Valerio and Associates

December 23, 2009 BIR RULING [DA-(VAT-119) 828-09] Rev. Regs. 16-2005; DA 220-07 Valerio and Associates Suite 17F Petron Mega Plaza 358 Sen. Gil Puyat Avenue Salcedo Village, Makati City Attention: Atty. Aileen Paulette Saavedra-De Jesus Gentlemen : This refers to your letter dated July 6, 2009 requesting on behalf of your client, EBusiness Services, Inc. ("EBusiness"), confirmation of your opinion that: 1. Service fees to be paid by Western Union Network (Canada) Company (Western Union-Canada) to EBusiness for money transfer services, wherein money is transferred inwardly from abroad to the Philippines, are subject to VAT, albeit at a zero-rate; and 2. Service fees paid to EBusiness for money transfer services, wherein money is transferred from the Philippines to abroad, are subject to the regular VAT rate of 12%. The facts, as are represented, are as follows: EBusiness, a corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office at the Philcom Building, Paseo de Roxas, Makati City, is engaged in electronic commerce and trading, through internet-based facilities and other on-line transactions, including but not limited to the development and marketing of goods and services and electronic value or debit cards; exchanging, transferring and remitting, domestically and internationally, funds or monies in whatever form of currencies; the development of web sites and information highway and other allied E-Commerce business transactions permitted by law. prcd On the other hand, Western Union-Canada is a corporation duly incorporated and existing under the laws of Nova Scotia, Canada. Its primary business purpose is to offer a variety of money transfer and related services in countries and territories throughout the world. Western Union-Canada charges a regular fee to its clients in order to initiate a transfer through its money transfer service, excluding taxes and other governmental charges or impositions, and foreign exchange gains. It is further represented that EBusiness entered into an agreement ("Agreement") with Western Union-Canada to provide the latter's money transfer services in the Philippines, consisting of the following: i. Commercial Transaction: a) "Quick Pay" i.e., money is paid by a consumer to Western Union Representative for payment to a Commercial Customer in consideration of goods or services provided by the Commercial Customer to the Customer; b) "Quick Cash" i.e., money is paid by a Commercial Customer to Western Union or Western Union Representative for payment to one or more recipients or other Commercial Customers. ii. Consumer Send and Receive Transaction, a money transfer service whereby money is paid by a Consumer to Western Union or to a Western Union representative for payment to a recipient. It is also represented that there are 2 modes in carrying out the above types of money transfer services: 1. A customer or sender avails of the said money transfer services abroad with Western Union-Canada by paying the regular fee. Upon visit of the recipient of the money transfer service to the Western Union representative in the Philippines (in this case, EBusiness), EBusiness will provide the currency designated by the sender. In turn, Western Union-Canada shall reimburse the payment made by its representative, EBusiness, and remits the said foreign currency one day after transaction date through the banking system; or 2. A customer or sender avails of the said services in the Philippines with EBusiness by paying the regular fee. Upon payment, Western Union-Canada will provide the recipient of the money transfer abroad in the currency designated by the sender. Likewise, Western Union-Canada shall net the said foreign currency payment from the amount to be reimbursed to EBusiness, through the banking system. Finally, it is represented that pursuant to said Agreement, EBusiness will receive a regular fee charged as compensation for the facilitation of both types of money transfer services. In reply thereto, please be informed that this Office hereby confirms your opinion as follows: 1. Section 4.108-5 (b) (2) of Revenue Regulations No. 16-2005, implementing Republic Act (R.A.) No. 9337, provides the following: "(b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: xxx xxx xxx (2) Services other than processing, manufacturing or repacking 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 BSP" In stressing the rationale of the above-mentioned rule, this Office held in BIR Ruling No. DA 012-05 dated January 17, 2005 which is a reiteration of BIR VAT Ruling No. 025-01 dated May 17, 2001, as follows: ". . . sale of services to SMSI which are paid for in foreign currency and accounted for according to the rules and regulations of the BSP fall squarely within the purview of the above-quoted law and regulations. Accordingly, your opinion is hereby confirmed that the same is entitled to the benefit of the zero percent VAT under Section 108(B)(2) of the Tax Code of 1997." The aforesaid rule is fortified by the Supreme Court in the case entitled Commissioner of Internal Revenue vs. American Express International Incorporated-Philippine Branch docketed as G.R. No. 152609 dated June 29, 2005, where it was ruled that: "Respondent's Service Exempt from the Destination Principle ". . ., the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, 'paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.' Thus, 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 fall under any of the categories in Section 102(b) of the Tax Code; and third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. DCHaTc Indeed, these three requirements for exemption from the destination principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category found in Section 102(b) of the Tax Code, because it is a service other than 'processing, manufacturing or repacking of goods' as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated. Performance of Service versus Product Arising from Performance Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-rated, it need not be tacked in as part of the cost of goods exported. The law neither imposes such requirement nor associates services with exported goods. It simply states that the services performed by VAT-registered persons in the Philippines services other than the processing, manufacturing or repacking of goods for persons doing business outside this country if paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. The service rendered by respondent is clearly different from the product that arises from the rendition of such service. The activity that creates the income must not be confused with the main business in the course of which that income is realized. Tax Situs of a Zero-Rated Service The law neither makes a qualification nor adds a condition in determining the tax situs of a zero-rated service. Under this criterion, the place where the service is rendered determines the jurisdiction to impose the VAT. Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State necessarily has to have 'a substantial connection to it, in order to enforce a zero rate. The place of payment is immaterial; much less is the place where the output of the service will be further or ultimately used." Considering that in the first mode of carrying out the money transfer service, the service fee of EBusiness, made in foreign currency, are inwardly remitted through the banking system by Western Union-Canada as part of the reimbursement made to EBusiness one day after the transaction date, the money transfer services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas pursuant to Section 108 (B) (2) of the National Internal Revenue Code, as amended. As such, this Office so holds that said service fee to be remitted by Western Union-Canada, a non-resident foreign corporation not operating in the Philippines, to EBusiness for money transfer services made in the Philippines, wherein money is transferred inwardly from abroad to the Philippines, are subject to VAT at zero-rate. IDaEHS 2. On the other hand, Section 4.108-2 of Revenue Regulations No. 16-2005 defines the term 'sale or exchange of services' as the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash . . . In the second mode of money transfer service, the regular service fee shall be paid locally by a customer or sender and pursuant to the Agreement, Western Union-Canada shall reimburse EBusiness only the foreign currency designated by the customer or sender for the recipient abroad, net of the service fees. Inasmuch as the service fees are payments for services rendered in the Philippines, the same is subject to VAT at the rate of 12% in accordance with Section 108 of the National Internal Revenue Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service