BIR Ruling [DA-376-06]

June 15, 2006 BIR RULING [DA-376-06] DA-456-2004; Sec. 4. 108-5 (b) (2), RR 16-2005 Asecasia Incorporated 12/F Asian Star Bldg. Filinvest Corporate City Alabang, Muntinlupa City Attention: Carlos C. Escober Financial Controller Gentlemen : This refers to your undated letter requesting for a ruling as to whether or not the sale of services to your foreign clients can be considered as a zero-rated VAT transaction. It is represented that Asecasia Incorporated ( "Asecasia" for brevity) is a firm engaged in encoding services. It is further represented that Asecasia renders these services mainly to foreign clients. Asecasia would now like this Office to confirm if the sale of said services may properly be classified as a zero-rated VAT transaction, considering that these are rendered abroad, particularly to the United States. In reply, please be informed that Section 4. 108-5 (b) (2) of Revenue Regulations (RR) No. 16-2005 states that: "(B) Transactions subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "(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 foregoing, it can be seen that for its encoding services to qualify for VAT zero-rating, Asecasia must meet two requisites under RR-16-2005, 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 Asecasia are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Thus, the encoding services that Asecasia renders to its US and other foreign clients may automatically qualify as VAT zero-rated transactions if said services are paid for in foreign currency and are accounted for through our local banking system. Failing that, the sale of said services will be regarded as subject to 10% (now 12%, starting February 1, 2006) VAT pursuant to Section 108 (A) of the Tax Code of 1997, as amended by RA 9337. In addition, to qualify Asecasia's sale of services to its foreign clients as VAT zero-rated sales, Asecasia must be a VAT-registered taxpayer in accordance with Section 4. 108-5 (b) of RR 16-2005. 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. IcSHTA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service