VAT Imposed on Consultancy Services

July 18, 1988 BIR RULING NO. 337-88 103 (u) 000-00 337-88 Gentlemen : This refers to your letter dated May 20, 1988 stating that your client, Unix Marketing, Inc. is a domestic corporation which intends to supply consultancy services to Japanese Corporations that undertake projects in the Philippines funded by the Overseas Economic Cooperation Fund of Japan (OECF); and that under the Exchange of Notes between the Governments of the Philippines and Japan covering loan package, Japanese contractors are exempt from Philippine taxes. You now request confirmation of your opinion that your client is exempt from the value-added tax (VAT) if it renders consultancy services to Japanese contractors undertaking OECF-funded projects pursuant to Section 103(u) of the Tax Code as amended by Executive Order No. 273, otherwise, your client will be to bill the Japanese contractors the additional 10% value-added tax. In reply, please be informed that this Office cannot confirm you opinion for lack of legal basis. Under the pertinent provision of the aforesaid Exchange of Notes between the Philippines and Japanese Governments reading as follows: "The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the loan." the tax exemption is limited only to Japanese firms and nationals operating as suppliers, contractors or consultants to which income may accrue from the supply of products and/or services to be funded from the loan. Hence, the tax exemption cannot be claimed by domestic corporations such as your client, supplying services to said Japanese firms and nationals. The rulings of this Office which are cited in your letter, all involve Japanese firms having contracts with agencies of the Philippine Government. The above transaction does not fall within the purview of Section 103(u) of the Tax Code which exempts from VAT, transactions which are exempt under special laws or international agreements to which the Philippines is a signatory. It is noted that under the aforesaid Exchange of Notes, the transaction exempt from taxes is one entered into between the Philippine Government through its agencies or instrumentalities on one hand and the Japanese firms and nationals on the other hand. As heretofore stated, the transaction in question involves a Japanese corporation and your client, a domestic corporation. Accordingly, being the party rendering consultancy services; your client is directly liable for the payment of the value-added tax. Since the value-added tax is an indirect tax, it can be shifted to the party to whom service was rendered. (BIR Ruling No. 243-88) cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner