BIR Ruling No. 119-14

May 6, 2014 BIR RULING NO. 119-14 Sections 105, 108 (B) (2) NIRC; BIR Ruling No. 455-2011 Agerico Export Corporation 2/F Fascon Bldg. Roosevelt Avenue SFDM, Quezon City Attention: Anselma R. Descartin Auditor Gentlemen : This refers to your letter dated January 3, 2012, requesting on behalf of Agerico Export Corporation ("Agerico") , confirmation of your opinion that service fees paid to Agerico for its painting services rendered to a non-resident client, Americanvas , a division of St. Design, Inc. , are subject to zero percent (0%) value-added tax (VAT) pursuant to Section 108 (B) (2) of the Tax Code of 1997. Based on the representation and the documents submitted, it is shown that Agerico , with Tax Identification Number 004-613-125-000, is a company duly organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC), bearing SEC Registration No. A1996-11071, dated December 9, 1996; that it is duly accredited with the Philippine Exporters Confederation, Inc. (PHILEXPORT) per Certificate of Accreditation issued on November 27, 2013; that the Company is a VAT-registered entity; and that the purposes for which the Company was established, as provided in its Articles of Incorporation, are the following: "To primarily engage in, conduct and carry on the business of buying, selling, distributing, marketing at wholesale and retail, in so far as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity, as manufacturer's representative, merchandise broker, indentor, commission merchant, factors, or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial." that Agerico is the exclusive supplier of painting services of canvas and stone to Americanvas , a division of St. Design, Inc. since 1988. TcSHaD In reply, please be informed that under Section 105 of the 1997 Tax Code, as amended, it is provided that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of the same Code. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Relative to the above provision, Section 108 (A) of the 1997 Tax Code, in providing the test for the applicability of VAT on sale of services, clarifies that payments for the sale or exchange of services, including the use or lease of properties are subject to VAT only if the services are performed in the Philippines. The said Section provides, viz. : "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%). . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. . ." Applying the above provisions in the instant case, it is clear that the payments for the painting services performed by Agerico for its non-resident client, St. Design, Inc. , which services were performed in the Philippines, are subject to VAT. As regards the VAT rate imposed on the subject services, Section 4.108-5 of Revenue Regulations No. (RR) 16-05, implementing Section 108 (B) of the 1997 Tax Code, as amended, provides for the transactions which are subject to the 0% VAT, to wit: "SEC. 4.108-5. Zero-Rated Sale of Services. (a) In general. A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these Regulations. (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: DcICEa 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 In the case of CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. G.R. No. 153205, Jan. 22, 2007 , the Supreme Court emphasized that certain requisites must be complied with in order that the services may qualify for VAT zero-rating under Section 102 (b) (2) [now Section 108 (B) (2)] , viz. : 1. The services must be performed in the Philippines; 2. The services must be rendered to persons engaged in business conducted outside the Philippines or to a non-resident persons not engaged in business who are outside the Philippines when the services are performed; and 3. The fees to be paid are in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Accordingly, since the painting services are rendered by Agerico to St. Design, Inc. , a non-resident company as evidenced by the Certificate of Non-Registration of Company issued by SEC dated March 25, 2013, and paid for in acceptable foreign currency, as evidenced by the Credit Memos and Sales Invoices submitted by Agerico , the service fees paid therefor by St. Design, Inc. are subject to zero percent (0%) VAT pursuant to the above-cited laws and regulations. It must be emphasized, however, that the application of the 0% VAT rate on the sale of services of Agerico is not automatic and does not cover all its transactions as it must still show that said transactions fully comply with the above-mentioned requirements. (BIR Ruling No. 455-2011 dated November 16, 2011) Furthermore, it is noted that Agerico is neither registered with the Board of Investments (BOI) nor with the Philippine Economic Zone Authority (PEZA). As such, it is subject to the regular income tax rate of thirty percent (30%) on its income derived from export sales. 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 as null and void. DACIHc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.