BIR Ruling No. 048-11

February 16, 2011 BIR RULING NO. 048-11 Section 108 (B) (2) of the Tax Code of 1997; BIR Ruling No. DA-508-06 Grundfos Pumps (Philippines), Inc. #2308 Natividad 1 Building Pasong Tamo Extension, Makati City Attention: Ms. Merlita Almonte Accounting Manager Gentlemen : This refers to your letter dated April 11, 2008 requesting for a ruling on whether the service you render to a foreign entity is considered a zero-rated VAT transaction. As represented, Grundfos Pumps (Philippines), Inc. ("Grundfos Phils." for brevity) is a corporation engaged in selling water pumps and pumping solutions. It is registered with the Bureau of Internal Revenue as a VAT company. Grundfos Phils.' Main source of income comes from the sale of pumps to local customers. Aside from this, it has commission income earned from indent sales which means sales executed by its Singapore parent company to the Philippine customer. Grundfos Phils.' Participation here is only securing the order; it acts as a mediator between the Philippine customer and its Singapore office. Once Grundfos Phils. gets the order, it forwards the order to the Singapore office and that finishes its role. The parent company will invoice the orders direct to the customer and normally the delivery term is FOB shipment so that it is the customer who takes care of the clearing of the items from the customs. The commission income Grundfos Phils. constructively receives, which is deducted from its payable to the parent company, every month is recorded in Grundfos Phils.' books as part of its "other income" subject to income tax. HAaScT In reply, please be informed that pursuant to Section 108 (A) of the Tax Code of 1997 as amended by Republic Act (R.A.) No. 9337. VAT shall be imposed on gross receipts derived from sale or exchange of services, and use or lease of properties. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for a fee, remuneration or consideration. Nevertheless, under Section 108 (B) (2) of the same Code as implemented by Section 4.108-5 (b) (2) of Revenue Regulations (RR) No. 16-05, the transaction may be subject to VAT at 0%, viz. : "(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; xxx xxx xxx" Under the above regulations, two (2) requisites must be complied with in order that the services may qualify for VAT zero-rating: (1) 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; and (2) The fees to be paid are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Grundfos Phils. is not covered by Section 108 (B) (2) of the Tax Code of 1997 as amended since its commissions for services in the Philippines to its parent company, a foreign entity outside the Philippines at the time the services are rendered, are not paid in foreign currency inwardly remitted to the Philippines in accordance with the rules and regulations of the BSP. Rather, the said commissions are deducted from its payables to the parent company. Such being the case, its commissions are subject to VAT at 12% and forms part of its gross income subject to income tax. 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. DTEHIA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue