VAT Ruling No. 034-04

November 8, 2004 VAT RULING NO. 034-04 Sec 108 (B) R.A. 8756 VAT Rule 075-02 Romulo Mabanta Buenaventura Sayoc & de los Angeles Attorneys at Law 30th Floor Citibank Tower, Citibank Plaza 8741 Paseo de Roxas, Makati City Philippines Attention: Atty. Jacqueline Romero-Laurel Gentlemen : This refers to your letter dated March 22, 2004 requesting for and in behalf of your client, Maersk Administrative Center Limited (MAC), confirmation of your opinion that its sale of services to its foreign affiliates is entitled to the benefit of the zero percent (0%) value added tax (VAT). It is represented that MAC is duly registered with the Securities and Exchange Commission as a regional operating headquarters (ROHQ) in the Philippines; that it is a multinational company organized under the laws of Hong Kong and has foreign affiliates located worldwide, all of which are part of the A.P. Moller-Maersk A/S Group; that MAC is authorized to engage in general administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistics services, research and development services and product development, technical support and maintenance, data processing and communications and business development; that initially, MAC, through its Philippine ROHQ, will provide documentation services to its affiliates; that MAC will assist in the preparation of bills of lading through computerized means; that employees of the ROHQ will sort out and type in data using a particular system used by Maersk companies necessary for shipping companies; that a bill of lading required by a Maersk company can just be printed out since the necessary information has been provided by the Philippine office; that various Maersk offices around the world will be linked by computer systems and any Maersk company outside the Philippines will know at any time the shipping activities in which it is involved; and that MAC's services shall be paid for by its foreign affiliates at cost plus a pre-determined mark-up in foreign currency and shall be accounted for in accordance with the rules and regulations of the Banko Sentral ng Pilipinas. In reply, please be informed that the ROHQ of multinational companies is governed by Book III, Omnibus Investments Code of 1987 (the investment code), as amended by Republic Act No. 8756, and defined as follows, "Regional Operating Headquarters shall mean a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets". ROHQ's activities in the Philippines shall be limited only to any of the following qualifying services: General administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, corporate finance advisory services, marketing control and sales promotion, training and personnel management, logistics services, research and development services and product development, technical support and maintenance, data processing and communication, and business, development. The VAT treatment of the income generating activities of ROHQ's is specifically defined in the last paragraph of Article 65 of the said law which provides that "Regional operating headquarters shall be subject to the ten percent (10%) value added tax as provided for in the National Internal Revenue Code." This statutory provision is implemented through the last paragraph of Section 14 of the Implementing Rules and Regulations (IRR) of the investments code, thus "In general, the regional operating headquarters shall be subject to the ten percent (10%) value-added tax unless otherwise provided under the National Internal Revenue Code, as amended or other existing laws". Section 4.102-2(b)(2) of Revenue Regulations (RR) No. 6-97, amending RR 7-95, implementing Section 108(B)(2) of the Tax Code of 1997, provides that "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines of 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", shall be subject to zero percent (0%) rate provided they are rendered by VAT-registered persons. In VAT Ruling No. 075-02 dated November 11, 2002, it was held that the services of an ROHQ, particularly customers services, content work, accounting services and technical support which are all rendered to and received by its non-resident foreign affiliates, paid for in US dollars and accounted for in accordance with the rules and regulations of the BSP "are basically a sale of information services to a non-resident foreign client, hence, embraced under Sec. 108(B)(2), NIRC of 1997, as implemented by the above-quoted Sec. 4.102-2(b)(2), Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, thus, entitled to the benefit of the zero percent (0%) VAT." Such being the case, MAC's services of providing documentation services to its affiliates, and assistance in the preparation of bills of lading constitutes sale of information services by an ROHQ. CTEaDc Accordingly, your instant request for confirmation that the sale of services by MAC to its foreign affiliates the proceeds of which are paid for in acceptable foreign currency accounted for in accordance with the rules and regulations of the BSP is entitled to the benefit of zero percent (0%) VAT rate is hereby confirmed. This ruling is being issued based on the foregoing representations. However, if upon investigation it shall be discovered 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 & Inspection Group