VAT Ruling No. 004-04

February 27, 2004 VAT RULING NO. 004-04 Sec. 108 (B) (2), 109 (v) VAT Ruling No. 006-02, 059-02 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr. R. R. Rubio Tax Division Gentlemen : This refers to your letter dated August 21, 2002, requesting, on behalf of your client, Provident Computer Consultants, Inc. Philippines (Provident-Phils.) , confirmation of your opinion that its gross receipts derived from off-shore development and outsourcing maintenance support services, which allegedly would have been subjected to zero percent (0%) value-added tax (VAT) under Section 108(B)(2) of the Tax Code of 1997, as implemented by Revenue Regulations No. 7-95, particularly Sec. 4.102-2(b)(2), had it been registered as a VAT-entity, are instead VAT-exempt pursuant to Sec. 109(v) of the same Code. It is represented that Provident-Phils. is the Philippine-branch of Provident Computer Consultants, Inc.-US (Provident-US), which is a corporation organized and existing under the laws of Pennsylvania, United States of America (USA); that Provident-Phils. was originally registered as non-VAT entity on April 23, 1997 and became a VAT-registered entity only last March 1, 2002; that, while being a non-VAT entity, it engaged in providing off-shore development and outsourcing maintenance support as a sub-contractor to the non-resident clients of its principal contractor, Pinkerton Computer Consultants, Inc. (Pinkerton), which is a USA resident; that such services substantially included the following: (a) Project screening and work definition assessment of its ability to supply technical, analytical and programming skills; provision of computer and communications network; and taking on all the risks involved; (b) On-site transition and project planning done after an agreement was reached with the client and involved development of a project plan and coordination on the preparation of the project site; (c) Off-site transition preparatory activities before the project went into full operation; (d) Development, maintenance and production support after the project went into full operation, all the works covered by the agreement were executed while maintaining constant communication with Pinkerton; and, that, in consideration of the said services, Provident-US, being the head office of Provident-Phils., and following the single entity concept (head office and Philippine-branch being considered as one and the same entity for tax purposes), billed Pinkerton, which then remitted the payment in US Dollars to Provident-Phils. It is likewise argued that, although the term "export sales" under Sec. 109(v) of the Tax Code of 1997 strictly pertains to sale of goods, the same principle should be applied to sale of services which is qualified for VAT zero-rating. You also argue in your supplemental letter dated June 17, 2003 that your position that Section 109 (v) of the Tax Code of 1997 includes the supply of services for export is consistent with the provision of Republic Act No. 7844, otherwise known as the "Export Development Act of 1994" under which the term "exporter" means any person, natural or juridical, licensed to do business in the Philippines, engaged directly or indirectly in the production, manufacture or trade of products or services which earns at least fifty percent (50%) of its normal operating revenues from the sale of its products or services abroad for foreign currency. You further mentioned that in the implementing rules and regulations for R.A. No. 7844, the term "services" refers to the supply of service for export in the following areas only: information technology services, construction services, consultancy and professional services and other services. LexLib In reply, please be informed that under Sec. 108(B)(2) of the Tax Code of 1997 (the Code), as implemented by Revenue Regulations No. 7-95, as amended by Rev. Regs. No. 6-97, more particularly Sec. 4.102-2(b) thereof, services rendered by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural design and other similar services, 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, shall be subject to a zero-percent (0%) value added tax (cited in VAT Ruling Nos. 006-02 and 059-02). On the other hand, Sec. 109(v) of the Code provides that export sales by persons who are not VAT-registered shall be exempt from the value-added tax: Accordingly, the off-shore development and outsourcing maintenance support services, which comes within the purview of information technology services, which Provident Phils. renders to the non-resident clients of its principal contractor, Pinkerton, and which are being paid for in acceptable foreign currency accounted for in accordance with the rules and regulations of the BSP, qualify for VAT zero-rating under Section 108(B)(2) of the Code, on the premise that Provident Phils. is a VAT-registered person. Considering, however, that from April 23, 1997 until the end of February 2002, Provident Phils. was still a NON-VAT person, its sale of the aforementioned services then was exempt from the value added tax, thus confirming your opinion. This ruling is being issued on the basis of the foregoing facts as represented. If, however, it will be disclosed later in an investigation that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO A. BUAG Deputy Commissioner Legal & Inspection Group