Citadel Shipping Services, Inc.

June 3, 2009 BIR RULING [DA-(VAT-045) 264-09] Sec. 4.108-5 (b) (4), RR 16-2005; RR4-2007; BIR Ruling No. DA-364-2007 Citadel Shipping Services, Inc. Citadel Building, 637 Bonifacio Drive Port Area, Manila Attention: Atty. Henry D. Castro Legal Counsel Gentlemen : This refers to your letter dated February 5, 2009 requesting for confirmatory ruling that the services you render as General Sales Agent to Hyundai Merchant Marine Co., Ltd., which is your foreign international shipping line principal are subject to VAT at zero percent (0%) rate. ETDSAc The facts as represented are as follows: CITADEL SHIPPING SERVICES, INC., ("CITADEL SHIPPING") (doing business under the trade name and style "Citadel Lines, Inc." ) is a domestic corporation duly registered with the Securities and Exchange Commission under SEC Registration No. 47921 and is authorized to act as a steamship agent or representative for ship owners or brokers related to or connected with overseas or inter-island shipping. It is a duly registered value-added tax (VAT) taxpayer. CITADEL SHIPPING is the General Sales Agent in the Philippines of Hyundai Merchant Marine Co., Ltd., a foreign shipping line incorporated under Korean Laws and is engaged in the business of owning, operating and managing vessels for international commerce. As a general sales agent, CITADEL SHIPPING provides the following services to Hyundai Merchant Marine Co., Ltd., among others: 1. Represent them with the Philippine regulatory agencies; 2. Take custody of inventory of bill of ladings, control its issuance to the various accredited agents, shippers and consignees located across the Philippines; 3. Conduct commercial promotion for Hyundai; and 4. Service and supervise Cargo Agents through distribution of accountable documents. As compensation for the foregoing services, CITADEL SHIPPING is paid a commission equivalent to a certain percentage of the total value of ocean freight sold. All transactions are denominated in U.S. dollars including but not limited to the rates you sell. Payments are directly remitted by the agent to Hyundai's bank account abroad. In turn, Hyundai process and remit the commission due CITADEL SHIPPING via the latter's USD and PHP local bank accounts. Under Section 108 (B) of the 1997 Tax Code as recently amended by R.A. 9337 Section 108 (B) (4), and relatedly, VAT Ruling No. 044-98 dated November 26, 1998, you consider your services to be zero-rated considering that these are rendered to international shipping lines and that the corresponding commissions due to you are actually and regularly remitted to you by the international shipping lines using the country's authorized banking channels. ACSaHc In reply, please be informed that Section 108 (B) (4) of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 9337 provides that: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. xxx xxx xxx (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. xxx xxx xxx (4) Services rendered to vessels engaged in international shipping or international air transport operations, including leases of property for use thereof;" The above provision must be read in connection with Section 4.108-5 (b) (4) of Revenue Regulations (RR) No. 16-2005, as amended by RR 4-2007, to wit: "Sec. 4.108-5. Zero-Rated Sale of Services. xxx xxx xxx (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: xxx xxx xxx (4) Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code starting Feb. 1, 2006;" It is clear from the foregoing that services rendered by VAT-registered entities to persons engaged in international shipping are entitled to VAT zero-rating. Thus, the services rendered by CITADEL SHIPPING to Hyundai Merchant Marine Co., Ltd., an international shipping line, are subject to VAT zero-rating pursuant to the above provisions. However, it must be stressed that the above entitlement of CITADEL SHIPPING to VAT zero-rating does not extend to its services rendered to common carriers by sea with respect to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to VAT in accordance with Section 4.108-5 (b) (4) of RR No. 16-2005, as amended by RR 4-2007. (BIR Ruling No. DA-364-2007 dated July 06, 2007) 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