)(2) of Revenue Regulations No. 16-2005, implementing Section 108(B)(2) of R.A. No. 9337, provides that "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" shall be subject to zero percent (0%) rate provided they are rendered by VAT-registered persons. Similarly situated is BIR VAT Ruling No. 075-02 dated November 11, 2002 , where it was held ". . . that the services of an ROHQ, particularly customer services, content work, accounting services and technical support which are all rendered to and received by its non-resident foreign affiliates, paid for in US dollars and accounted for in accordance with the rules and regulations of the BSP" are basically a sale of information services to a non-resident foreign client, hence, embraced under Section 108(B)(2) of the Tax Code of 1997, as implemented by the above-quoted Section 4.102-2(b)(2) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, thus, entitled to the benefit of the zero percent (0%) VAT. Such being the case, MAC's services of providing documentation services to its affiliates, and assistance in the preparation of bills of lading constitutes sale of information services by an ROHQ. HAICET "Accordingly, your instant request for confirmation that the sale of services by MAC to its foreign affiliates the proceeds of which are paid for in acceptable foreign currency accounted for in accordance with the rules and regulations of the BSP is entitled to the benefit of zero percent (0%) VAT rate is hereby confirmed." WHEREFORE, in view of the foregoing , this office hereby confirms your opinion that the sale of services of SGS Gulf Limited to its foreign affiliates is entitled to the benefit of zero percent (0%) VAT as prescribed in Section 108(B)(2) of the Tax Code of 1997, as amended by R.A. No. 9337, as implemented in Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, as further amended by Revenue Regulations No. 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 or void. Very truly yours, (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service