VAT Ruling No. 004-03

January 9, 2003 VAT RULING NO. 004-03 Sec. 108 (B) (2) DA-064-2-6-97 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated March 12, 2002 requesting on behalf of your client, First Philippine Balfour Beatty (FPBB) , for confirmation of our opinion that services consisting of "project studies, information services, engineering and architectural design services", which are rendered to a non-resident and which are paid for in foreign currency and accounted for in accordance with the rules and regulations, is subject to automatic zero-percent (0%) VAT pursuant to Section 108 (B)(2) of the Tax Code, as amended, as implemented by Section 4. 102-2 (b)(2) of Revenue Regulations No. 5-96. It is represented that the Balfour-Cleveland Consortium (the Consortium/BCC) a corporation organized and existing under the laws of the United Kingdom entered into a contract with the Department of Public Works and Highways (DPWH) for the design, fabrication and supply of structural bridges with advisory services; that under the contract, BCC shall supply and deliver beam and truss type bridging materials for 256 bridges in connection with the DPWH Bridge Replacement Project and render Advisory Services in connection with the installation of the superstructure; that the contract for the supply of bridges does not include the installation of the superstructure; that BCC as a supplier, shall merely cause the preparation of all generic design for the steel beam and steel truss superstructures, and reinforced concrete decks and deliver all pre-fabricated, hot-dipped galvanized bridge steelwork and necessary materials in connection with the Bridge Replacement Project of the DPWH while the actual installation of the architectural structure in the Philippines and any onshore construction in connection with the project shall be undertaken by DPWH directly; that since the 256 bridges shall be installed by DPWH in 256 different locations, BCC is tasked to fabricate each superstructure precisely in accordance with the distinct features of the site of installation; that information as to the site of installation is critical for BCC to be able to come up with an accurate and precise design and fabrication the appropriate bridge structure, hence the information required by BCC must contain all critical and essential information, data, statistics and facts relevant to location which has been identified as the site of installation; that since BCC has no presence in the Philippines, the aforesaid site information must be sourced from the Philippines; that the superstructure shall be designed and fabricated , by BCC on the basis of information gathered thus, site surveys and transmittal of information to BCC must be undertaken by an entity who possess the compulsory architectural and engineering background and expertise so as to recognize and detect details and aspects of the site which may affect the design of the bridges to be delivered; that FPBB has been contracted by BCC on account of its competence to provide the necessary project study and information services in connection with bridge technology; that FPBB and BCC entered into a Subcontract Agreement whereby FPBB shall render advisory services which consists of the following: "33.2 The Advisor and/or Advisors Representatives shall provide such information and give such advise arising out of the duties listed below as may be practicable during the period set out in Clause 34.2 to the Project Manager in relation to the Plant and its proper installation. Develop in conjunction with the Purchaser (DPWH) and the U.K. Consultant a detailed programme for bridge site surveys, designs and fabrication of bridge steel parts, delivery and installation of superstructures; Attend key site surveys and determine the appropriate bridge technology in co-ordination with the Purchaser and the U.K. Consultant; Co-ordinate with Consultant and the Purchaser; Provide advisory services to oversee the installation of bridge superstructure; Conduct local training and technology transfer which shall include - explanation of Suppliers design concept - advise installation methods. It was further represented that FPBB shall render service to BCC by providing the necessary information and site survey so as to facilitate BCC in the fabrication of each superstructure, that the site survey shall consist of inspecting, examining and studying the site, which shall include an assessment on whether the proposed bridge design is appropriate for the specific site in the light of its architectural and engineering pattern; that the advisory services to be rendered by FPBB to BCC are necessary and essential for BCC to come up with the accurate design, specification, fabrication of the structural bridges and their proper installation procedure in accordance with the requirements of DPWH; that in addition to the above services, FPBB shall provide information to BCC by submitting a detailed programme for site surveys, design, fabrication of parts, delivery and installation of the bridges. This includes the submission of drawings of the superstructure, and drawings showing how the bridges are to be installed and any other information required for preparing suitable foundations or other means of support and necessary connections of the bridges, that the services also includes the preparation of Installation and Maintenance Instruction Manuals for the pre-fabricated bridges as supplied; and that for the above services rendered, BCC shall pay FPBB "service fees" paid for in foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). In reply, please be informed that pursuant to Section 108 (B)(2) of the Tax Code of 1997, as implemented by Section 3(b) of Revenue Regulations No. 7-95 as amended by Section 4.102-2(b) of the Revenue Regulations No. 5-96 which reads as follows: 'B) Transactions Subject to Zero Percent (0%) Rate . The following services, performed in the Philippines by VAT-registered. persons shall be subject to zero percent (0%) rate: "(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas ; "xxx xxx xxx." (Emphasis Supplied) Our VAT law is basically a consumption type VAT system and follows the Destination Principle or Cross-Border Doctrine, under which goods, property or services destined to be used or consumed in the Philippines are subject to the 10% VAT while those destined to be used or consumed abroad, are accorded to the benefit of zero-rating. (VAT Ruling No. 031-99 dated March 18, 1999.) The supply of services is entitled to the benefit of the zero-rating because of the basic principle underlying a Consumption Type/Destination-Type VAT, adhering to the "Cross Border Doctrine" wherein "the onus of taxation is in that country where the goods, property or services, supplied by a VAT-registered person, are destined, used or consumed. ADcSHC Since the project studies, information services, engineering and architecture designs and other similar services", which are precisely the nature of service rendered by FPBB when it provides its non-resident foreign client, BCC, of site survey and technical consultancy, which service is paid for in acceptable foreign currency and inwardly remitted in the Philippines, is indispensable and required by BCC to the design and fabrication of the structural steel bridges, the services are actually destined for consumption abroad and therefore would qualify for VAT zero-rating as the same would have clearly satisfied the requirements under the destination principle or cross-border doctrine. Considering the foregoing and since services to be rendered by FPBB to the non-resident foreign corporation BCC, consist of "project studies, information services; engineering and architectural design services" and the service fees are to be paid by BCC to FPBB in foreign currency and accounted for in accordance with the rules and regulations of the BSP, your opinion that the service fees received by FPBB qualifies for automatic zero-rated value-added tax (VAT) pursuant to Section 108 (B)(1) and (2) of the Tax Code, as amended, as implemented by Section 4. 102-2 (b)(2) of Revenue Regulations (RR) No. 5-96 is hereby confirmed. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group