VAT Ruling No. 030-04

October 29, 2004 VAT RULING NO. 030-04 106 (A) (2) (b) Infophil, Inc. 106 Neptune Street, Bel-Air Makati City Attention: Mr. Eric Tomacruz Gentlemen : This refers to your undated letter clarifying the kind of services your company renders in connection with your request for VAT exemption. It is represented that your company provides services broken down into three major components such as, online shopping mall and delivery service wherein clients can purchase gifts, flowers and other items online while they are situated outside the country, and deliver to their relatives here in the Philippines, providing free on-line services to web-surfing consumers, and media to businesses who wish to advertise to those consumers; that a large majority of your users and members are the U.S. based, all of your paying advertisers are also clients of North America; that all the income you collect from said clients are in U.S. Currency to ease purchases on the client's part; and that all payments made for these are made through credit card charging. In reply, please be informed that Section 106(A)(2)(b) of the Tax Code of 1997 provides, viz : "SEC. 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax (2) [Zero-rated Sales] The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: . . . (b) Foreign Currency Denominated Sale. the phrase "foreign currency denominated sale means a sale to a non-resident of goods, except those mentioned in Section 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)." Therefore, when your non-resident client avails of your online shopping mall services and pays through credit card charging, said sale is a foreign currency denominated sale subject to value-added tax at zero percent (0%) rate. As represented, Infophil, Inc. provides services broken down into three major components, namely: 1. online shopping mall; 2. delivery services and 3. online services to web-surfing consumers and media to businesses who wish to advertise to consumers. Pursuant to Section 108(A) of the Tax Code of 1997, there shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchanges of services, including the use or lease of properties. However, paragraph (B)(2) of said Section provides, viz : "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of properties . . . . (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: . . . (2) Services other than those mentioned in the preceding paragraph, 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 (BSP)" Considering that your services, i.e., online shopping mall, delivery services and online services to web-surfing consumers and media to businesses who wish to advertise to consumers are paid for through credit card charging in U.S. currency, the same shall be subject to VAT at zero percent (0%) rate. Moreover, with respect to advertising service, the rule is, the same is taxable in the place where the service is rendered. Thus, Section 4.102-2(b)(2) of Revenue Regulations No. 7-95 as amended by Revenue Regulations No. 5-96, provides viz : "SEC. 4.102-2. Zero Rating . . . (b) Transactions subject to zero-rate . The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: SECS. 4.102.2(b)(2) Services other than processing, manufacturing, or repacking for other persons doing business outside the Philippines for foods 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 service, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." Since advertising service is not among the above enumerated services, it is subject to ten percent (10%) VAT pursuant Section 108 of the Tax Code of 1997 (then Section 102 of the 1977 Tax Code, as amended). TIDcEH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group