Reimbursement of "Routine, Non-Technical Day-to-Day Administration Services" Expenses Not Subject to VAT

March 30, 1999 BIR RULING NO. 044-99 105-000-00-044-99 Kuehne & Nagel (Philippines), Inc. Unit 5 & 6 Columbia Complex II 707 Ninoy Aquino Ave., Paraaque Metro Manila Attention: Mr . Honesto M . Raquipiso Finance and Adm . Manager Gentlemen : This refers to your letter dated March 26, 1998 requesting for a ruling as to whether or not reimbursement of expenses relative to "routine, non-technical day-to-day administration services" is subject to value added tax (VAT). It is represented that KUEHNE & NAGEL (Philippines), Inc. ["Kuehne & Nagel, Phils."] is a domestic corporation engaged in international forwarding by air and sea; that the share holdings to the extent of 40% is held by Kuehne & Nagel (Asia Pacific) Management Limited ["Kuehne & Nagel, Asia Pacific"] domiciled overseas with address at 25/F, Evergo House, 38 Gloucester Road, Wanchai, Hongkong; that the nature of business carried out by Kuehne & Nagel (Phils.), Inc. which is that of freight forwarding, requires extensive regional and international connections; that its customers are both locals and foreigners, its suppliers, i.e., the shipping and airlines are internationally affiliated, and the destinations of goods being sent by its customers can be in any part of the world; that it intends to enter into an agreement with Kuehne & Nagel, Asia Pacific whereby the latter shall provide routine, non-technical day-to-day administration services to Kuehne & Nagel (Phils.), Inc.; that Kuehne & Nagel (Phils.), Inc., under the proposed agreement shall receive routine, non-technical day-to-day services from Kuehne & Nagel (Asia Pacific) Management Limited, including but not limited to notification of forwarding space available, project handling, publicity and promotion, financing and financial coordination, provision of directors, and coordinating the implementation of group policy and procedures; that Kuehne & Nagel (Phils.), Inc. shall, under the proposed agreement, reimburse Kuehne & Nagel (Asia Pacific) Management Limited for the: a) actual expenses incurred overseas by the latter directly associated with the routine, non-technical day-to-day services; and b) a share in the administration expenses which will include but not limited to, cost of maintaining its offices, staff salaries and wages and travelling and other necessary expenses; and that you are of the opinion that the reimbursement of expenses incurred by a non-resident foreign corporation, Kuehne & Nagel (Asia Pacific) Management Limited, does not constitute sale of services to Kuehne & Nagel (Phils.), Inc.. In reply, please be informed that pursuant to Section 105 of the Tax Code of 1997 which provides for the coverage of the value added tax, only "person who in the course of trade or business, sells, barters, exchanges, leases goods or properties or renders services, and any person who imports goods shall be subject to the value-added tax". Considering that Kuehne & Nagel (Asia Pacific) will merely support the operations of Kuehne & Nagel (Phils.) in Asia Pacific excluding Philippines, through a non-technical day to day administration services which shall thereafter be charged to the latter on a reimbursement-of-cost basis, the provision of Section 105 shall not apply to it. Furthermore, even if the billing which shall be forwarded by Kuehne & Nagel (Asia Pacific) Management Limited to Kuehne & Nagel (Phils.), Inc. will not reflect the expenses on a reimbursement basis , the same is not subject to VAT since the same refers to services imputable to Kuehne & Nagel (Asia Pacific) rendered abroad. dctai This ruling is being issued on the basis of the 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, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue