VAT Ruling No. 035-01

June 13, 2001 VAT RULING NO. 035-01 Sec. 108 (A) (B) 000-00 Chato Eleazar Liboro & Santos Law Office 8th Floor, Strata 2000, Emerald Avenue Ortigas Center, 1065 Pasig City Attention: Victor Y . Elazar Partner Gentlemen : This refers to your letter dated April 19, 2000, requesting for a ruling on whether the pre-need services rendered to the regional or area headquarters (RHQ) of GLOBAL MARINE SYSTEMS LIMITED (Global), by your client, PACIFIC PLANS, INC. (Pacific), are subject to an effective zero-percent (0%) rate value-added tax (VAT). It is represented that Pacific has sold pre-need retirement/pension plans to the RHQ in the Philippines established by Global; that Global, formerly known as Cable & Wireless (Marine) Ltd., is a multinational corporation organized and existing under the laws of England; that said RHQ is licensed under Securities and Exchange Commission License No. BS-FM-034 dated August 23, 1990 (as amended in January 24, 2000); and that Global has been authorized to establish a regional warehouse in the Philippines, subject to certain conditions, under Certificate of Authority No. 004 dated February 8, 1991 issued by the Board of Investments. Based on the foregoing, it is your opinion that services rendered to a regional or area headquarter (RHQ), a regional operating headquarter (ROHQ), and a regional warehouse (RW) established in the Philippines by multinational companies are subject to zero-percent (0%) value-added tax (VAT), by virtue of the enactment of Republic Act (R.A.) No. 8756, an Act amending certain provisions of Executive Order (E.O.) No. 226, otherwise known as the Omnibus Investments Code of 1987. In reply, please be informed that Section 108 (B) of the National Internal Revenue Code (Tax Code) of 1997 provides, viz: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. "(A) . . . "(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 : "(1) . . .; "(2) . . .; "(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; "xxx xxx xxx." On the other hand, Section 65 of E.O. No. 226, as amended by R.A. No. 8756, provides as follows, viz : "ARTICLE 65. Value-Added Tax . The regional or area headquarters established in the Philippines by multinational companies shall be exempted from value-added tax . In addition, the sale or lease of goods and property and the rendition of services to regional or area headquarters shall be subject to zero percent (0%) VAT rate as provided for in the National Internal Revenue Code, as amended . " Regional operating headquarters shall be subject to the ten percent (10%) value-added tax as provided for under the National Internal Revenue Code, as amended ." Under the aforequoted Section 108(B)(3), to be eligible for zero-rating, (1) the exemption of the person or entity with whom a VAT-registered person enters into a transaction must be provided under a special law (or international agreement); and (9) the exemption effectively subjects such transaction to zero rate. aHTDAc In this case, it is clear from Article 65 of EO No. 226, as amended, that RHQs are exempt from VAT and that services rendered thereto are subject to the zero-percent (0%) VAT rate. Such being the case and since the said EO is a special law, the supply of services (i.e., sale of pre-need plan) to the RHQ of Global by Pacific shall be effectively subject to the zero-percent (0%) VAT rate. Please be reminded, however, that for Pacific to avail of the zero-percent rate, it is required to obtain an approved application for effective zero-rating, pursuant to Section 4.107.1(d) of Revenue Regulations 7-95, as amended. With regard to services rendered to ROHQs by VAT-registered persons, it remains subject to the ten-percent (10%) VAT rate, pursuant to the said Article 65. As to services rendered to RWs established in the Philippines by multinational companies, none has been provided on this point by EO No. 226, as amended by RA No. 8756, as to its non-VAT taxability. Thus, services rendered in the Philippines to RWs established by multinational companies are subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997, provided the taxpayer's gross annual sales and/or receipts exceeds P550,000, otherwise said taxpayer, without opting to be VAT-registered, shall be liable to the percentage tax under Section 116 of the same Tax Code. Please be guided accordingly. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue