The Maximum Reimbursable Out-of-Pocket Expenses of a Foreign Corporation Not Doing Business in the Philippines and a Domestic Finance Company in the Maximum Aggregate Amount of US$150,000.00 is Not Subject to VAT

February 23, 1995 BIR RULING NO. 039-95 100 (a) 102 (a) 000-00 039-95 National Development Company Producers Bank Bldg. 371 Sen. Gil J. Puyat Ave. Makati, Metro Manila Attention: Ms . Veronica A . Santos Legal Department Gentlemen : This refers to your letters dated December 1, 1993 and April 4, 1994 seeking confirmation of your opinion that the reimbursable out-of-pocket expenses of your financial advisors are not part of their gross receipts, and therefore not subject to value-added tax (VAT). prcd Document submitted to this Office show that the National Development Company ("NDC"), with principal office address at Producers Bank Bldg., 371 Sen. J. Puyat Ave., Makati, Metro Manila, appointed Barclays de Zoete Wedd Limited ("BZW"), with principal office address at Ebbgate House, 2 Swan Lane, London EC4R 3TS United Kingdom, and All Asia Capital & Trust Corporation ("ALL ASIA"), with principal office address at SyCip Law-All Asia Capital Center, 105 Paseo de Roxas, Makati 1200, Metro Manila, (together, the "ADVISERS"), as its financial advisors to the privatization of its wholly-owned subsidiary, the National Steel Corporation ("NSC"). On the other hand, Beddows & Company, Cesar Virata and Associates ("CESAR VIRATA") and SyCip Salazar Hernandez and Gatmaitan ("SYCIPLAW") were engaged by it as its consultants in the steel industry and on legal and regulatory matters in connection with the said privatization of NSC. The financial advisory contract entered into by the aforementioned parties took effect on July 29, 1993. The fee structure of the engagement and the taxation provision of the said financial advisory contract are as follows: "i) An advisory fee of US$300,000.00 to cover Stage I, which comprises one phase, is billable at the completion of Stage I and payable within two weeks of invoicing. "ii) An advisory and implementation fee of US$575,000 to cover Stage II payable in different phases subject to negotiations prior to implementation based on the privatization strategy. "iii) In addition, NDC shall reimburse ADVISERS for their reasonable out-of-pocket expenses including, but not limited to, disbursements of legal advisers, expenses for travel (at business class standard) and accommodations, communications, printing, postage, advertising, courier fees, incurred in connection with the conduct of the privatization study or any actual or proposed sale transaction, subject to the submission of appropriate receipts or invoices (except for taxi fares). The reimbursement of the foregoing expenses shall include the TAXES thereon. The ADVISERS agree to the maximum out-of-pocket expenses limit of US$75,000.00 for EACH of Stages I and II and that savings in one stage may be utilized in the other stage. xxx xxx xxx "The advisory fee for Stage I and the advisory and implementation fee for Stage II are inclusive of consultancy fees which will be paid to Beddows & Company, Cesar Virata and SyCip Law. BZW and ALL ASIA will each invoice separately for their services but the aggregate of their fees payable will be as set forth above. Likewise, respective expenses will be separately reimbursed subject to the aggregate limits set forth above. "Taxation "NDC will reimburse any tax which may be imposed on the advisory and implementation fees under Philippines law, such as Value-Added Tax, Withholding Tax, and Gross Receipts Tax up to a maximum limit of US Dollars Thirty-Five Thousand (US$35,000.00). "BZW represents, and NDC acknowledges, the BZW is domiciled in the United Kingdom, has no place of business in the Philippines, and will be performing services outside the Philippines, BZW, upon the advice of SYCIPLAW based on the foregoing representations, expects that no fees payable to BZW will be subject to any Value-Added Tax, Withholding Tax, Gross Receipts Tax, or any other Philippine Taxes. "NDC acknowledges that BZW and ALL ASIA do not from a partnership or joint venture." Further to this, you represented that NDC required BZW to present progress reports on the conduct of the privatization to appropriate government authorities to secure necessary approvals. One such instance was their November 9, 1993 presentation to President Fidel V. Ramos wherein the BZW personnel flew to and incurred expense in the Philippines. For king such similar reports to the appropriate government agencies, the said BZW personnel were intermittently in the Philippines for a total of forty-nine (49) days in 1993. You now contend that the reimbursable out-of-pocket expenses of BZW and ALL ASIA, for their services as your financial advisors in the privatization of NSC, in the maximum amount of US$150,000.00, do not form part of their gross receipts and therefore not subject to VAT. prll In reply, please be informed that the maximum reimbursable out-of-pocket expenses of BZW, a foreign corporation not doing business in the Philippines, and ALL ASIA, a domestic finance company, in the maximum aggregate amount of US$150,000.00 is not subject to VAT because of the following reasons: 1. BZW is a non-resident foreign corporation domiciled in the United Kingdom; with no permanent headquarters in the Philippines and performs its financial advisory services for the privatization of NSC outside the country. Pursuant to Secs. 100(a) and 102(a) of the Tax Code, VAT is imposed only on sale of goods and services performed in the Philippines. 2. On the other hand, ALL ASIA, a co-venturer of BZW in the rendition of the said financial advisory services in the privatization of NSC, although a domestic corporation, cannot likewise be subjected to VAT on its share in the US $150,000.00 reimbursable out-of-pocket expenses on the ground that ALL ASIA is a finance company and therefore its share in the said US$150,000.00 is not subject to VAT but rather, to the percentage tax imposed on finance companies under Sec. 120 of the Tax Code, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if it will be disclosed, upon investigation, that the facts are different, then this ruling shall be considered null and void. cdt Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue