BIR Ruling [DA-508-A-06]

August 22, 2006 BIR RULING [DA-508-A-06] DA-456-2004; Sec 4. 108-5 (b) (2), RR 16-2005 ADEC Solutions Bldg 15-17, Don Mariano Lim Industrial Complex Alabang-Zapote Road Las Pias City Attention: Carolina S. Esguerra Chief Finance Officer Gentlemen : This refers to your letter dated June 26, 2006, 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 ADEC Solutions ("ADEC" for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Registration No. 2002551168 dated September 11, 2002. ADEC is engaged in Business Process Outsourcing (BPO) which includes transcription of data, data encoding, data conversion, and data processing for 100% transmittal to the U.S.A. via internet. ADEC's services are included in DTPs Revenue Streams, a list of priority products for export promotion under the Philippine Export Development Plan (PEDP). It is further represented that ADEC's principal client is American Data Exchange Corp., Ltd; that its billing statements/Sales Invoices to the latter correspond to the number of documents sent; and that these services are paid in US dollars which are remitted to its US Dollar Bank Account through our banking system via the Central Bank. ADEC 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 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, ADEC 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 ADEC are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Thus, BPO services that ADEC renders to American Data Exchange Corp., Ltd. and other US clients may automatically qualify as VAT zero-rated transactions if said services are paid for in foreign currency and are accounted for in accordance with BSP rules and regulations. 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 ADEC's sale of services to its foreign clients as VAT zero-rated sales, ADEC must be a VAT-registered taxpayer in accordance with Section 4. 108-5 (b) of RR 16-2005. DcaECT 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service