Sycip Salazar Hernandez & Gatmaitan

December 7, 2007 BIR RULING [DA-628-07] VAT 017-00 Sycip Salazar Hernandez & Gatmaitan SSHG Law Center 105 Paseo de Roxas Makati City Attention: Atty. Hector M. De Leon, Jr. and Atty. Michael Geronimo G. Martin Gentlemen : This refers to your letter dated September 4, 2007 stating that the Philippine Ports Authority (PPA) is a government-owned and controlled corporation, created by virtue of Presidential Decree No. 857, and with office address at Marsman Building, Muelle de San Francisco Street, South Harbor, Port Area, Manila; that on the other hand, Unisys Australia Limited (Philippine Branch) (Unisys Philippines) is a United States corporation duly authorized to do business in the Philippines with office address at 20th Floor, Tower 2, The Enterprise Center, 6766 Ayala Avenue corner Paseo de Roxas, Makati City; that Unisys Philippines and PPA entered into a contract denominated as a "Contract for PPA MIS Computerization Project Implementation Phase" dated August 26, 2002 (the Contract); that the project subject of the Contract is the implementation of a computerized solution to mission-critical business requirements of PPA; that under the Contract, Unisys Philippines, which is referred therein as the contractor, shall perform the System Integration Services for implementation of the PPA's MIS Computerization Project; that in the course of performing System Integration Services, the Contract requires Unisys Philippines to develop a System Requirement Specification with inputs from PPA; that Unisys Philippines' deliverables to PPA, and for which the schedule of payment depends, would be the completion and acceptance of systems specification, the completion of accounting and financial management systems at the PPA Head Office, and the completion of the administrative port operations, inventory and engineering systems at the PPA Head Office and the various port districts of the PPA; that for the services rendered by Unisys Philippines, Unisys Philippines will receive payments corresponding to: (a) remuneration for services rendered (Professional Fees); and (b) cost for application solution and licenses (Solution Costs); that in addition, Unisys Philippines is entitled to the payment of reimbursable expenses (Reimbursable Expenses); that the Reimbursable Expenses include: (a) per diem of Unisys Philippines personnel; (b) cost of travel of Unisys Philippines' staff who are required to travel away from their station of duty; and (c) cost of items which may be required by Unisys Philippines for the successful and timely completion of the services; that under the Contract, Unisys Philippines warrants the following: (a) Systems Application Warranty for a period of one year from date of final systems turnover; and (b) Unisys Philippines-Supplied Software, Hardware/Peripherals and Infrastructure Warranty for a period of one year from date of acceptance; that pursuant to the Contract, Unisys Philippines also grants PPA the appropriate number of licenses and/or license to use of the Application System Software and Related Softwares commencing on the date of installation at designated locations; that any ideas, concepts, know-how and data processing techniques developed by Unisys Philippines in connection with the services provided to PPA will be the property of Unisys Philippines; that however, PPA is granted a perpetual license to use such ideas, concepts, know-how, and data processing techniques; that all rights, title and interest in and to the copyright of software code specifically developed as part of the services under the Contract shall be owned by and belong to PPA; and that Unisys Philippines is an independent contractor under the Contract; that its responsibilities include (a) carrying out the services and providing deliverables in accordance with the statement of work and the acceptance criteria of the Contract; (b) accepting full responsibility for the consulting services to be performed under the Contract for which Unisys Philippines is liable to PPA; (c) performing the work in an efficient and diligent manner and using its best effort to keep reimbursable costs down to the minimum without impairing the quality of the services rendered; and (d) complying with and strictly observing all laws regarding workmen's health and safety, workmen's welfare, compensation for injuries, minimum wage, hours of work and other labor laws. ADSIaT Based on the foregoing representations, you now request confirmation of your opinion that 1. The Professional Fees and Solution Costs are subject to a two percent (2%) creditable withholding tax; 2. The Professional fees and Solution Costs are subject to a five percent (5%) final VAT withholding rate; and 3. The Reimbursable Expenses do not constitute income of Unisys Philippines and are not subject to creditable withholding tax. In addition the Reimbursable Expenses are not subject to the five percent (5%) final VAT withholding rate. In reply thereto, please be informed as follows: 1. Section 2.57.2 (E) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 14-02, provides that "(E) Income payments to certain contractors . On gross payments to the following contractors, whether individual or corporate Two percent (2%) xxx xxx xxx (4) Other contractors xxx xxx xxx (m) Persons engaged in the sale of computer services, computer programmers, software/program developer/designer, internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities; xxx xxx xxx" In the instant case, Unisys Philippines is an independent contractor as expressly provided in the Contract. The System Integration Services performed by Unisys Philippines in relation to the implementation of a computerized solution to mission-critical business requirements of PPA such as those relating to the completion and acceptance of systems specification, the completion of accounting and financial management systems, and completion of the administrative port operations, inventory and engineering systems constitute computer related activities. Moreover, installation of Application Software and Related Softwares, the development of data processing techniques, among others, as well as the warranty extended to systems application and the Unisys Philippines-Supplied Software, Hardware/Peripherals and Infrastructure further confirm the status of Unisys Philippines as other contractor under Section 2.57.2 (E) (4) (m), supra . The aforesaid services clearly show that Unisys Philippines is engaged in the sale of computer services, computer programmers, software/program developer/designer, computer data processing and other computer related activities. Such being the case, the gross income received by Unisys Philippines in the form of Professional Fees and Solution Costs should be subject to the 2% withholding tax. 2. Section 4.114-2 (a) of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, provides that "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents . (a) The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. DAaHET The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of the seller's expense or costs. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost." The term "Gross Receipts" refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually and constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor. A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g., customer or client of the payor of the obligation). SEDICa An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the above-mentioned another party) for the sale of goods or services by the former to the latter. (Sec. 4.108-4, Revenue Regulations No. 4-2007) In BIR Ruling No. UN262-95 dated July 11, 1995 , this Office ruled that ". . . reimbursement of actual expenses being a mere return of capital does not constitute income. Accordingly, said reimbursements are not subject to the withholding tax prescribed under Revenue Regulations No. 6-85, as amended, otherwise known as the Expanded Withholding Tax Regulations, nor to the creditable value-added tax under Revenue Regulations No. 10-93." EHACcT This is fortified in VAT Ruling No. 017-00 dated March 20, 2000 , where it was held that ". . . reimbursable costs of consultancy contracts, being reimbursements of expenses and not charges for services should not be considered part of gross receipts for purposes of the withholding tax. As such, it is not subject to the VAT. However, in order that a contractor's receipts for reimbursable expenses will not be considered part of its gross receipts subject to VAT, all invoices for said expenses must be in the name of the government agency concerned." WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that 1. The Professional Fees and Solution Costs are subject to a two percent (2%) creditable withholding tax. 2. The Professional Fees and Solution Costs are subject to a five percent (5%) final VAT withholding rate. 3. Finally, the Reimbursable Expenses do not constitute income of Unisys Philippines and are not subject to creditable withholding tax. In addition the Reimbursable Expenses are not subject to the five percent (5%) final VAT withholding rate. 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. SDHETI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service