VAT Ruling No. 032-03

June 30, 2003 VAT RULING NO. 032-03 108 (B) (2) VAT Ruling No. 005-99 VAT Ruling No. 049-00 VAT Ruling No. 024-00 Ms. Mirasol Patawaran Mercado 300 M. Ponce Street, Tibag Baliuag, Bulacan Dear Madam : This refers to your request for VAT ruling on the taxability of the inward remittances received by Philkoei International, Inc. (Philkoei) from Nippon Koei, Co. Ltd.., Japan (Nippon Koei) for services rendered relative to JBIC-funded government projects. It is represented that your client Philkoei, an engineering consultancy firm, is a domestic corporation; that 40% of its capital stock in owned by Nippon Koei, a foreign corporation organized and existing under the laws of Japan; that a contract for consultancy services for the Agrarian Reform Infrastructure Support Project Phase II was executed between the Department of Agrarian Reform (DAR) and Nippon Koei in association with Philkoei and Hydrotrerre Consultants Inc. referred therein as "Consultant" which project is to be financed by Loan Agreement No. PH-203 entered into between the Government of the Republic of the Philippines and the Japan Bank for International Cooperation (JBIC); that Article V of said contract provides that DAR agrees to seek exemption, reimburse or pay in behalf of Consultant for amounts paid on account of all taxes, duties, fees, levies and other impositions under the laws and regulations of the Philippines or any political subdivisions or agency thereof (other than personnel who are citizens or permanent residents of the Philippines); that according to the association agreement among Nippon Koie, Philkoei and Hydroterre Consultants, Inc., Nippon Koei will be the lead firm and will be responsible for the overall management and execution of services required from said government project and as such Nippon Koei is responsible in billing the services to DAR and collecting therefrom; that for the specific engineering and architectural designs to be performed by Philkoei relative to such project it shall Nippon Koei who shall be responsible in paying the same based on the method of payment provided for under Article 9 of the Association Agreement; and that for payments made by Nippon Koei to Philkoei, the same are paid for in foreign currency inwardly remitted. In view of the foregoing facts, you now request for clarification on whether the inward remittance received by Philkoei from Nippon Koei with respect to services rendered relative to the said JBIC-funded project is subject to zero-rated sales, effectively zero-rated or exempt sales? It is your contention that such is treated as zero-rated and its basis of claiming refund for the VAT paid on such sales of services is on the decision made by the Court of Tax Appeals in the case of Nichimen Corporation - Philippine Branch, petitioner , vs. The Commissioner of Internal Revenue, respondent ( CTA Case No. 5470, February 16, 1999 ) In reply, please be informed that Section 4.102-2(b)2 of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 5-96 provides for the automatic zero-rating of " Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for 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 ." Based on the foregoing provision, it would seem that your sale of services to Nippon Koei, a non-resident foreign corporation falls squarely on transactions that may be subject to zero-rate VAT. However, please take note that such services rendered by Philkoei to Nippon Koei are intended to be used in a JBIC-funded project of DAR which is located in the Philippines. ICTacD Our VAT law, which was first adopted and promulgated under E.O. 273, effective January 1988, is basically a Consumption Type VAT System and, in general follows the destination principle or Cross Border Doctrine. The onus of taxation under this type of VAT System is in that country where the goods, property or services are destined, used or consumed. This is the reason why under our VAT law, goods, property or services destined, used or consumed in the Philippines are subject to ten percent (10%) VAT whereas those destined, used or consumed, outside the Philippines are subject to zero percent (0%) VAT. Therefore, the sale of services subject to zero percent VAT based on the provision cited above is limited to such sales which are destined for consumption outside the Philippines. ( VAT Ruling No. 049-00 dated October 30, 2000 and VAT Ruling No. 005-99 dated January 13, 1999 ) Inasmuch as the situs of the services rendered by Philkoei is within the Philippines, and it is here where such services are used or consumed, such services therefore is subject to ten percent (10%) VAT. Thus, the 10% VAT on inward remittances paid by Philkoei which is now the subject of claim for tax refund is, therefore, denied for lack of legal basis. Moreover, since such services rendered are related to a JBIC-funded project of DAR, such VAT paid shall be passed on to Nippon Koei, it being the lead firm consultant of the project, which shall then pass on such VAT to DAR. DAR in accordance with the agreement, is therefore obligated to reimburse Nippon Koei of the VAT paid out of its local funds. As the implementing government agency of such JBIC-funded project, DAR should not impose the 8.5% creditable VAT withholding prescribed under Section 114(C) of the Tax Code of 1997 pursuant to Revenue Memorandum Circular No. 42-99. ( VAT Ruling No. 24-00 ) The Court of Tax Appeals in the case of Nichimen Corporation - Philippine Branch, petitioner , vs. The Commissioner of Internal Revenue, respondent (CTA Case No. 5470, February 16, 1999) will not apply in this case for the facts attendant therein are different from the facts of the instant case. In the said case, the issue of situs of services has never been raised and the amount being claimed for tax credit/refund is the excess input taxes paid on account of zero-rated VAT sales of services, whereas in the case at bar, the issue is one where the situs of the services is rendered in the Philippines and that what is being claimed for refund is the 10% VAT paid on the sale of services which were paid for in foreign currency inwardly remitted in accordance with rules and regulations of the Bangko Sentral ng Pilipinas. Accordingly, the aforesaid decision can not be invoked as a precedent in the herein request. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Service