BIR Ruling [DA-321-03]

September 29, 2003 BIR RULING [DA-321-03] RA 8756 VAT Ruling No. 050-00 Madarang & Company G-26 South Star Plaza President Osmea Highway Makati City Attention: Mr. Agapito M. Madarang Managing Partner Gentlemen : This refers to your letter dated May 5, 2003 stating that your client, Gen Pro International, Inc. (GPI) is a foreign company organized and registered under the laws of the Commonwealth of the Northern Mariana Islands; that GPI is duly charged to engage in the business principally of shipping, import, export, retail, wholesale, general merchandise and such other lines of business permitted by the laws of said Commonwealth; that GPI normally conduct trade internationally with affiliates, subsidiaries, or branch offices in the Asia-Pacific Region; that in aid of such activity, GPI established a regional area headquarters (RAHQ) in the Philippines that is duly licensed by the Securities and Exchange Commission (SEC) through the endorsement of the Board of Investments (BOI) to act as its supervisory, communications and coordinating center for company branches and for affiliate or subsidiary companies in the region; that as such, GPI does not earn or derive income from the Philippines, nor conduct any revenue-generating business in the country; that GPI likewise does not earn any fees from its subsidiaries, affiliates, or branches in respect to any service rendered or performed by the RAHQ in the course of its operations or bill said subsidiaries, affiliates, or branches other than for reimbursement of actual cash and non-cash advances to them or for collection of their allocated share in RAHQ expenses, where applicable; and that no part of which results in income as understood in the ordinary and business sense. In connection therewith, you now request confirmation of your opinion that 1. (T)he registration of GPI as an RAHQ in the Philippines pursuant to Republic Act No. 8756 is exempt from value-added tax (VAT) under Section 109(p) of the Tax Code of 1997 and/or from income tax; and 2. (B)eing a duly licensed and registered RAHQ, the sale of goods and property and the rendition of service to GPI is subject to zero percent (0%) VAT. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. Section 2 of RA No. 8756 defines Regional Area Headquarters (RAHQ) as an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade which principally services as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines, while Regional Operating Headquarters (ROHQ) shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines in the Asia-Pacific Region and in other foreign markets. Section 109(p) of the Tax Code of 1997 provides that services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines shall be exempt from value-added tax. Accordingly, the registration of GPI as an RAHQ which does not earn or derive income in the Philippine but merely acts as a supervisory, communications and coordinating center for its affiliates is exempt from value-added tax under Section 109(p) of the Tax Code. Moreover, GPI is likewise not subject to Philippine income tax under Section 28(A)(6)(a) of the Tax Code of 1997. (BIR Ruling Nos. 047-01 doled September 28, 2001; 053-00 dated October 30, 2000) However, whether or not the RAHQ actually derives income and should, by definition, be considered not an RAHQ is a question of fact that this office shall and will not rule on. 2. Article 65 of the Omnibus Investments Code of 1987, as amended by Section 6 of RA No. 8756 provides as follows: "Art. 65. Value-Added Tax . The regional or area headquarters established in the Philippines by multinational companies shall be exempted from the value-added tax. In addition, the sale or lease of goods and property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code, as amended. "Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for under the National Internal Revenue Code, as amended. The same article is implemented by Section 14 of its Implementing Rules and Regulations, as follows: "Sec. 14. Value-Added Tax . Regional or area headquarters shall be exempted from the value-added tax. The sale or lease of goods and property and the rendition of service to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code, as amended. EIDaAH "The regional or area headquarters shall not be required to obtain or secure a prior permit from the Bureau of Internal Revenue for zero-rating of the suppliers' sale of goods and services to them. "In general, the regional operating headquarters shall be subject to the ten percent (10%) value-added tax unless otherwise provided under the National Internal Revenue, as amended or other existing laws." In BIR VAT Ruling No. 050-00 dated October 30, 2000, this Office ruled ". . . GHD is a duly-registered regional or area headquarters of a multinational company, this Office hereby confirms (a) that its VAT-registered suppliers of goods, properties and services are entitled to the benefits of the zero percent (0%) VAT, pursuant to the aforequoted law and regulations. . . . The said suppliers of GHD are entitled to the benefit of the zero percent (0%) VAT without necessity of any prior permit from this Office. As such, the aforesaid VAT-registered suppliers shall use and issue only a duly-registered VAT invoice on which the word "zero rate" is pre-printed thereon, to cover the said zero-rated sales, pursuant to the provisions of Section 4.108-1 of Revenue Regulations No. 7-95, as amended." Such being the case, the sale goods or lease of property and the rendition of services to GPI's RAHQ by its VAT-registered suppliers shall be entitled to the benefits of the zero percent (0%) 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