VAT Ruling No. 083-91

October 14, 1991 VAT RULING NO. 083-91 Punongbayan & Araullo 6th Floor Vernida IV Bldg. Alfaro Street, Salcedo Village 1200 Makati, Metro Manila Attention: Atty . Rosario S . Bernaldo General Manager Gentlemen : This refers to your letter dated September 27, 1990 requesting clarification on the tax liability of your client, ETSI, where, under a contract between Siemens AG Germany (Siemens) and PLDT involving delivery by the former to the latter of sophisticated telecommunications equipment and new technology of installing and commissioning the same, ETSI, as the sole executing agent of Siemens in the Philippines will undertake the actual installation of modern equipment through technical expertise channeled/provided by Siemens. cdta It appears that ETSI is a domestic corporation and an affiliate of Siemens AG; that Siemens and PLDT entered into a multi-million dollar contract involving the delivery of new equipment and technology to modernize PLDT's telecommunications network in the Philippines; that because of the huge foreign exchange requirements, and Central Bank restrictions, some portions of the contract were denominated in Philippine pesos which were subsequently subcontracted to ETSI; that by denominating certain portions of the contract in pesos which Siemens subcontracted to ETSI, PLDT is able to obtain Siemens' technology without having to pay for it in foreign currency; that, by channeling its expertise through ETSI which receives payment in pesos, foreign exchange is saved; that although the contract is originally between PLDT and Siemens, ETSI becomes an inseparable party in its execution; that without resorting to this scheme, the huge foreign exchange requirement for all the equipment and services cannot be met because of restrictions on foreign exchange remittances. A certification by the Security Bank also show that foreign exchange have actually been remitted by Siemens to ETSI, as working capital of the latter in executing the project. In reply, please be informed that under Section 102(a)(2) of the Tax Code, services other than processing, manufacturing or repacking goods for other persons, the considerations for which is paid for in acceptable foreign currency inwardly remitted and accounted for in accordance with the rules and regulations of the Central Bank of the Philippines, shall be subject to the Value-Added Tax at zero percent. Under Revenue Memorandum Circular No. 47-88 dated September 12, 1988, portion of freight collection being used to pay for services rendered to foreign vessels while docked in the Philippines ports are deemed inwardly remitted provided prior Central Bank approval is secured to deduct said fund from its remittable freight collections. In substance, the sale of services is zero-rated provided it is paid for in foreign currency which is "inwardly remitted" and remittable pesos collections which are saved from being actually remitted abroad are considered "inwardly remitted". Since the contract between PLDT and Siemens (Germany) requires the latter to supply equipment and technology, huge foreign exchange outlay would have been required to pay for them. By entering into a sub-contract arrangement with ETSI, Siemens is able to bring into the Philippines some of the stipulated equipment and technology from Germany the dollar equivalent of which to the extent that is saved from being remitted abroad may be considered "inwardly remitted". In fact, the peso payments made by PLDT to your client which are not remitted abroad are used by your client for working capital requirements. Furthermore, Siemens has already inwardly remitted to your client the amount of US$5,490,940.75 for working capital requirements for the PLDT project . Accordingly, the peso payments by PLDT for Siemen's equipment and technology supplied through you may be zero-rated pursuant to Section 102(a)(2) of the Tax Code subject to the provision of Section 8(d), Revenue Regulations No. 5-87 in view of the Central Bank's conformity that payments under the foregoing terms and conditions are deemed inward remittance of foreign currency. However, equipment brought to the Philippines pursuant to the Siemens-PLDT contract shall be subject to 10% VAT under Section 101(a) of the Tax Code. cdti Very truly yours, JOSE U. ONG Commissioner of Internal Revenue