VAT Ruling No. 017-92

February 26, 1992 VAT RULING NO. 017-92 NIRC Sec. 102 (a) (2) Precedent Ruling 000-00 Mindanao Shipbuilding Corporation, Inc. Caliclic Babak Samal Island Davao City Attention: Ms. Agnes Cordero Administrative Assistant Gentlemen : This refers to your letters dated December 10, 1990 and October 24, 1991 requesting a ruling as to whether your services of dewatering the earthquake-damaged Ambuklao Hydroelectric Plant of the National Power Corporation (NPC) in behalf of a foreign re-insurance company which paid for your services in foreign currency quoted at US Dollars 500,000.00 and remitted to the Philippines in accordance with Central Bank rules and regulations should be zero-rated. It appears that NPC's Ambuklao Dam was reinsured by a foreign insurance company; that as a result of extensive damage caused by the earthquake in 1990, the foreign insurance company became the party principally liable for its restoration; that although the contract for the dewatering services was entered into by and between NPC and MSC, the actual selection of the contractor was made through adjusters appointed by the insurers; and that you have stipulated that any claim in excess of the minimum contract amount shall be arbitrated between you and the insurers. It is significant to note that your engagement to perform the work of restoring the NPC's Ambuklao Dam is on a "No Cure, No Pay" basis. In other words, if the damaged dam is not rehabilitated, the insurance company, NPC, and consequently, the foreign insurer is not obligated to pay. In reply, we quote Section 102(a)(2) of the Tax Code stating: "Sec. 102. Value-added tax on the sale of services . xxx xxx xxx "That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: "(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for 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." Under the foregoing provision, sale of services to a foreign principal which is paid for in foreign currency and remitted inwardly in accordance with Central Bank rules and regulations is zero-rated. In the instant case, since NPC is the insured, while the foreign insurer is principally obligated to restore or rehabilitate the NPC's dam, it is the virtual principal, notwithstanding your Contract with NPC. Such being the case, since your contract with NPC requires you to rehabilitate its dam in behalf of a foreign insurer, you are in effect rendering service for a foreign principal and since you were paid in foreign currency remitted through the Central Bank you are entitled to zero-rating pursuant to Section 102(a)(2) of the Tax Code, as amended. SHADcT Very truly yours, (SGD.) JOSE U. ONG Commissioner of Internal Revenue