Isla Lipana & Co.

April 23, 2007 BIR RULING [DA-253-07] R.A. 7227 DA-430-2006 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, 1226 Makati City Attention: Mr. George J. Lavadia Principal, Tax Services Gentlemen : This refers to your letter dated December 26, 2006 requesting on behalf of your client, WPP Marketing Communications, Inc. (WPP MARKETING), for confirmation of the following: 1. Payments it receives from Unilever Foods Philippines, Inc. (UNILEVER PHILIPPINES) for services rendered in the Philippines are subject to the twelve percent (12%) value-added tax (VAT). 2. Payments it receives from nonresident affiliated entities (which are responsible for handling particular Unilever brands) are subject to zero percent (0%) VAT, provided that these payments are made in acceptable foreign currency which are remitted through the Philippine banking system. It is represented that WPP MARKETING, is a Philippine domestic corporation engaged in the advertising business; that its activities include conceptualization and production of advertisements for broadcast through television; that WPP MARKETING is part of the WPP/JWT group, which is organized with a Regional Hub located in Manila, servicing offices located in Indonesia, Malaysia, Thailand and Vietnam; that for the production of advertisements, WPP MARKETING performs most services within the Philippines; that from time to time, WPP MARKETING also sends personnel to other countries to perform work for other WPP/JWT entities and in turn, it also purchases time from WPP/JWT affiliates outside the Philippines, in order to adapt the advertisements produced to other countries; that WPP MARKETING's services are predominantly composed of brand-specific work (which is tied up with a particular project or brand) and non-brand specific work (which includes time spent in meetings and administrative work); that brand-specific work involve services performed in the Philippines (such as location shooting and other production activities), as well as work done outside the Philippines, such as adopting the commercials to formats in other countries and various post-production activities for ads intended for use in other countries by non-resident clients or non-resident affiliates of clients; that on the other hand, non-brand specific work, while performed in the Philippines, such as pre-production planning and brainstorming sessions for ad campaigns, are also intended for both resident and non-resident clients or non-resident affiliates of clients depending on where these ad campaigns will eventually be implemented. It is further represented that among the WPP/JWT group's biggest clients is the Unilever group, which has various affiliates outside the Philippines; that the Unilever group engaged the WPP/JWT group for the production of various ads for its products across the region; that internally, each Unilever entity works within a prescribed budget, such that a Unilever entity is only allowed to pay its share of the allocated payments; that, on the other hand, the relevant WPP/JWT entity bills its clients an amount based on a mark-up on costs incurred in contributing to the ad campaign (WPP/JWT affiliated entity revenue); that this represents the actual revenues of the respective WPP/JWT entity, such as WPP MARKETING; that if the local Unilever entity's share of the overall fees is less than the "WPP/JWT affiliated entity revenue," the difference is billed to the other WPP/JWT affiliate responsible for handling the particular Unilever brand, as part of the inter-affiliate billings, thereby rendering the WPP/JWT affiliate as the payor for the said services. In reply thereto, please be informed that this Office hereby confirms your opinion as follows: 1. Payments made by UNILEVER PHILIPPINES to WPP MARKETING for services performed by the latter in the Philippines are subject to the 12% VAT . Section 108 of the Tax Code of 1997, as amended by Section 6 of RA 9337 imposes a twelve percent (12%) VAT on services performed in the Philippines and paid by a Philippine domestic corporation, to wit: SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided , That the President, upon the recommendation of the Secretary of Finance , shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) . . . (ii) . . . The phrase ' sale or exchange of services ' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, . . .". Accordingly, the amounts billed and received by WPP MARKETING from UNILEVER PHILIPPINES representing its services rendered in the Philippines to the latter are subject to the twelve percent (12%) VAT under Section 108 of the Tax Code. 2. Payments received by WPP MARKETING from other WPP/JWT entities, which are nonresident foreign corporations, are subject to the zero percent (0%) VAT . TDSICH Section 108 (B) of the Tax Code provides the conditions for payments for services to be subject to the zero percent (0%) VAT: "108(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 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) xxx xxx xxx" Accordingly, payments received by WPP MARKETING from non-resident WPP/JWT entities are subject to the zero percent (0%) VAT even if the services are performed in the Philippines, provided that the following requisites are met: 1. The WPP/JWT entity is a non-resident entity engaged in business conducted outside the Philippines; 2. The consideration must be paid for in acceptable foreign currency; and 3. The payment must be accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). The VAT treatment of the sale of services of WPP PHILIPPINES to its affiliates abroad, provided that all the aforementioned requisites are met, is further confirmed in the decision of the Supreme Court in the case of Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch) , G.R. No. 152609 (2005). In the said decision, the Supreme Court held that 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 falls 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 the rules and regulations and regulations of the BSP. SEACTH 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