VAT Ruling No. 075-02

November 11, 2002 VAT RULING NO. 075-02 R.A. 8756 000-00 SGV & Company 6760 Ayala Avenue 1226 Makati City Attention: Joel I. Tan-Torres, Partner, Tax Division SUBJECT : Paragon Travel Limited (PARAGON) Gentlemen : This refers to your letter, dated May 14, 2002, requesting for a confirmation that PARAGON's 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 PARAGON is duly registered with the Securities and Exchange Commission (SEC) as a "Regional Operating Headquarters" (ROHQ) in the Philippines; that, its head office is located in Hongkong; that, its foreign affiliates are located in Hongkong and in Singapore; that, PARAGON's sale of services to its foreign affiliates consist of the following: Customer services . Consisting of processing hotel reservations and bookings placed by guests through the Website and coordination with the respective hotels or the wholesalers to confirm the hotel reservations and bookings; Content work . Which refers to the population of the Website for the required hotel information, rates, customers reviews, and other relevant information, as well as the performance of hotel visits and on-site hotel inspection and reviews; Accounting Services . Consisting mainly of bookkeeping services for the head office and the foreign affiliates; and Technical Support . Consisting of application development as well as maintenance, technical and functional support of the Website together with all other application systems and Quickbooks. That, PARAGON's services is paid for by its foreign affiliates, at cost plus a predetermined mark-up, in terms of US dollars which is duly accounted for in accordance with the rules and regulations of the Bangko Sentral Ng Pilipinas (BSP). In reply, please be informed that the ROHQ of multinational companies is governed by Book III, Omnibus Investments Code of 1987, as amended by R.A. No. 8756, 1 and defined as follows: "(3) Regional Operating Headquarters (ROHQ) 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 ." 2 ROHQs' activities in the Philippines shall be limited only to any of the following Qualifying Services ; 3 "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." ROHQs shall be subject to special tax procedures, as follows: " Art. 64 .4 Corporate Income Tax Incentive to Regional or Area Headquarters and Regional Operating Headquarters . Regional or area headquarters established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets shall not be subject to income tax. Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable income as provided for under the National Internal Revenue Code, as amended by Republic Act No. 8424: Provided, That any income derived from Philippine sources by the ROHQ when remitted to the parent company shall be subject to the tax on branch profit remittances as provided for in Section 28 (a) (5) of the National Internal Revenue Code." " Art . 65 .5 Value-Added Tax. The regional or area headquarters established in the Philippines by multinational companies shall be exempted from the 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 ." " Art . 66 .6 Exemption From All Kinds of Local Taxes, Fees, or Charges . The regional or area headquarters and regional operating headquarters of multinational companies shall be exempt from all kinds of local taxes, fees, or charges imposed by a local government unit except real property tax on land improvements and equipment. " Art . 67 .7 Tax and Duty Free Importation of Training Materials and Equipment ; Importation of Motor Vehicles. Regional or area headquarters and regional operating headquarters shall enjoy tax and duty free importation of equipment and materials for training and conferences which are needed and used solely for their functions as regional or area headquarters or regional operating headquarters and which are not locally available subject to the prior approval of the Board of Investments. "The sale or disposition of equipment within two (2) years after importation, entered tax and duty free, shall require prior approval of the Board of Investments and prior payment of applicable taxes and duties waived in favor of RHQ/ROHQ. "Regional or area headquarters and regional operating headquarters shall be entitled to the importation of new motor vehicles subject to the payment of the corresponding taxes and duties." Art. 65, supra ; Omnibus Investments Code of 1987, as amended by R.A. No. 8756, in respect to the VAT on ROHQs, is implemented by SECTION 14 of its Inter-Agency Implementing Rules and Regulations (IRR), as follows: "SEC. 14. Value-Added Tax . Regional or area headquarters shall be exempted from the value-added tax. 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. "The regional or area headquarters shall not be required to obtain or secure a prior permit from the Bureau of Internal Revenue for Zero-Rating of the supplier's sale of goods and services to them. " 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 ." The above quoted proviso of the IRR means that, in general, the ROHQ of a multi-national company shall be governed by the VAT law, hence, liable to the 10% VAT on its sale of service, except on certain sale of service which, under the VAT law is, however, entitled to the benefit of the zero percent (0% VAT). Section 108 (B) (2), National Internal Revenue Code, as amended by R.A. No. 7716 and R.A. 8241, and as renumbered by R.A. No. 8424, provides that the following sale of services, made by a VAT-registered person, shall be entitled to the benefit of the 0% VAT: "(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) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); "(2) Services other than those mentioned in the preceding paragraph, 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 (BSP); "xxx xxx xxx." The law at issue in this case is the aforequoted provisions of Sec. 108 (B) (2) of the Code, which has its origin from Sec. 102 (a) (2), NIRC of 1977, as amended by E.O. No. 273, which heretofore provided as follows: "...Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: "xxx xxx xxx "(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines." The object of the above quoted law is "export of service" by a VAT-registered person, hence, the statutory requirement that the consideration therefor shall be in acceptable foreign currency which is remitted inwardly to the Philippines . The above quoted Sec. 102 (a) (2) 8 was amended by R.A. No. 7716, as follows: "(2) Services other than those mentioned in the preceding paragraph, 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 (BSP);" Per the said amendment, the proviso, " remitted inwardly to the Philippines ," was repealed. The reason for this repeal was, because at the time of the enactment of R.A. No. 7716, 9 the Foreign Exchange Deregulation under C.B . CIRCULAR NO . 1389 ,dated April 13, 1993, was already in place. However, the said amendment notwithstanding, the object of this law remains pertaining only to " export of service ." This law is implemented by Revenue Regulations No. 5-96, as follows: " 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.'" It appearing that PARAGON's services, namely the aforementioned " customers services ; content work ; accounting services ; and technical support ," are all rendered to and received by its non-resident foreign affiliates, and paid for in US dollars that is accounted for in accordance with the rules and regulations of the BSP, this Office believes and hereby rules that the same 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. 5-96, thus, entitled to the benefit of the zero percent (0%) VAT. (See also the Commissioner's VAT RULING No. 038-01, June 25, 2001, where it was held that sale of information services to a non-resident foreign client, paid for in acceptable foreign currency that is accounted for according to the rules of the BSP, is entitled to the benefit of the 0% VAT, pursuant to Sec. 108 (B) (2) of the Code, as implemented by Revenue Regulations No. 5-96). This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes 1. Enacted into law on Nov. 23, 1999. 2. R.A. No. 8756, Sec. 2 (3). 3. ART. 59 (b) (1), BOOK III, Omnibus Investments Code, as amended by SEC. 4, R.A. No. 8756. 4. ART. 64, CHAPTER IV, Omnibus Investments Code, as amended by SEC. 6, R.A. No. 8756. 5. Id. 6. Id. 7. Id. 8. Renumbered by R.A. No. 8424 as Sec. 108 (B) (2), effective Jan. 1, 1998. 9. Enacted into law on May 5, 1994. Implemented beginning January 1, 1996, pursuant to Revenue Regulations No. 6-95.