Manabat San Agustin & Co.

October 27, 2009 BIR RULING [DA-(VAT-092) 620-09] Sec. 108 (B) (2); DA-094-07; DA-322-08; DA-016-06; VAT-006-06; VAT-010-08; VAT-010-01 Manabat San Agustin & Co. The KPMG Center 9/F, 6787 Ayala Avenue, Makati City Attention: Atty. Roberto L. Tan Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated January 15, 2009 requesting on behalf of your client, Vestas Asia Pacific A/S ("Vestas-Denmark"), confirmation that its payments in United States dollars to SMCC Philippines, Inc. ("SMCC") for services performed in the Philippines, in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), are subject to zero percent (0%) value-added tax (VAT) pursuant to Section 108 (B) (2) of the Tax Code of 1997, as amended. It is represented that Vestas-Denmark is a foreign corporation duly organized and existing under the laws of Denmark engaged in the supply of wind power solutions. On October 20, 2006, it was granted a license to do business in the Philippines through a branch office to engage in the sale and service of Vestas wind power systems. On the other hand, SMCC, is a VAT-registered domestic corporation with office address at 2nd Floor, Pioneer House, 108 Paseo de Roxas, Legaspi Village, Makati City. On November 1, 2007, the head office of Vestas-Denmark directly entered into Contract Agreement No. SP 14220 Vestas Asia Pacific/SMCC Philippines, Inc. (the Agreement) with SMCC, for the execution and completion by SMCC of the civil and electrical works for the "NorthWind Bangui Bay Windpower project-phase II" in the Philippines. The contract price for the works is based on a lump sum, fixed amounts stated in two (2) currencies as follows: Philippine Peso (PHP)61,109,674.00 plus US Dollars (USD)448,647.00. The breakdown of cost attached to the Agreement indicates that the contract price is inclusive of applicable VAT. For the performance of the works, SMCC billed Vestas-Denmark the following invoices in USD, inclusive of the 12% VAT: ITADaE Invoice No. Invoice Date Total Amount VAT Portion Amount Paid Sales Invoice No. 2128 13-Dec-07 $282,472.05 0 $282,472.05 (Zero-Rated) Sales Invoice No. 1039 13-Feb-08 $282,472.05 $30,264.86 $252,207.19 (Vatable) Sales Invoice No. 1059 8-Apr-08 $123,745.15 $13,258.41 $110,486.74 Sales Invoice No. 1072 8-May-08 $224,323.50 $24,034.66 $200,288.84 Sales Invoice No. 1073 8-May-08 $482,018.33 $51,644.82 $430,373.51 Sales Invoice No. 1074 8-May-08 $67,297.05 $7,210.40 $60,086.65 Sales Invoice No. 1075 8-May-08 $217,244.89 $23,276.24 $193,968.65 Sales Invoice No. 1091 11-Jun-08 $104,545.01 $11,201.25 $93,343.76 Sales Invoice No. 1092 11-Jun-08 $44,864.70 $4,806.93 $40,057.77 Sales Invoice No. 1093 11-Jun-08 $138,718.96 $14,862.75 $123,856.21 Sales Invoice No. 1099 23-Jun-08 $3,375.00 $361.61 $3,013.39 Sales Invoice No. 1100 23-Jun-08 $562.50 $60.27 $502.23 Sales Invoice No. 1108 16-Jul-08 $44,864.70 $4,806.93 $40,057.77 Sales Invoice No. 1110 11-Jun-08 $10,064.22 $1,078.31 $8,985.91 Sales Invoice No. 1111 16-Jul-08 $1,361.25 $145.85 $1,215.40 Sales Invoice No. 1112 16-Jul-08 $6,494.95 $695.89 $5,799.06 Sales Invoice No. 1113 16-Jul-08 $124.08 $13.29 $110.79 Sales Invoice No. 1114 16-Jul-08 $134,441.28 $14,404.42 $25,724.48 Sales Invoice No. 1118 11-Aug-08 $3,420.00 $366.43 $3,053.57 Sales Invoice No. 1119 11-Aug-08 $570.00 $61.07 $508.93 Sales Invoice No. 1138 24-Sep-08 $26,348.65 $2,823.07 $23,525.58 Sales Invoice No. 1140 24-Sep-08 $2,364.73 $253.36 $2,111.37 Sales Invoice No. 1141 24-Sep-08 $574.58 $61.56 $513.02 Sales Invoice No. 1143 24-Sep-08 $3,413.31 $365.71 $3,047.60 Sales Invoice No. 1144 24-Sep-08 $859.75 $92.12 $767.63 Sales Invoice No. 1145 24-Sep-08 $944.47 $101.19 $843.28 Sales Invoice No. 1150 3-Oct-08 $400.37 $42.90 $357.47 Sales Invoice No. 1155 3-Oct-08 $243.54 $26.09 $217.45 The sales invoices were billed by SMCC in USD regardless of whether the billings pertain to the peso portion or dollar portion of the Agreement. Excluding the VAT portion indicated per invoice, Vestas-Denmark paid all of the above sales invoices, and remitted USD payments through Nordea Bank of Copenhagen that remitted payments into the USD account of SMCC in the Philippines. Based on the foregoing, you are requesting for confirmation that Vestas-Denmark's payments to SMCC for services performed in the Philippines pursuant to the Agreement entered by Vestas-Denmark directly with SMCC are subject to VAT at 0% pursuant to Section 108 (B) (2) of the Tax Code of 1997, as amended, and as implemented by RR No. 16-2005, as amended. In reply, please be informed that Section 108 (B) of the Tax Code of 1997, as amended, and as implemented by Section 4.108-5 (b) (2) of RR No. 16-05, as amended, states that the following services performed in the Philippines by VAT-registered persons shall be subject to 0% rate: "(1) Processing, manufacturing or repacking 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 when 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; " (Emphasis ours) In BIR Ruling DA-094-07 dated February 15, 2007, the BIR held that in order that services will qualify for VAT zero-rating, two (2) requisites under RR No. 16-05 must be complied, namely: a. The services must be rendered to persons engaged in business conducted outside the Philippines or to non-resident foreign clients not engaged in business who are outside the Philippines when the services are performed; SHECcT b. The fees are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Since Vestas-Denmark is a non-resident foreign corporation outside the Philippines when SMCC's services are performed, and said services are paid in USD inwardly remitted to the Philippines in accordance with the rules and regulations of the BSP, the requisites to qualify for zero-rating as above stated are therefore complied with. Accordingly, SMCC's services to Vestas-Denmark are subject to VAT at 0% rate. (BIR Ruling Nos. DA-259-07 dated April 25, 2007, DA-322-08 dated May 28, 2008, and DA-016-06 dated January 20, 2006; VAT Ruling No. 006-06 dated May 30, 2006 citing VAT Ruling No. 010-2001 dated May 17, 2001 and 010-08 dated October 29, 2008) 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