BIR Ruling [DA-355-06]

June 8, 2006 BIR RULING [DA-355-06] R.R. 16-2005; 046-95 KHI Design & Technical Service, Inc . 6/F The Island Plaza, 105 L.P. Leviste St. Salcedo Village, Makati City Attention: Sadanki Murakawa President Gentlemen : This refers to your letter dated March 27, 2006 requesting for a ruling relative to your application for VAT zero-rate on sale of services. It is represented that KHI Design & Technical Service, Inc. (KHI, formerly Kawaju Marine Engineering (Philippines), Inc.), is registered with the Board of Investments (BOI) under Certificate of Authority No. 2079 dated April 6, 1990; that it has been authorized to carry and conduct exclusively for export to Japan, the preparations and drafting of engineering designs, drawings and models of any and all types of ships and vessels, subject to the following terms and conditions: 1. That it shall not engage in any other line of business activity without prior Board authority; 2. That any availment of peso loans from banks and non-bank financial intermediaries shall be subject to prior authorization of the Inter-Agency Committee on Domestic Borrowings of Foreign Firms per Central Bank Circular No. 572, Series of 1977, as amended; and that it is also registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 177266 on December 27, 1996 with the primary purpose, "to carry on and conduct the preparation and drafting of engineering designs, drawings and models for any and all types of plants, ships and vessels and to enter into contracts with Japanese companies for the preparation and drafting of such designs, drawings and models." In reply, please be informed that Section 4.108-(a) & (b)(2) of Revenue Regulations No. 16-2005 dated September 1, 2005, provides, viz: "SEC. 4.108-5. Zero-Rated Sale of Services . (a) In general. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations. (b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate; xxx xxx xxx (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 of which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP" Since KHI's sale of services is exclusively for export to Japan, i.e., the preparations and drafting of engineering designs, drawings and models of any and all types of ships and vessels, the same is governed by Section 108(B)(2) of the NIRC of 1997, as implemented by Section 4.108(a) & (b)(2) of Revenue Regulations No. 16-2005, hence is entitled to the benefit of the zero percent (0%) VAT in accordance with the above cited law and regulations. Thus, the sale of services by KHI shall be considered export and effectively subject to zero percent (0%) VAT. The vendor shall not impute or shift any VAT as part of the cost to be paid by KHI on its purchases. (BIR Ruling No. 013-2003 dated January 20, 2003). 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. ISHaTA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service