BIR Ruling [DA-302-05]

July 1, 2005 BIR RULING [DA-302-05] Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated April 28, 2005 stating that SYSTRA Philippines [formerly Societe Francaise d'Etudes et de Realisations de Transports Urbains (SOFRETU), is a French Joint Stock Company, with office address at 5, Avenue du Coq-75009, Paris, France; that SYSTRA (then SOFRETU) entered into a "Deed of Agreement for Technical Assistance to the Department of Transportation and Communications: Consultancy Services" (Deed of Assignment) dated May 28, 1992, with the Department of Transportation and Communications (DOTC) of the Republic of the Philippines; that DOTC holds office at the Columbia Tower, Barangay Wack-Wack, Ortigas Avenue, 1550 Mandaluyong City; that SYSTRA (then SOFRETU) was issued a license by the Securities and Exchange Commission (SEC) to establish a branch office in the Philippines on May 3, 1994; that the principal place of business of the Philippine branch office is at the Mezzanine Floor, MRT III Depot, North Avenue corner EDSA, North Triangle Area, Quezon City; that it was given the license to: a) implement a contract signed with the Department of Transportation and Communications for the supervision of the Metro Manila LRT III project implementation; and b) work on potential transportation projects in the Philippines. that on August 26, 1997, the SEC approved the amendment of license of SYSTRA (then SOFRETU) to reflect the change of name from Societe Francaise d'etudes et de Realisations de Transports Urbains (SOFRETU) to SYSTRA Philippine Branch; that the Deed of Agreement between SYSTRA and DOTC provides that the former will render technical assistance and consultancy services to the latter; that specifically, SYSTRA undertook to provide the DOTC two (2) types of services, to wit: a) The technical assistance as well as the training of the technical staff during the construction period; and b) The technical assistance during the operation period. that DOTC and SYSTRA subsequently signed six (6) amendments to the Deed of Agreement to take into consideration the revised scope of work and the extension of the project duration of the Deed of Agreement, to wit: a. Amendment N1 dated May 28, 1995, covering services rendered until July 1996; b. Amendment N2 dated April 11, 1997, covering services rendered until January 1999; c. Amendment N3 on March 3, 1999, covering services rendered until November 1999; d. Amendment N4 dated September 1, 2000, covering services rendered until June 2000; e. Amendment N5 dated December 28, 2000, covering services rendered until December 2000; f. Amendment N6 dated December 4, 2001 that the actual performance of the aforementioned services however, was performed by SYSTRA Phil. Branch, in accordance with its license (under SEC Reg. No. AF094-000029), to implement the contract signed with the DOTC for the supervision of the Metro Manila LRT III project; that there are also certain services performed by SYSTRA's employees; that since SYSTRA Phil. Branch performed the services under the aforementioned Deed of Agreement, and amendments thereto, all billings for such services were issued by SYSTRA Phil. Branch directly to DOTC; that DOTC, in turn, paid the said billings directly to SYSTRA Phil. Branch; and that the amount received by SYSTRA Phil. Branch from DOTC for such services were subjected by the latter to 10% withholding VAT. In connection therewith, you now request confirmation of your opinion that "1. Whether or not payments for consultancy services rendered by SYSTRA Phil. Branch to the DOTC are subject to withholding VAT at a rate of 6% pursuant to Section 114(C) of the Tax Code of 1997; and 2. Whether or not services rendered by SYSTRA outside the Philippines is subject to VAT." In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 114(C) of the Tax Code of 1997 provides that "(C) Withholding of Creditable Value-added Tax . The Government or any of its political subdivision, instrumentalities or agencies, including government-owned-or-controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor: Provided, however, that in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, that the payment for lease or use of properties or property rights to non-resident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. "xxx xxx xxx" It is clear that the above creditable VAT withholding shall apply if the payor is the Government or any of its political subdivisions, instrumentalities or agencies, including Government-owned or controlled corporations, provided, that the payee is a domestic company. The said payee may credit, against its VAT liability, the aforesaid creditable VAT withheld in filing its corresponding monthly and final quarterly VAT returns, pursuant to the above-cited section, as implemented by Revenue Regulations No. 7-95, as amended by Revenue Regulations Nos. 4-2002 and 8-2002. In the instant case, considering that SYSTRA has a branch in the Philippines, it is considered as a resident foreign corporation. As such, it is subject to 10% VAT on its gross receipts from services performed in the Philippines. However, the payments made by the DOTC for the services rendered in the Philippines under the Deed of Agreement, as amended, is subject to 6% withholding VAT since the payment pertains to the performance of services rendered by a resident foreign corporation. ( BIR Ruling No. DA456-03 dated December 5, 2003 ) 2. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines. Thus, the place where the service is performed determines the jurisdiction to impose the VAT. Accordingly, the gross receipts of the SYSTRA Head Office for services performed in the Philippines shall be subject to VAT. Conversely, services rendered and performed by the SYSTRA-Head Office outside the Philippines is not subject to VAT. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group