VAT Ruling No. 005-99

January 13, 1999 VAT RULING NO. 005-99 105, 108-000-00-005-99 Gulf Express Corporation Ground Floor Manila Banking Building 6772 Ayala Avenue, Makati City Attention: Mr . Leonardo A . Anyayahan Audit Manager Gentlemen : This refers to your letter requesting for a ruling as to whether or not the commission earned by the general sales agent of a foreign air carrier can be considered as zero-rated. It is represented that Gulf Express Corporation (GEC) , a domestic corporation duly organized and existing under Philippine Laws, is a VAT-registered company; that it acts as the general agent of Gulf Air Company (GAC), a foreign air carrier with principal office in Bahrain, pursuant to a contract executed by the parties on July 1, 1995; that its income are foreign currency-denominated and purely commissions earned as agent of GAC; that GAC's Branch Office in the Philippines has been automatically deducting the commissions due from its remittable revenues in effecting the remittance to the Head Office thru authorized agent banks; that, in effect, acceptable foreign currency is constructively remitted to GEC by the foreign principal and which is being accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP), and that in view of these, you consider GEC as a zero-rated taxpayer under the Section 102(a)(2) of the Tax Code of 1997, as amended. In reply, please be informed that our VAT law, which was first adopted and promulgated under E.O. 273, effective January 1, 1988, is basically a Consumption Type VAT System and, in general, follows the destination principle or Cross Border Doctrine. Under the VAT System, VAT exemption and VAT zero-rating are distinguished as follows: "...zero-rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his PRICE or cut payments to his factors of production (capital and labor).This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero rate." [VAT Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C.,1988, p. 51] "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade; the origin principle (exports taxable, imports exempt) or the destination principle (exports exempt, imports taxable)." [Value-Added Tax (VAT) by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz: "the country taxes all value-added, at home and abroad, or goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable. This is comparable with the consumption type VAT."] Accordingly, the onus of taxation under our VAT System is in that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. (Sections 105 and 108, Tax Code of 1997) llcd Section 108(B), Tax Code of 1997, is implemented by Section 3(b) of Revenue Regulations No 7-95, as amended by Section 4.102-2(b) of Revenue Regulations No. 5-96, as follows: "SEC. 3. Zero-rating . (a) ... xxx xxx xxx (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: xxx xxx xxx (2) Services other than repacking goods for other persons doing business outside the Philippines of goods which are subsequently exported, as well as services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs 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 BSP." The sale of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code of 1997, are limited to such sales which are destined for consumption outside of the Philippines. prLL As sales agent of GULF AIR COMPANY, an international airline company, GEC is paid commission for services rendered in the Philippines in behalf of its foreign principal. The situs of services rendered is within the Philippines and it is here where such services are used or consumed. Therefore, GEC's sale of services must be subject to the 10% VAT rather than the 0% VAT, regardless of whether its compensation for services rendered be paid in foreign currency actually or constructively remitted. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group