SGV & Co.

June 19, 2008 BIR RULING [DA-369-08] 108 (B) (2); DA-655-2006 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated March 5, 2008, requesting on behalf of your client, UTStarcom (Philippines), Inc. (UPI) for a ruling, that the sale of UPI's services to its foreign client, UTStarcom, Inc. (UI), is a zero-rated value-added tax (VAT) transaction under Section 108 (B) (2) of the 1997 Tax Code, as amended. It is represented that UPI is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines and is a subsidiary of UI, an entity incorporated under the laws of Delaware, U.S.A. On January 13, 2006, UPI entered into a Services and Marketing Agreement (Agreement) with UI. Under the agreement, UI appointed UPI, on a non-exclusive basis to perform the following functions on behalf of UI, to wit: UPI shall be responsible for the identification of potential customers for the products and services of UI; shall identify potential business opportunities and customers for UI products and services, and refer them to UI; shall distribute and disseminate information on UI products and services; shall engage in promotional activity for UI products and services; shall respond to inquiries for UI products and services; shall advise UI on marketing strategies and local market conditions; shall provide information on market trends, competitors and new products and services in the telecommunications market; and shall provide other services as may be requested from time to time. For the above services, UI shall reimburse UPI for all necessary and reasonable operating costs incurred by UPI in the performance of its duties under the agreement, including, without limitation, the appropriate portion of UPI's employee salaries, travel expenses, professional fees and indirect costs plus eight percent (8%). Payment of the service fees shall be made in U.S. Dollars. DHIaTS You now would like this Office to confirm your opinion that the service fees to be paid to UPI by UI are subject to zero percent (0%) VAT. In reply, please be informed that Section 4.108-5 (b) (2) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, states that: "(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 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 cleaned that for the services of UPI to qualify for VAT zero-rating, UPI must first be a VAT-registered entity and must comply with the two (2) requisites laid down, 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 UPI are in acceptance foreign currency and accounted for in accordance with the rules and regulations of the BSP. Inasmuch as UPI has met all the requisites for its services to be regarded as a VAT zero-rated sale in the instant case, this Office hereby confirms your opinion that the sale of UPI's services to its foreign client, UI is a 0% VAT transaction under Section 108 (B) (2) of the 1997 Tax Code, as implemented by Section 4.108-5 (b) (2) of RR 16-2005, as amended by RR 4-2007. aCIHAD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service