VAT Ruling No. 053-02

September 12, 2002 VAT RULING NO. 053-02 Sec. 108 VAT 005-99 E-MoneyPlus, Inc. 9th Floor, ELJ Communications Center Building Eugenio Lopez Drive, South Triangle Quezon City Attention: Mr . Jerome V. Mejia Head/Operations Gentlemen : This refers to your letter dated October 6, 2000 requesting in effect for confirmation of your position that your sale of services to your "receiving agents" is subject to VAT at zero percent. You stated in your letter that E-MoneyPlus, Inc. (e-moneyplus) was incorporated on August 7, 2000 and that its primary purpose is to establish and maintain money remittance service; that initially, it will provide services for the processing of inward remittances received from "receiving agents" abroad; that it will collect a service fee and/or transaction fee from these agents periodically, which will be in the form of US dollar; Italian Lire, etc.; that all payments of agents are subsequently transferred to its foreign account in the Philippines through bank-to-bank transfers. In fine, your business is that of receiving foreign currency from abroad and delivering the same to the recipients in the Philippines for a fee in the form of acceptable foreign currency. You anchor your claim on Section 108(B)(2) of the Tax Code of 1997 which provides that 'services other than those mentioned in the preceding paragraph [referring to Section 108(B)(1)] 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' shall be subject to VAT at zero percent. In reply, please be informed that our VAT law, which was first adopted and promulgated under Executive Order No. 273, effective January 1, 1988, is basically a Consumption Type VAT system and, in general, follows the destination principle or Cross Border Doctrine. Under this System, VAT exemption and VAT zero-rating are distinguished as follows: ". . . zero-rating should be used when 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 is 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." [VAT Tax International Practice and Problems, Allan A. Tait, International Monetary Fund, Washington D.C. 1988, p. 51] "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 (exports 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, or 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 that country where goods, property or services are destined, used or consumed. This is the reason why under our VAT law, goods, property or services destined to, used or consumed in the Philippines are subject to the 10% VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. (Sections 106 and 108, Tax Code of 1997). Sections 108(B), Tax Code for 1997, is implemented by Section 4.102-2(b) of Revenue Regulations No. 5-96, as follows: (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 structural 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 sale of services subject to zero percent (0%) VAT under Section 108(B)(2) of the Tax Code of 1997 is limited to such sales which are destined for consumption outside the Philippines. E-moneyplus is paid a consideration or fee for services rendered in the Philippines in behalf of the "receiving agents" who are based abroad. The situs of services rendered is within the Philippines and it is here where such services are used or consumed. Therefore, the sale of service by e-moneyplus must be subject to the VAT at 10% rather than 0%, regardless of whether, or not, its compensation for services rendered is paid in foreign currency actually or constructively remitted (VAT Ruling No. 005-99) Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO B. GUEVARA Deputy Commissioner Legal & Inspection Group