BIR Ruling [DA-292-05]

June 27, 2005 BIR RULING [DA-292-05] RR 6-2001; DA-438-03 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. George J. Lavadia Principal Gentlemen : This refers to your letter dated April 27, 2005 requesting for confirmation of your opinion on the following: 1. The 10% value-added tax shall be applied by the Power Sector Assets and Liabilities Management (PSALM) on payments for the fees of Joaquin Cunanan & Co./PricewaterhouseCoopers Philippines (JCC/PwC) and the latter's own expenses, to the extent attributable to services performed within the Philippines; 2. Payments for the fees and expenses of Third-Party Advisors of JCC/PwC for the PSALM project do not constitute gross receipts of JCC/PwC, and thus, shall not be subjected by PSALM to the 10% VAT. It is represented that JCC/PwC is a general professional partnership duly organized and operating under and by virtue of the laws of the Republic of the Philippines with principal address at the 29/F Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City; that after public bidding, JCC/PwC was selected as Consultant and entered into a Contract Agreement to undertake an independent third-party valuation of the generating assets/plant portfolios of PSALM, a government-owned and controlled corporation created under Republic Act No. 9136, which was mandated to take ownership and to manage the orderly sale, disposition and privatization of, among others, existing power generating assets of the National Power Corporation; that under the Contract Agreement, JCC/PwC is tasked and/or authorized to engage the services of other advisors, both foreign and local (JCC/PwC Third-Party Advisors), to render international and local valuation services and market modeling services; that to coordinate with PSALM and its other advisors for all activities required for the valuation of the assets of PSALM and that together with JCC/PwC Third-Party Advisors, JCC/PwC will: 1. Provide assistance and advice, including as well the development and formulation of recommendations, relating to the financial valuation of certain large generating plant and portfolios; 2. Perform detailed analysis of the environmental conditions where the subject generation assets operate and evaluate all the significant factors observed that are necessary in conducting the assets valuation; ASEcHI 3. Develop and design relevant and useful financial valuation models for each of the generation plants to enable PSALM to optimize the sale proceeds of the generation assets; 4. Conduct dispatch analysis including scenario analysis; 5. Assist PSALM to set a reserve price for such generation plant portfolios; 6. Provide comparator company analysis; 7. Advise and train PSALM concerned personnel on the various techniques and methodologies applied in coming up with said financial valuation models; 8. Provide recommendations on important provisions in PSALM's privatization bid documents; and 9. Undertake and/or provide assistance and advice in the formulation and preparation or recommendations relative to the privatization-related activities of PSALM. that the Contract Agreement provides for an all inclusive lump-sum amount covering all costs required to carry out the services including all taxes, duties and levies that may be imposed under existing applicable Philippine laws as well as local ordinances; that in turn, the individual contracts with the respective Third-Party Advisors provide that fees of the Third-Party Advisors shall form part of the reimbursable expenses of JCC/PwC from PSALM and that JCC/PwC is acting as mere collecting agent for the Third-Party Advisors in seeking reimbursement from PSALM; that as such, the parties agreed that the fees of the Third-Party Advisors shall form part of the reimbursable expenses of JCC/PwC from PSALM; and that for this purpose, the Third-Party Advisors shall issue invoices for services rendered within the Philippines, and separate invoices for those rendered outside the Philippines. In reply, please be informed that Section 108(A) of the Tax Code of 1997 provides that the value-added tax shall be imposed on gross receipts derived from the sale or exchange of services, and use or lease of properties. 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. .." In relation thereto, the term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding VAT. (Revenue Regulations No. 7-95) Accordingly, payments by PSALM of the Transaction Fees of JCC/PwC and JCC/PwC's own expenses shall be subject to 10% final withholding VAT but only to the extent attributable to the services rendered in the Philippines. The payments received by JCC/PwC from PSALM covering the fees and expenses of its JCC/PwC Third-Party Advisors are not compensation for services rendered by JCC/PwC in the Philippines but for the work rendered within and without the Philippines by its JCC/PwC Third-Party Advisors. This can be gleaned from the fact that JCC/PwC does not impose any margin or profit on the fees and expenses of the JCC/PwC advisors and the manner the invoices are billed and the corresponding payments are made by and between the JCC/PwC Third-Party Advisors, JCC/PwC and PSALM. Such being the case, payments to JCC/PwC for the fees and expenses of its Third-Party Advisors do not constitute gross receipts of JCC/PwC and consequently, such payments to be made by PSALM shall not be subject to the 10% final withholding VAT. EaICAD 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group