Isla Lipana & Co.

December 24, 2008 BIR RULING [DA-(VAT-059) 572-08] Sec. 108 (B) (4); RMC 31-08; BIR Ruling No. DA 374-07; VAT Ruling No. 62-98 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Malou P. Lim Partner, Tax Services Gentlemen : This refers to your letter dated July 22, 2008 requesting on behalf of your client, Hanjin Shipping (Singapore) Pte. Ltd. (Hanjin Shipping) for confirmation of your opinion that all services rendered by local suppliers to Hanjin Shipping including transshipment services rendered by domestic carriers are subject to the automatic value-added tax (VAT) zero percent (0%) rate pursuant to Section 108 (B) (4) of the Tax Code, as amended. CAIHTE It is represented that: 1. Hanjin Shipping is a nonresident foreign corporation duly organized under the laws of the Republic of Korea engaged in international shipping, operation, charter and management of shipping vessels. Hanjin Shipping is registered with the Bureau of Internal Revenue and considered a resident foreign corporation under the Tax Code. 2. MOF Company, Inc. (MOF), a domestic corporation duly organized under Philippine laws, is the general shipping agent of Hanjin Shipping in the Philippines. As a general shipping agent, MOF performs services to Hanjin Shipping related to sales, vessel operations, and handling of container and cargo. 3. For its international shipping operations in the Philippines, Hanjin Shipping, by itself or through MOF, engages the services of various local suppliers with respect to the following: a. cleaning, repairs, washing, storage and other special services of empty international containers; b. partial or full crewing to ocean-going foreign vessels, and maritime services such as documentation, vessel clearing in and out of the port, assistance in and arrangement of the provisioning, storage and maintenance of said vessels and like services; c. pilotage and launch services; d. collection of solid and liquid waste from inbound ocean-going foreign vessels per contract entered into with the Philippine Ports Authority; e. container handling, storage and related services; f. outbound transshipment of goods or cargoes; g. transshipment of empty foreign containers bound for ports outside of the Philippines; h. marine hull insurance services; ISAaTH i. tugging, linemen handling and wharf usage as well as attendance services; j. printing services relative to bills of lading/inter-charge receipts; and k. agency services; 4. In its outbound ( i.e. , from the Philippines to a foreign port) movement of goods, Hanjin Shipping secures the local transshipment services of domestic carriers. These transshipment services pertain to the shipment of cargoes from one place in the Philippines to the ports of Manila where such cargoes are subsequently loaded into Hanjin Shipping vessels exclusively for outbound shipment to foreign ports. 5. The fees for the transshipment and other services are paid in either United States Dollars or Philippine Pesos. In reply, please be informed that Section 108 (B) (4) of the Tax Code specifically provides that: "Section 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 persons engaged in international shipping or international air transport operations, including leases of property for use thereof; xxx xxx xxx" In accordance with the above provision, this Office has consistently ruled that services rendered by VAT-registered entities to persons engaged in international shipping are entitled to the VAT zero-rate. (BIR Rulings Nos. DA 374-07 dated July 12, 2007, DA 368-07 dated July 6, 2007, DA 365-07 dated July 6, 2007 and DA 355-07 dated July 3, 2007) . ADScCE Meanwhile, the proper VAT treatment of transshipment services was discussed in Revenue Memorandum Circular (RMC) No. 31-08 dated January 30, 2008, to wit: "Q. 44: If an international carrier issues a contract of carriage of goods from Davao to Los Angeles, USA but said carrier picks up the goods only in Manila and therefore sub-contracts to a domestic carrier the carriage service from Davao to Manila, what are the tax liabilities of the two (2) carriers in this continuing transaction ? A-44: In this scenario, the international carrier shall be liable to pay the Gross Philippine Billing Tax (Income Tax) and the common carrier tax based on freight from Davao to Los Angeles whereas the domestic carrier shall be liable for income tax on the freight or service income from Davao to Manila. However, said freight income of the domestic carrier shall be subject to VAT at zero percent (0%), it being service rendered to international carrier engaged in international transport operation." RMC No. 31-08 is consistent with previous BIR rulings on transshipment services. In VAT Ruling Nos. 45-01 and 46-01 both dated July 16, 2001 citing VAT Ruling No. 62-98 dated December 15, 1998, it was held that: "Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. Thus, unless otherwise expressly provided for by law, sale of services, such as those rendered to vessels engaged exclusively in international shipping business, may be treated qualified for the zero percent VAT provided the use or benefit derived from such services crosses the Philippine territory, in accordance with the Cross Border Doctrine, which is the underlying principle of our VAT System. For this reason, this Office is amenable to apply the zero percent (0%) VAT on the transshipment services rendered by the aforesaid domestic carriers to the aforementioned international carriers with respect to transshipment of goods or cargoes from a Philippine port to a foreign port of entry (i.e., zero percent (0%) VAT only for outbound transshipment of goods or cargoes) . Conversely, Inbound Transshipment of goods or cargoes shall be subject to the 10% VAT, pursuant to Section 108 (A) of the Tax Code of 1997." (Emphasis supplied) CaDEAT In view of the foregoing, this Office hereby confirms your opinion that all services including transshipment services rendered by VAT-registered persons to Hanjin Shipping since its registration with the BIR and paid for in either Philippine Pesos or acceptable foreign currency are subject to the automatic VAT zero-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 foregoing 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