VAT Ruling No. 060-03

December 15, 2003 VAT RULING NO. 060-03 Sec. 108 (B) (2) VAT Ruling No. 009-99, 120-99, 005-99 Sia Martinez Sepulveda & Co. Suite 2D Valuepoint Condominium 227 Salcedo Street, Legaspi Village Makati City Attention: Ma. Teresita T. Supulveda, Partner Gentlemen : This refers to your letter dated April 24, 2001, requesting for confirmation of your opinion that the services rendered by your client, DAIICHI JITSUGYO PHILIPPINES, INC. (Daiichi Philippines) to Daiichi Jitsugyo, Japan (Daiichi Japan) is entitled to the benefit of the zero percent (0%) value added tax (VAT). It is represented that DAIICHI PHILIPPINES is a domestic corporation organized and existing under the laws of the Republic of the Philippines; that its principal place of business is at Unit 21022103 PSBank Building, Gil Puyat Avenue, Makati City; that it acts as the sales agent of Daiichi Japan; that sales orders are placed directly by a customer to Daiichi Japan and the latter ships and delivers the goods direct to the customer; that as remuneration for the sales and marketing services rendered by DAIICHI PHILIPPINES, Daiichi Japan pays commission to the former, computed on a monthly basis; that the Commission is paid for in Japanese Yen and inwardly remitted to the Philippines in accordance with the rules and regulations of the Bangko Sentral Ng Pilipinas. In reply, please be informed that VAT zero rating of sale of services made by a VAT-registered person is governed by Section 108 (B) (2) of the National Internal Revenue Code, as amended by R.A. No. 7716, and as renumbered by R.A. No. 8424. This law is implemented by Section 4.102-2 of Revenue Regulations No. 5-96, as follows: EIcTAD "Section 4.102-2 (b) (2) '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. " The Commissioner of Internal Revenue also ruled in two separate cases, as follows: "Clear from the foregoing provisions is the fact that the performance of certain services, to be qualified for zero-rating, must somehow translate to the export of goods or export activities, in general. This is consistent with the Cross-Border Doctrine of the VAT system which is being observed in this jurisdiction, i.e ., exports are exempt, imports are taxable. (VAT Ruling No. 009-99 dated January 21, 1999) . "Corollary to this, services performed in the Philippines, not otherwise embraced by the provisions on VAT exemption and VAT zero-rating, are subject to VAT. It appearing that you have entered into a contract as a sub-contractor for the construction of the Acrylic Dispersion Plant of BASF Philippines, Inc. at Canlubang, Laguna, you are therefore essentially rendering services in the Philippines and hence, the 10% VAT imposed under Section 108 of the Tax Code of 1997 applies. The fact that the payment for your services will be in foreign currency paid by a non-resident party does not, in itself, operate to entitle such locally-rendered service to zero-rating for VAT purposes." (VAT Ruling No. 120-99, dated December 10, 1999, in the case of SUMMA KUMAGAI, INC.) "The sale 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. "As sales agent of GULF AIR COMPANY, an international airline company, GEC is paid commission for services rendered in the Philippines in behalf of its foreign principal. The situs of services rendered is within the Philippines and it is here where such services are used or consumed. Therefore, GEC's sale of services must be subject to the 10% VAT rather than the 0% VAT, regardless of whether its compensation for services rendered be paid in foreign currency actually or constructively remitted" (VAT Ruling No. 005-99, January 13, 1999, in the case of GULF EXPRESS CORPORATION) Your client's services to DAIICHI JAPAN are basically and essentially rendered in the Philippines. It does not constitute the rendering of project studies, information services, engineering and architectural designs or other services similar thereto. Hence, its sale of service to DAIICHI JAPAN cannot qualify for the benefit of the 0% VAT, even if its services is paid for in foreign exchange. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group