VAT Ruling No. 010-90

January 12, 1990 VAT RULING NO. 010-90 Westinghouse Electric SA Box 274 Commercial Center Post Office Makati Attention: Mr . Alan S . Frayco Budget and Finance Officer S i r s : This refers to your letters dated November 21, 1988 and April 10, 1989, requesting information if your sale of services may qualify for zero-rated value added tax under the provisions of Section 102(a)(2), of the Tax Code as amended. LLphil It is represented that Westinghouse Electric SA-Phil. (WELSA PHIL.) is a Philippine branch office of WELSA SWITZERLAND; that WELSA PHIL. sells services to Westinghouse Electric Corporation-USA (WEC-USA); that WELSA PHIL. shall be paid compensation for services rendered to WEC-USA through its head office (WELSA SWITZERLAND) and which payment shall be contingent based on dividends that WELSA SWITZERLAND may receive from Westinghouse Asia Controls Corporation (WACC); that WACC shall deliver to WELSA PHIL. such amount of the dividends otherwise remittable to WELSA SWITZERLAND, in payment of WELSA PHIL. compensation for services rendered to WEC-USA. In reply, please be informed that, based on the foregoing mode of payment by WEC-USA for services rendered by WELSA PHIL., the herein sale of service transaction does not qualify for zero-rated value added tax under Section 102(a)(2), of the Same Code. To qualify for zero-rated VAT, the said law requires that the consideration for service rendered shall be paid by the buyer of service (i.e., by WEC-USA) in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines. The said requirement of the law is not satisfied because the said service will not be paid by WEC-USA in terms of foreign exchange inwardly remitted. Instead, it shall be paid in Philippine pesos through an indirect scheme wherein a local affiliate of your head office, Westinghouse Asia Controls Corporation (WACC) shall deliver to you the amount of dividends realized domestically but would have been remittable to WELSA Switzerland. Likewise, please be informed that your case is not embraced by the "deemed inward remittance of foreign exchange" provided in Revenue Memorandum Circular No. 47-88, which is limited only to freight remittances by international shipping lines to their respective foreign principals, i.e., the agent deducts/offsets from the gross amount of freight revenue to be remitted to his foreign principal, the amount corresponding to his service fees for services rendered to his foreign principal which means, the said foreign principal himself makes payment of the compensation. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue