San Augustin Services, Inc.

June 6, 2016 BIR RULING NO. 239-2016 Sections 105 & 108 (B) (2); BIR Ruling No. 119-14; BIR Ruling No. 455-2011 San Augustin Services, Inc. 5th Floor, Pryce Tower, Pryce Business Park J.P. Laurel Avenue, Davao City Attention: Mr. Thomas Charles Henderson Director Gentlemen : This refers to your letter dated December 9, 2011 requesting for confirmation of your opinion that the onshore services rendered by SAN AUGUSTIN SERVICES, INC. ("SASI" for brevity) in favor of MDC America, Inc. ("MDCA" for brevity), a non-resident foreign company not engaged in business in the Philippines, are subject to zero percent (0%) value-added tax (VAT) pursuant to Section 108 (B) (2) of the Tax Code of 1997, as amended. HTcADC It is represented that SASI (TIN _________________) is a corporation duly organized and existing under Philippine laws, with Securities and Exchange Commission (SEC) Company Registration No. __________ dated June 16, 2011. It is registered with the Bureau of Internal Revenue on June 29, 2011 as VAT registered taxpayer with TIN ___________. Its principal place of business is at 5th Floor, Pryce Tower, J.P. Laurel Avenue, Barangay 19-B, Davao City. SASI is primarily organized to " render exploration and other mining-related services to persons engaged in the exploration, development and commercial utilization of mineral resources; to provide technical, management, administrative and other services to (1) mining companies or other persons engaged in mining: (2) persons engaged in the acquisition, conveyance, storage, marketing, processing, refining and distribution of minerals; provided however, that the corporation shall not engage in mining activities for itself but will only render services for its clients ." On the other hand, MDCA is a corporation organized and existing under the laws of the State of Washington, United States of America, with registered address at 422 W. Riverside Avenue, Suite 1100, Spokane, Washington, 99201. On June 28, 2011, a Services Agreement (the "Agreement") was executed by and between MDCA and SASI. Pursuant to the Agreement, MDCA engaged the services of SASI as its onshore service provider to perform the following: 1. (i) (ii) (iii) (iv) (v) 2. 3. 4. Furthermore, pursuant to the Agreement MDCA shall pay Service Fees to SASI in an amount denominated in the US dollar currency, equivalent to 105% of the actual labor costs incurred by SASI, in pursuance to their Agreement. Payments to be made by MDCA shall be coursed through SASI's nominated dollar bank account. 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, as amended, 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. (A) 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 onshore services performed by SASI in favor of its non-resident client, MDCA, 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, as amended by RR No. 4-2007, implementing Section 108 (B) of the 1997 Tax Code, as amended, provides for the transactions which are subject to the 0% VAT, to wit: aScITE "SEC. 4.108-5. (a) Regulations. (b) xxx xxx xxx (2) 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. 2. 3. In relation thereto, Section 3 (d) of Republic Act (RA) No. 7042 dated June 13, 1991, defines the phrase "doing business," to wit: " Section 3. Definitions. As used in this Act: xxx xxx xxx d) Furthermore, the terms "doing" or "engaging in" or "transacting" business were explained in the case of Mentholatum Co., Inc., et al. v. Mangaliman, et al. (072 Phil. 524, G.R. No. 47701 dated June 27, 1941) where the Supreme Court ruled that: "No general rule or governing principle can be laid down as to what constitutes "doing" or "engaging in" or "transacting" business. Indeed, each case must be judged in the light of its peculiar environmental circumstances. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. ( Traction Cos. v. Collectors of Int. Revenue [C. C. A. Ohio], 223 F. 984, 987.) The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization.] ( Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N. W. 75. 77; Pauline Oil & Gas Co. v. Mutual Tank Line Co. , 246 p. 851, 852, 118 Okl. 111; Automotive Material Co. v. American Standard Metal Products Corp. , 158 N. E. 698, 703, 327, Ill. 367.)" In the present case, however, the MDCA cannot be considered as doing business in the Philippines by mere engaging the services of SASI. The duration of the services agreement is not to be construed as engaging in business since the provider of service is SASI and not MDCA. Thus, there is no continuity of commercial dealings on the part of MDCA when it entered into a service agreement with SASI. HEITAD Accordingly, since the onshore services are rendered by SASI in favor of MDCA, a non-resident foreign company, not engaged in business in the Philippines, as evidenced by the Certification of Non-Registration of Company issued by SEC dated February 5, 2015, and paid for in acceptable foreign currency, the service fees paid therefor by MDCA is 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 SASI 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 SASI 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. (BIR Ruling No. 119-2014 dated May 6, 2014) 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. Very truly yours, KIM S. JACINTO-HENARES Commissioner of Internal Revenue