BIR Ruling [DA-377-05]

September 5, 2005 BIR RULING [DA-377-05] Sections 28; 108 (B) (2); VAT Ruling-006-02 SGV & Co . 6750 Ayala Avenue 1226 Makati City Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated June 2, 2005 requesting in behalf of your client, NAVITAIRE INTERNATIONAL, LLC Philippine Branch (NIPB) for a confirmation of the following issues: 1. The service fee being paid by NIUS to NIPB for product development services and business solutions services forms part of the gross income of NIPB and is subject to the regular corporate income tax rate for domestic corporations at the rate of 32% or the 2% MCIT as provided for under Section 28(A) in relation to 27(E) of the Tax Code; and 2. The above described service fee is subject to VAT Zero percent (0%) rate under Section 108(B)(2) of the Tax Code without the need to secure prior BIR approval for zero rating and NIPB may also claim a refund/tax credit certificate for the unutilized input VAT, if any, arising from its purchases of goods and services and importations related to its VAT zero-rated sale of services. It is represented that NIPB is a limited liability company organized and existing under the laws of the State of Delaware, USA and duly authorized to engage in business in the Philippines by the Securities and Exchange Commission (SEC) with business address at the 16th Floor, Philamlife Tower, 8767 Paseo de Roxas Street, 1226 Makati City; that the SEC issued License No. A200008948 to NIPB to operate, manage, license and/or develop technology and services related to the access to and/or distribution of airline and other mode of travel products/inventory; that NIPB has a Technical Services Agreement (TSA) with its head office, Navitaire International, LLC (NIUS) with business address at AT&T Tower, 901 Marquette Avenue, 16th Floor, Minneapolis, MN 55402, whereby NIPB agreed to provide product development and business solutions provider services to NIUS; that the product development services relate to the design and program coding of NIUS system component; that NIPB also agreed to provide business solutions services to NIUS for the latter's Revenue Protection Services clients involving review of system outputs of ticket audit results and creating debit memo receivables to travel agents for tickets sold in violation of ticketing restrictions; that in turn, NIUS shall pay the cost of providing the services described above plus 10 percent (10%) of such cost in U.S. Dollars; and that as provided for in the TSA, payments for services rendered shall be made on the monthly basis. In reply thereto, please be informed that our opinion is based on the provisions of the Tax Code of 1997 and existing regulations and tax issuances applicable to the taxation of income arising from the above-mentioned transactions. 1. Income Tax Section 27(A) of the Tax Code of 1997 provides that an income tax of 32% is imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation organized and existing under the laws of the Philippines. Furthermore, Section 27(E) of the Tax Code of 1997, as amended by Revenue Regulations No. 9-98, as amplified in Revenue Memorandum Circular No. 4-2003, provides that a minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year is hereby imposed on a corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of the said Section for the taxable year. In view of the foregoing provisions, the income of NIPB derived from product development services and business solutions services will be subject to either the 32% regular corporate income tax or to the 2% minimum corporate income tax, in case the latter is applicable under Section 27(E) of the Tax Code of 1997. 2. Value Added Tax (VAT) Section 108(B) (2) of the Tax Code of 1997 provides that: "Sec. 108 Value Added Tax of Sale of Services and Use or Lease of Properties. "(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: "(1) . . . "(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)." Moreover, in implementing Section 108(B)(2), the Bureau of Internal Revenue ("BIR"), imposed additional requirements to qualify for zero-rating. Thus, Section 4.102-2 (b)(2) of Revenue Regulations ("RR") No. 7-95 as amended by Revenue Regulations No. 5-96, further provides that: "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services , the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." (Emphasis supplied) In view of the above, to be entitled to zero percent (0%) rate under Section 108(B)(2), it is also required that the services must be characterized either as project studies, information services, engineering and architectural designs or other similar services. CHDaAE Under the TSA, NIPB will render product development services and business solutions services to NIUS at a 10% mark-up on cost. The product development services (which involve designing and program coding of system component) and business solutions services (which involve system outputs of ticket audit results and creating debit memo receivables to travel agents for tickets sold in violation of ticketing restrictions) fall under the above qualified services, more particularly, "information services". In VAT Ruling No. 006-02 dated March 4, 2002 , the BIR confirmed that ASPI's services is entitled to the benefit of the zero percent (0%) VAT as information services. The services are more particularly described, as follows: "ASPI's primary purpose is to engage in the business of outsourcing customer relationship management solutions for United States based entities and such other entities from different countries, including but not limited to, technical help desk support, reservations, account management, pre-sales consulting, web assistance, customer marketing and acquisition, product sales and such other similar services through a remote customer contact center to be established in the Philippines utilizing telephone, facsimile, e-mail, the internet/Web and such other telecommunications infrastructure; that, ASPI will provide technical support or solutions to its clients as well as the latter's customers." Since the sale of services by NIPB, to a non-resident, NIUS, is governed by Section 108(B)(2) of the Tax Code of 1997, as implemented by Section 4.102-2(b)(2) of RR No. 7-95, as amended by RR 5-96, the same is entitled to the benefit of zero-percent (0%) VAT without need of any prior application to the BIR for zero-rating, otherwise required under Section 4.107-1(d) of RR No. 7-95. Such prior application is required only for effectively zero-rated sale of services as enumerated under Section 108(B)(3) of the Tax Code of 1997, as implemented by Section 4.102-2(b)(3)(4) and (5). Accordingly, the said sale of services by NIPB to NIUS is entitled to automatic zero percent (0%) VAT treatment. Additionally, Sections 110 and 112(A) of the Tax Code of 1997 provide that any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, to the extent that such input tax has not been applied against the output tax. Accordingly, NIPB is entitled to claim tax credit or refund of the corresponding input tax that has not been applied against its output tax. 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue