BIR Ruling [DA-617-06]

October 17, 2006 BIR RULING [DA-617-06] Section 108 (B) (2); BIR Ruling No. 456-04 narraSoft Philippines, Inc . 4/F, MAJ Building Pallocan West, Batangas City Attention: Ms. Divina Lea P. Munoz Corporate Secretary Gentlemen : This refers to your letter dated September 14, 2006 requesting for confirmation of your opinion that the services of your company, narraSoft Philippines, Inc. ("narraSoft" for brevity) is subject to zero percent (0%) Value-Added Tax (VAT) rate. As represented, narraSoft is a corporation organized and existing under the laws of the Republic of the Philippines and registered with the Securities and Exchange Commission (SEC) under Registration No. CS200413133. It is likewise registered with the Bureau of Internal Revenue (BIR) under Revenue District Office No. 58, Batangas City, as a VAT taxpayer as evidenced by BIR Certificate of registration No. OCN 2006-580-0189. narraSoft is an entity engaged in the development of software products and other programming services, 100% of which products and services are exported to its clients primarily based in the United States of America and Europe who, in turn, pay for the same in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). From the foregoing, it is your opinion that the services rendered by narraSoft to its foreign clients paid for in foreign currency is subject to VAT at zero percent (0%) rate in accordance with Section 108(B)(2) of the Tax Code of 1997, as amended. In reply, please be informed that Section 108(B)(2) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, provides, viz.: (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) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. DaTEIc (2) Services other than those mentioned in the preceding paragraph 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 Bangko Sentral ng Pilipinas (BSP); xxx xxx xxx." This provision of the Code is implemented by Section 4.108-5(b)(2) of Revenue Regulations (RR) No. 16-2005, which states as follows: "(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; xxx xxx xxx." In view of the foregoing, this Office is of the opinion that narraSoft is within the ambit of Section 108(B)(2) of the Tax Code of 1997, as amended by R.A. No. 9337, considering that it regularly renders in the Philippines services other than "processing, manufacturing or repacking of goods" for which services it is being paid by its foreign clients in foreign currency inwardly remitted to the Philippines in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. Hence, narraSoft's income for services performed in the Philippines to its foreign clients and paid in foreign currency inwardly remitted is subject to VAT at zero percent (0%) rate. Finally, narraSoft may avail of the zero-rating treatment without prior approval or prior confirmation from the Bureau. The above transaction of narraSoft is entitled to the automatic zero-rating pursuant to Sec. 4.108-5 of RR No. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service