VAT Ruling No. 040-98

November 23, 1998 VAT RULING NO. 040-98 108 (B) (2)-000-00-040-98 Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Ms . Tomasa H . Lipana Managing Partner Gentlemen : This refers to your letter dated February 24, August 17 and August 23, 1998, requesting opinion on whether or not your client, Marsman Tours and Travel Corporation, is entitled to zero-rated value-added-tax on its sales of services (tour package, individual services, travel agency) to foreign tourists. It is represented that your client is engaged in the business of Travel and Tours Agency, that it offers various services like (1) tour package, (2) individual services and (3) travel agency, provided in the following manner; (1) Tour Package Foreign tourists who come to the Philippines are provided with various facilities like hotel room, meals, transportation, tour guide, and other related services by the facility provider or in some cases by a sub-contractor contracted by your client. The facility provider bills your client (in the latter's own name) for services rendered and facilities provided (inclusive of VAT, where applicable).Upon receipt of the above billing, your client prepares the billing to its foreign counterpart. Payments are made by its foreign counterpart in foreign currency inwardly remitted to the Philippines, inclusive of the portion payable by your client to the facility provider. In some cases, your client receives payments in foreign currency from the local offices of multinational companies or private individuals. (2) Individual Services Your client sells the tour components to the tourists (not as a package) as follows: (a) room only; (b) room with breakfast or full board; (c) transportation only; (d) transportation with guide. Your client derives income from these services in the form of mark-up added to the amounts billed by the facilities providers (such as hotels or transportation contractors).Payments for services rendered to foreign tourists are normally received by your client on foreign exchange which are accounted for in accordance with the Rules & Regulations of the Bangko Sentral Ng Pilipinas while payments for services rendered to domestic tourists are generally received by your client in Philippine peso. (3) Travel Agency As travel agents, your client sells tickets or passage documents to its customers. Your client's margin does not exceed 9% of the gross selling price of such tickets or passage documents. In reply, please be informed of the following: 1. Under the Value-Added-Tax (VAT) System, exemption from VAT and Zero Percent (0%) are distinguished, as follows: "...,zero rating should be used when the authorities really wish to ensure that a product is to be free of VAT. Using an exemption for VAT means that the tax is borne by the trader, and if that trader sells to the public, he must pass on the tax on input to the public in his price or cut payments to his factors of production (capital and labor).This suggests that countries that generally wish to pass on to the consumer the benefits of VAT-free goods and services should be allowed to use the zero rate." [Value Added Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington, D.C.,1988, p. 51] Our VAT law, which was first adopted and promulgated under EO No. 273 effective January 1, 1998, basically adhered to the Consumption Type VAT Regime and, in general, follows the destination principle, viz: "When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade: the origin principle (exports taxable, imports exempt),or the destination principle (export exempt , imports taxable) ." [Value-Added-Tax VAT by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz: " the country taxes all value-added , at home and abroad , of goods that have as their destination the consumers of that country . Exports are exempt , imports are taxable . This is comparable with the consumption type VAT ."] Accordingly, the onus of taxation under our VAT system is in the country where goods, property or services are destined and consumed. This is the reason why under our VAT Law, goods, property or services destined to or consumed in the Philippines are subject to the 10% VAT whereas exports are zero-rated. (Sections 105 and 108, Tax Code of 1997) LLpr Section 3(b)(2) of Revenue Regulations No. 7-95, as amended by Section 4.102-2(b)(2), Revenue Regulations No. 5-96 (implementing regulations of Section 108(B)(2), of the Tax Code of 1997 amended by R.A. 7716) provides: "SEC. 3. Zero rating . ... "(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: xxx xxx xxx (2) Services other than repacking goods 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." The sales of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code of 1997, are limited to such sales which are destined for consumption outside of the Philippines in that such services are tacked-in as part of the cost of goods exported. The zero-rating also extends to project studies, information services, engineering and architectural designs and other similar services sold by a resident of the Philippines to a non-resident foreign client because these services are likewise destined to be consumed abroad. The phrase "project studies, information services, engineering and architectural designs and other similar services" does not include services rendered by travel agents to foreign tourists in the Philippines following the doctrine of ejusdem generis ,since such services by travel agents are not of the same class or of the same nature as those enumerated under the aforesaid section. Considering that the services by your client to foreign tourists are basically and substantially rendered within the Philippines, it follows that the onus of taxation of the revenue arising therefore, for VAT purposes, is also within the Philippines. For this reason, it is our considered opinion that the tour package services of your client to foreign tourists in the Philippines cannot legally qualify for zero-rated (0%) VAT but rather subject to the regular VAT rate of 10%. 2. With respect to the individual services offered by your client, considering that the service is destined and consumed substantially within the Philippines, for the same rationale as discussed above, your client's gross receipts from tourists (whether domestic or foreign tourists and whether received in foreign exchange or in Philippine peso) shall be subject to the 10% VAT. However, your clients shall be entitled to input tax credit on their purchases of goods and services from VAT-registered suppliers and facilities providers provided the same are covered by VAT-registered sales invoices or receipts. 3. Relative to your client's sale of tickets or passage documents to customers as travel agents, wherein your clients' margin does not exceed 9% of the gross selling price of such tickets or passage documents, your gross receipts therefrom shall, likewise, be subject to 10% VAT (limited to the said margin) pursuant to RMC No. 7-98. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue