Parlance Systems, Inc.

October 30, 2009 BIR RULING [DA-(VAT-095) 634-09] Section 106; DA-355-2006; DA-537-04; DA-361-99 Parlance Systems, Inc. PLDT Jupiter Compound 222-224 N. Garcia St., corner Jupiter St., Bel-Air, Makati City Attention: Ms. Rosalie R. Montenegro President George H. Tan Treasurer Gentlemen : This refers to your letter dated July 18, 2006 requesting for a confirmation of your opinion that the sale of services of a domestic corporation to a non-resident foreign corporation be considered as an export sale and effectively subject to zero-percent (0%) VAT. AEIcSa It is represented that Parlance Systems, Inc. (PARLANCE) is a domestic corporation organized and existing under the laws of the Philippines with principal office at G/F PLDT Jupiter Warehouse, Reposo corner Jupiter Street, Makati City and registered with the Securities and Exchange Commission with Certificate of Registration No. A200200694 issued on January 16, 2002; that PARLANCE is also registered with the Board of Investments under the Omnibus Investments Code of 1997 with BOI Certificate of Registration No. 2002-074 having been granted pioneer status under the category of New IT Export Service Firm; that PARLANCE is currently on income tax holiday for a period six (6) years from March 2002 or actual start of its operations, whichever is earlier; that PARLANCE has its sole client, Echostar Global Services Corporation (ECHOSTAR), a non-resident foreign company, organized and existing under the laws of Colorado, United States of America; that the payment of these services rendered to ECHOSTAR are accounted for in foreign currency pursuant to the rules and regulations of Bangko Sentral ng Pilipinas; that you opine that the said sale of services are VAT zero-rated (0%). In reply, please be informed that this Office confirms you opinion that, pursuant to Section 108 (B) of the Tax Code as amended by Section 6 of R.A. No. 9337 which provides the conditions for payments for services to be subject to the zero percent (0%) VAT: "108(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 (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a non-resident 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 Bangko Sentral ng Pilipinas (BSP) xxx xxx xxx" Accordingly, payments received by PARLANCE from non-resident ECHOSTAR entities are subject to the zero percent (0%) VAT even if the services are performed in the Philippines, provided that the following requisites are met: 1. The ECHOSTAR is a non-resident entity engaged in business conducted outside the Philippines; 2. The consideration must be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). Moreover, the sale of services by local suppliers may be effectively zero-rated provided that the seller, who must be a VAT registered person, applies and secures prior approval for effective zero-rating on his sale of services to the non-resident foreign corporation. Although the sale of services is a taxable transaction for VAT purposes, the same shall not result in any output tax on the part of the seller but input tax on his purchases of goods, property or services related to such effectively zero-rated sale of goods or services shall be available as tax credit or refund. (BIR Ruling No. DA-158-98 dated November 20, 1998; BIR Ruling No. 014-96 dated February 20, 1996) The VAT treatment of the sale of services of PARLANCE to its sole client, ECHOSTAR abroad, provided that all the aforementioned requisites are met, is further confirmed in the decision of the Supreme Court in the case of Commissioner of Internal Revenue v. American Express International, Inc.(Philippine Branch), G.R. No. 152609 (2005). In the said decision, the Supreme Court held that for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service falls under any of the categories in Section 108 (B) of the Tax Code of 1997, as amended; and, third, it be paid in acceptable foreign currency accounted for in accordance with the rules and regulations and regulations of the BSP. CADHcI This ruling is being issued on the basis of foregoing facts as represented. However, if upon investigation it shall 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