Nitorreda, Nasser & Layusa

April 12, 2007 BIR RULING [DA-220-07] DA 012-05 Nitorreda, Nasser & Layusa Suite 211, Doa Margarita Building J.P. Rizal corner Cardona Streets Makati City Attention: Atty. Leocadio S. Nitorreda Gentlemen : This refers to your letter dated February 28, 2007 stating that your client, Universal Storefront Services Corporation (USSC), is a corporation duly incorporated in the Philippines and has been formed as a result of management purchase of certain businesses of Radio Communications of the Philippines, Inc. (RCPI), which has been previously offering money transfer services within the Philippines; that USSC's principal place of business is at the 8th Floor, RCPI Building, 711 EDSA, Cubao, Quezon City; that it is the intention of USSC to offer Western Union-branded money transfer services in the Philippines; that on the other hand, Western Union Network (Canada) Company (Western Union-Canada) is a corporation duly incorporated and existing under the laws of Nova Scotia, Canada; that its primary business purpose is to offer a variety of money transfer and related services in countries and territories throughout the world; that Western Union-Canada charges a regular fee to its clients in order to initiate a transfer through its Money Transfer Service, excluding any added charges for credit/debit card payments or other special services, taxes and other governmental charges or impositions, and foreign exchange gains; that USSC offered to provide Western Union-Canada its Western Union-branded money transfer services in the Philippines; that as such, Western Union-Canada entered into an International Representation Agreement (Agreement) with USSC, wherein USSC will provide services to Western Union-Canada by providing, among others, the latter's money transfer services in the Philippines; that pursuant to said Agreement, USSC will act as the representative of Western Union-Canada in offering the latter's services in the Philippines; that the Money Transfer Services subject of the Agreement is composed of two (2) types, either a Commercial Transaction, which is composed of Quick Pay (wherein money is paid by a consumer to Western Union Representative for payment to a Commercial Customer in consideration of goods or services provided by the Commercial Customer to the Consumer) or a Quick Cash (wherein money is paid by a Commercial Customer to Western Union or a Western Union Representative for payment to one or more recipients or other Commercial Customers), or a Consumer Send and Receive Transaction, a money transfer service whereby money is paid by a Consumer to Western Union or to a Western Union representation for payment to a recipient; that further to this, there are two (2) types of cycles in carrying out the above types of money transfer services: (1) A customer or sender avails of the said money transfer services abroad with Western Union-Canada by paying the regular fee. Upon payment, western Union-Canada remits the said foreign currency to its representative, USSC, through the banking system and USSC in turn will provide the recipient of the money transfer service in the Philippines in the currency designated by the sender; or (2) A customer or sender avails of the said services in the Philippines with USSC by paying the regular fee. Upon payment, USSC will remit the said currency to Western Union-Canada through the banking system, and Western Union-Canada, in turn, will provide the recipient of the money transfer abroad in the currency designated by the sender. that as a compensation for the facilitation of both types of money transfer services, USSC will receive thirty percent (30%) of the regular fee charged on the said service based on the schedule of values provided by Western Union-Canada; that in the first cycle, part of the money remitted by Western Union-Canada includes the compensation of USSC while in the second cycle, USSC will withhold the compensation due the said money transfer service from the regular charge imposed on the said service; and that the term of the Agreement commenced on March 1, 2006 and shall be effective until September 6, 2007, unless otherwise renewed by the parties. DTcHaA Based on the foregoing representations, you now request confirmation of your opinion that 1. The service fees to be paid by Western Union-Canada to USSC for money transfer services, wherein money is transferred inwardly from abroad to the Philippines, are subject to VAT, albeit at a zero-rate; and 2. The service fees of USSC for money transfer services, wherein money is transferred from the Philippines to abroad, are subject to the regular VAT rate of 12%. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 4.108-5 (b) (2) of Revenue Regulations No. 16-2005, implementing Republic Act (R.A.) No. 9337, provides: "(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 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; xxx xxx xxx" In stressing the rationale of the above-mentioned rule, this Office elucidated the matter in BIR Ruling No. DA012-05 dated January 17, 2007 which is a reiteration of BIR VAT Ruling No. 025-01 dated May 17, 2001 , as follows: ". . . sale of services to SMSI which are paid for in foreign currency and accounted for according to the rules and regulations of the BSP fall squarely within the purview of the above-quoted law and regulations. Accordingly, your opinion is hereby confirmed that the same is entitled to the benefit of the zero percent VAT under Section 108(B)(2) of the Tax Code of 1997." This is fortified by the Supreme Court in the case entitled Commissioner of Internal Revenue vs. American Express International Incorporated-Philippine Branch docketed as G.R. No. 152609 dated June 29, 2005, where it was ruled that " Respondent's Service Exempt from the Destination Principle ". . . , the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, 'paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.' Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than 'processing, manufacturing or repacking of goods' as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated. Performance of Service versus Product Arising from Performance Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-rated, it need not be tacked in as part of the cost of goods exported. The law neither imposes such requirement nor associates services with exported goods. It simply states that the services performed by VAT-registered persons in the Philippines-services other than the processing, manufacturing or repacking of goods for persons doing business outside this country-if paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different from the product that arises from the rendition of such service. The activity that creates the income must not be confused with the main business in the course of which that income is realized. Tax Situs of a Zero-Rated Service The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State necessarily has to have 'a substantial connection' to it, in order to enforce a zero rate. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used." SUCH BEING THE CASE , this Office holds that the service fees to be paid by Western Union-Canada, a non-resident foreign corporation not operating in the Philippines, to USSC for money transfer services, wherein money is transferred inwardly from abroad to the Philippines are subject to VAT at zero-rate. 2. On the other hand, Section 4.108-2 of Revenue Regulations No. 16-2005 defines the term 'sale or exchange of services' as the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash . . . . aESIHT In the instant case, the service fees paid to USSC by Western Union-Canada, for money transfers coming to the Philippines from abroad, are paid in local Philippine currency. Accordingly, the service fees of USSC for money transfer services, are subject to the regular VAT rate of 12%. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service