Punongbayan & Araullo

July 24, 2008 BIR RULING [DA-(VAT-009) 075-08] DA259-07 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Raymund S. Gallardo Tax Partner Gentlemen : This refers to your letter dated January 11, 2008 stating that your client, Plastro Southeast Asia, Inc. (Plastro), is a VAT-registered company organized and existing under the laws of the Philippines with business address at Door 201, GRDC Building, Km. 7, Lanang, Davao City; that it is mainly engaged in the sale of irrigation materials and installation of irrigation and infrastructure systems; that since its incorporation in 1998, it has been the sole distributor of the products of Plastro Irrigation Systems Ltd. (Plastro Israel), a foreign affiliate based in Israel which is engaged in the development, manufacture, marketing and support of irrigation products; that in December 2005, the Plastro and Plastro Israel formally entered into an agreement wherein certain transactions shall be directly concluded by Plastro Israel (Direct Transactions); that however, similar to previous years, Plastro shall provide support services which shall include the following: Pre-sale and post-sale assistance to Plastro Israel, to the buyer and to the end-users; Administrative support; Assistance in matters related to dealings with governmental agencies in the Philippines and receipt of government aid; Warehousing services; Management and performance warranty and post-warranty service; Billing and collection assistance; Conduct of project studies, gathering of information and rendering of related engineering services necessary for the design and installation of the irrigation system to Plastro Israel's buyers in the Philippines; and DHTECc Other services as may be necessary from time to time. that in consideration of the services rendered, Plastro Israel pays the Plastro an amount equivalent to 18% (computed on a cost-plus basis) of the invoice value of the Direct Transactions, subject to adjustment upon mutual consent of the parties; that the Agreement is automatically renewed every year, but each party may terminate it upon 90-day written notice to the other party; that currently, Plastro books the income from support services as commission income; and that the income is being invoiced in US dollar and offset against the trade liability of the Plastro with Plastro Israel on a quarterly basis. In connection therewith, you now request an opinion on the following 1. Whether the service income earned by Plastro from Plastro Israel is subject to VAT at zero percent; and 2. Whether the offsetting arrangement satisfies the requirement for the payment to be made in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). In reply thereto, please be informed as follows 1. Section 108 (B) of R.A. No. 9337, as implemented by Revenue Regulations No. 16-2005, as amended, provides: "(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 of 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 BSP; (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines where 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; SIEHcA To be qualified for zero rating under the above-quoted provisions, the following must concur: 1) The services must be rendered in the Philippines 2) The service fall under any of the categories mentioned in Section 108 (B), supra 3) The service consideration is paid in acceptable foreign currency accounted for in accordance with the BSP rules and regulations. In the instant case, since Plastro is a duly registered VAT entity and the support services being rendered are in the Philippines and is paid for in foreign currency, clearly it falls within the contemplation of Section 108 (B) (2) of the said Code. Accordingly, the support services to be performed by Plastro to Plastro Israel are subject to VAT at zero percent pursuant to Section 4.108-5 (b) of Revenue Regulations No. 16-2005, as amended. 2. Under the BSP Circular No. 1353, Series of 1992, payment for exports may be made through the following: Letter of Credit Documents Against Payment Documents Against Acceptance Open Account Cash Against Document Prepayment/Export Advance Intercompany Open Account Offset Arrangement Exports on Consignment It is undisputed that the offsetting arrangement between Plastro and Plastro Israel falls under intercompany open account offset arrangement whereby the exporter offsets its payable to against its receivable from, its parent/affiliate company abroad. EacHCD Accordingly, the offsetting of the Company's receivable from Plastro Israel against its trade liabilities to the latter is considered as made in accordance with BSP rules and regulations. This Office justified its ruling with the following ratiocination as held in "Cebu Toyo Corporation vs. CIR" where the Court of Tax Appeals in its resolution dated May 31, 2000 decreed that there is no need for the BSP approval for offsetting arrangements since such type of payment may be categorized as an intercompany open account offset arrangement. WHEREFORE, in view of the foregoing, this Office holds that 1. The service income earned by the Company from Plastro Israel is subject to VAT at zero percent. 2. The offsetting arrangement satisfies the requirement for the payment to be made in accordance with rules and regulations of the BSP. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service