Follosco Morallos & Herce

April 25, 2007 BIR RULING [DA-259-07] DA-456-2004; Sec 4.108-5 (b) (2), RR 16-2005 Follosco Morallos & Herce Suite 1506, BB Corporate Center 141 Valero St., Salcedo Village, Makati City Attention: Rachel P. Follosco Gentlemen : This refers to your letter dated December 8, 2005, requesting for a ruling on behalf of your client, Aureos Philippine Advisers, Inc. ("APAI"), as to whether or not the sale of APAI's services to its foreign clients can be considered as a zero-rated VAT transaction. It is represented that APAI is a VAT-registered corporation organized and existing under the laws of the Republic of the Philippines and is also a subsidiary of Aureos South East Asia Managers, Ltd ("ASEAM"), a non-resident foreign corporation registered under the laws of the Republic of Mauritius. It is further represented that on 18 October 2005, APAI entered into an Advisory Services Agreement with ASEAM whereby APAI was to render advisory services to ASEAM in connection with the latter's function as investment manager of a certain fund to be partly invested in the Philippines. As stipulated in the Agreement, the advisory services to be rendered by APAI to ASEAM in the Philippines include: (a) identifying, researching, evaluating and negotiating investment opportunities, preparing and recommending investment agreements and/or shareholder agreements and/or recommending to ASEAM that the Fund subscribes, purchases or otherwise acquires, alone or together with other investors, prospective Investments falling within the Fund's Investment Policy, and recommending for sale, exchange or other disposal of Investments; (b) monitoring the performance of, and where appropriate, recommending the nomination of directors of Investee Companies, assisting ASEAM in exercising all rights conferred upon the Fund under the terms of any shareholders' agreement or investment agreement or otherwise in respect of an Investee Company, and as directed by ASEAM, liaising with, consulting, assisting or procuring assistance to be given to Investee Companies and generally to advise ASEAM to take any action it considers appropriate for the protection of an Investment; (c) making recommendations to ASEAM on the mechanism to enter into, make, execute and perform such deeds, contracts, agreements and other undertakings, in connection with Investments or proposed Investments. (d) advising ASEAM of appropriate opportunities for the Fund to Invest in securities to be issued by an Investee Company; and (e) assisting ASEAM with financial planning and reporting with respect to ASEAM and funds under the management of ASEAM. In consideration for the foregoing services, APAI is entitled to an Advisory Fee in the amount equal to all costs and expenses incurred by APAI as a direct consequence of providing the advisory services to ASEAM, plus a margin of five percent (5%). Specifically, as provided under the Agreement, the following costs and expenses are reimbursable by ASEAM to APAI: 1) all fees and expenses associated with the operations of ASEAM, including all legal, audit and secretarial fees and expenses; 2) the cost of insurance for directors or officers of ASEAM; 3) custodian fees, money market management fees and brokerage fees; and 4) all other expenses of any kind reasonably and properly incurred by APAI on behalf of ASEAM in its performance of its duties under the Agreement. The Agreement further stipulates that all payments becoming due to APAI under the Agreement shall be paid in US Dollars remitted into APAI's nominated bank account. Pursuant to this, ASEAM will be remitting the Advisory Fees payable to APAI under the Agreement in US Dollars into the latter's foreign currency account with a local bank. cEAHSC You now would like this Office to confirm your opinion that the advisory services performed in the Philippines by APAI for ASEAM, the consideration for which is paid in US Dollars and remitted through a local bank, whether or not the foreign currency proceeds thereof is subsequently converted to Philippine currency, may qualify for zero-rating or the application of zero percent (0%) value-added tax ("VAT") rate. In reply, please be informed that Section 4.108-5 (b) (2) of Revenue Regulations (RR) No. 16-2005 states 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: "(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; From the above provision, it can be seen that for its advisory services to qualify for VAT zero-rating, APAI must first be a VAT-registered entity and must also comply with the two requisites laid down under RR 16-2005, namely: (1) The services must be rendered to persons engaged in business conducted outside the Philippines or to non-resident foreign clients not engaged in business who are outside the Philippines when the services are performed; and (2) The fees to be paid to APAI are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. It appears that APAI has met all the requisites necessary for its advisory services to be regarded as VAT zero-rated in the present case. Not only is APAI a VAT-registered person, but its Advisory Services Agreement also expressly states that the services it renders to ASEAM, a non-resident foreign corporation, shall be paid in US Dollars and remitted into APAI's nominated local bank account. Accordingly, this Office hereby confirms your opinion that APAI's advisory services to ASEAM are VAT zero-rated pursuant to Section 4.108-5 (b) (2) of RR 16-2005. TEHDIA 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