BIR Ruling [DA-655-06]

November 7, 2006 BIR RULING [DA-655-06] Section 108 (B) (2); DA 319-2003 SyCip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. Luis Jose P. Ferrer Partner, Tax Services Gentlemen : This refers to your letter dated April 21, 2006 requesting in behalf of your client, DSM Nutritional Products Philippines (DSM Philippines), for a confirmation that its supply of services to DSM Nutritional Products Asia Pacific Pte. Ltd. (DSM Asia), which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, qualifies as a transaction subject to the zero percent (0%) Value-Added Tax. It is represented that DSM Nutritional Products Philippines, a domestic corporation, entered into a Support Agreement (the "Agreement") with DSM Asia, a corporation established and existing under the laws of Singapore and engaged in the business of marketing certain vitamins, vitamin products, feed supplements, nutritional products, cosmetic ingredients and other fine chemicals in the Asia-Pacific Region; that under the Agreement, DSM Philippines undertook to solicit, on behalf of DSM Asia, orders for DSM Asia's products in the Philippines; that DSM Philippines shall meet existing and potential customers in the Philippines, provide customers with product literature and transmit customer orders to DSM Asia for the latter's acceptance or rejection; that DSM Philippines shall earn a commission, which is quoted as a percentage of sales on a quarterly basis; that in facilitating the orders, DSM Philippines would receive commissions for such activity, which are paid for in U.S. dollars, and accounted for in accordance with the Rules and Regulations of the Bangko Sentral ng Pilipinas. IAcTaC In reply, please be informed that this Office confirms your opinion that the commission to be received by DSM Philippines from DSM Asia, is subject to the value-added tax of zero percent (0%) considering that it complies with the requirement of Section 108(B)(2) of the National Internal Revenue Code of 1997, such that the consideration for services rendered is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas [ BIR Ruling DA-319-03 ] "Our VAT law is basically a consumption type VAT system and follows the Destination Principle of Cross-Border Doctrine, under which goods, property or services destined to be used or consumed in the Philippines are subject to the 10% VAT while those destined to be used or consumed abroad, are accorded the benefit of zero-rating. ( VAT Ruling No. 031-99 dated March 18, 1999 ) The supply of services is entitled to the benefit of the zero-rating because of the basic principle underlying a Consumption Type/Destination-Type VAT, adhering to the Cross Border Doctrine wherein the onus of taxation is in that country where the goods, property or services, supplied by a VAT-registered person, are destined, used or consumed." [ BIR Ruling DA-162-04 ] Since the sale of services by DSM Philippines to DSM Asia, is governed by Section 108(B)(2) of the Tax Code of 1997, as implemented by Section 4.108-5(b)(2) of Revenue Regulations No. 16-2005, the same is entitled to the benefit of the zero percent (0%) VAT, without need of any prior application to the BIR for zero rating otherwise required under Section 4.108-6 of RR 16-2005. Such prior application is required only for effectively zero-rated sales of service, as enumerated under Section 108(B)(3) of the Tax Code, and implemented by Section 4.108-5(b)(3), (4) and (5). Accordingly, the sale of services by DSM Philippines is entitled to the benefit of the zero percent (0%) VAT, in accordance with the abovequoted law and regulations. 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