VAT Ruling No. 027-04

October 20, 2004 VAT RULING NO. 027-04 Sec. 28 (B) & 105 Mr. Waldo Q. Flores Senior Deputy Executive Secretary Office of the President of the Philippines Malacaang, Manila Dear Mr. Flores : This refers to your letter dated February 24, 2004 requesting an opinion as to whether or not the overhaul repair/maintenance of the spare engine of the F-28 presidential jet is subject to VAT and/or other withholding taxes. It is represented that your Office is conducting a public bidding on the overhaul repair/maintenance of the spare engine of the F-28 presidential jet; that the subject engine is currently stored at Scotland; that the prospective bidders, both non-resident foreign contractors represented by their respective local agent, have signified their intention to participate in the public bidding; that the engine shall be delivered at the Villamor Air Base, 250th PAW Hangar, Pasay City, Philippines. In reply, please be informed that Sections 28(B) and 105, of the National Internal Revenue code, as amended, provide as follows: "Sec. 28. Rates of Income Tax on Foreign Corporations . "xxx xxx xxx "(B) Tax on Non resident foreign corporation "(1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines. "Sec. 105. Persons Liable . Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Section 106 to 108 of this Code. "xxx xxx xxx "The rule of regularity, to the contrary notwithstanding, services as defined in this code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." In the particular case presented, the person under question is a "non-resident foreign contractor" and the overhauling and maintenance services of the spare engine are to be rendered in Scotland where the engine was brought. It is evident therefore, that the services are to be rendered outside the territorial jurisdiction of the Philippines by a non-resident alien. Applying the aforecited provisions of the NIRC and for income tax and withholding tax purposes, only those income generated in the Philippines shall be subject to the taxes mentioned. In the case of non-resident alien who is doing business outside of the Philippines and whose services to be rendered to a Filipino clientele shall be performed abroad such as in this case, shall still be treated as services performed abroad by a non-resident alien not doing business in the Philippines. Such services rendered shall not be subject to income tax and withholding tax pursuant to Section 28(B). On the other hand, with respect to the Value Added Tax and as far as this particular transaction/undertaking is concerned, the same is not subject to the VAT. As earlier mentioned, the services shall be rendered by an alien doing business in Scotland. Pursuant to Section 105 of the Tax Code, services rendered in Scotland by non-resident foreign person in the ordinary course of trade or business is not subject to VAT. This means that the services rendered in the course of trade or business shall arise in the domestic market and not abroad to be subject to VAT. AaSTIH Accordingly, the income/gross receipts of the non-resident foreign contractors on the overhaul repair/maintenance of the spare engine of the F-28 presidential jet are not subject to VAT and/or other withholding taxes pursuant to Sec. 105, in relation to Sec. 28(B)(1) of the Tax Code of 1997. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group