BIR Ruling [DA-666-04]

December 28, 2004 BIR RULING [DA-666-04] 27 (A); (E); 108 (B) (2); VAT 059-02; 013-03 SGV & Co. 6760 Ayala Avenue Makati City Attention: Fabian K. Delos Santos Gentlemen : This refers to your letter dated November 16, 2004 stating that your client, SUMIFRU PHILIPPINES CORPORATION ("SFPC"), a company duly registered with the Securities and Exchange Commission ("SEC"), with business address at 3rd Floor Pacific Star Bldg., Makati Avenue, Makati City, is primarily engaged in the business of providing information management services and other related support services, which includes but is not limited to handling, monitoring, quality inspection, packaging, shipping and other related activities of various agricultural products and chemicals, plastic pellets, corrugated papers and other related products, and coordination with various growers, shippers and buyers of the said products; that on the other hand, SUMIFRU CORPORATION ("SFC") is a corporation organized and existing under Japanese law, with principal office at Shinkeikan Bldg., 4-9-25, Hongou, Bunnkyou-ku Tokyo, Japan; that SFC is an export company legally engaged in the business of distribution of Cavendish bananas and other tropical fruits purchased from the Philippines and other countries; that to aid SFC in ensuring market quality of Cavendish bananas and other tropical fruits purchased from the Philippines for export, SFC intends to avail of the services of SFPC to monitor: (1) the quality of packaging materials in which the fruits are packaged and shipped and (2) the schedule of production and shipment of said fruits.; that as such, SFC will avail of the information management and consultancy services of SFPC as well as project studies as provided for under the Export Services Agreement ("ESA") which includes but is not limited to, among others, the study of the packaging materials requirement of each contract grower and submit the same to SFC; monitor the KD carton and other packaging materials requirement in accordance with the study made; monitor and submit to SFC the KD carton and other packing materials position in all packing houses making sure that proper inventory levels are maintained; monitor and ensure the proper accounting of all KD cartons and other packing materials; determine procedures and systems in order to avoid losses and damages of KD cartons and other packing materials; report to SFC on a regular basis regarding all KD cartons and other packing materials produced and delivered to warehouses and packing houses by the manufacturers; report to SFC the quality of KD cartons and other packing materials produced and delivered to warehouses and packing houses by the manufacturers; coordinating with various shippers; and coordinating with growers. In consideration for the provision by SFPC of the abovementioned services, SFC shall pay SFPC "Service Fee" as agreed upon in the ESA in US dollars. Based on the foregoing representations, you now request for an opinion on the tax implications of the ESA between SFPC and SFC. 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. Section 27 (E) of the Tax Code of 1997, as amended, implemented by Revenue Regulations No. 9-98, and 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. SCEHaD In view of the foregoing provisions, the Service Fee to be paid by SFC to SFPC for both information management services and project studies as enumerated under the ESA forms part of the gross income of SFPC and will be subject to the 32% regular corporate income tax or to the 2% minimum corporate income tax, as the case may be. This is so because SFPC, being a domestic corporation, is taxable on its income from all sources within and without the Philippines. 2. Value-Added Tax (VAT) Section 108 (B) (2) of the Tax Code of 1997, as amended, provides that services other than those mentioned in paragraph (1), 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), shall be subject to zero percent (0%). In view of the fact that the services as enumerated in the ESA to be rendered by SFPC to SFC, a non-resident foreign corporation, refer to information management and consultancy services as well as project studies, the Service Fee, which is paid for in foreign currency by SFC to SFPC, is subject to the VAT at zero-rate under Section 108 (B) (2) of the Tax Code of 1997. Furthermore, SFPC is entitled to the same without the need of any prior application to the Bureau of Internal Revenue ("BIR") for VAT zero-rating under Section 108 (B) (2) of the Tax Code; as amended. In VAT Ruling No. 059-02 dated September 16, 2002, this Office ruled that ". . ., the research activity and consultancy service, which are both similar to a project study and an information service, that is paid for in US dollars inwardly remitted shall qualify as a zero-rated VAT transaction if rendered by your company to a non-resident foreign client. It must be noted that, to qualify as a zero-rated VAT transaction, the said services must not only be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP must also be rendered directly to a non-resident foreign client." Moreover, in VAT Ruling No. 013-03 dated January 20, 2003 citing VAT Ruling No. 010-01, it was also ruled that ". . ., this Office hereby confirms your opinion that the aforementioned sale of services by NTAP are likewise entitled to the benefit of the zero percent (0%) VAT, pursuant to Section 108(B)(2) of the Tax Code of 1997, as implemented by Section 4.102-2(b) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 5-96. xxx xxx xxx NTAP's sale of service is entitled to the benefit of the zero percent (0%) VAT without need of a prior application for VAT zero rating. Section 108(B) of the Tax Code of 1997 (Section 102(b) of the Tax Code, as amended), is implemented by Section 4.102-2, Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 5-96, as follows: xxx xxx xxx Since NTAP's sale of services is governed by Section 108(B)(2) of the Tax Code of 1997, as implemented by Section 4.102-2(b)(2), Revenue Regulations No. 7-95, the same is entitled to the benefit of the zero percent (0%) VAT without need of any prior application to the BIR for VAT zero rating, otherwise required under Section 4.107-1 (d), Revenue Regulations No. 7-95. Such prior application is required only for effectively zero rated sale of service 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, NTAP's above sales of services, since its registration under the VAT law, are entitled to the benefit of the zero percent (0%) VAT in accordance with the above quoted law and regulations." Additionally, Section 110 and 112 (A) of the Tax Code of 1997 provides 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, SFPC is entitled to claim tax credit or refund the corresponding input tax that has not been applied against its output tax. HcDSaT 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group