November 16, 2009

VAT RULING NO. 016-09

Sec. 108 (B); DA-154-06

Sycip Gorres Velayo & Co.

6760 Ayala Avenue, Makati
Metro Manila

Attention: Atty. Fabian K. delos Santos

Partner, Tax Division

Gentlemen :

This refers to your letter dated December 27, 2006 requesting on behalf of
your client, Lapanday Packaging Corporation (LPC), for confirmation of your
opinion that the payment for tolling services to be rendered by LPC to a non-resident
foreign corporation (NRFC) will be subject to zero percent (0%) rate VAT pursuant
to Section 108 (B) (2) of the Tax Code, as amended by Republic Act (RA) No. 9337,
without need of seeking prior approval or confirmation from the BIR.

It is represented that LPC is a corporation organized and existing under the

laws of the Republic of the Philippines. It is engaged in the manufacturing and trading
of packaging materials such as carton boxes, plastics, and registered with the BIR as a
VAT taxpayer. LPC will provide tolling services, [i.e., conversion of paper roll
material into knock down (KD) carton boxes] to a non-resident foreign corporation
(NRFC) not engaged in trade or business in the Philippines. The said NRFC is a buyer
of fresh produce (i.e., bananas) from local grower/supplier in the Philippines. As part
of NRFC's arrangement with the local grower/supplier of fresh produce, it will
shoulder the cost of packaging materials (KD carton boxes) to be used in the export
shipment of the fresh produce. On the other hand, NRFC will ship paper roll materials
to the Philippines and LPC will render tolling service by converting these paper roll
materials into KD carton boxes.

In consideration for the tolling services rendered by LPC, the same will be paid
by the NRFC in foreign currency inwardly remitted to the Philippines, and which will

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 be acknowledged by LPC with the issuance of a VAT-registered receipt duly stamped
with the words ZERO-rated. IEcDCa

Initially, it was noted by the VAT Committee that your request is wanting in
facts to allow an accurate determination on whether the tolling services will really be
rendered to a person engaged in business conducted outside the Philippines or to a
non-resident person not engaged in business who is outside the Philippines when the
services are performed. Hence, you were requested to submit the following to
substantiate your request for a ruling, viz.:

1. Identification of the NRFC;

2. Certificate of Non-registration of corporation or partnership from SEC

of the unnamed NRFC;

3. Relationship between LPC and the NRFC, i.e., subcontractor, agent,

etc.; and

4. Copy of the tolling service agreement to be entered into by the parties

indicating the scope of work/service and the duration of the agreement.

In compliance with the additional requirements requested from you, it was

ascertained that the NRFC alleged in your request for ruling is SUMISHO PAPER
COMPANY, LTD. (SUMISHO for brevity), a corporation organized and existing
under and by virtue of the laws of Japan which is not registered with the SEC to be
doing business here in the Philippines per your submitted 'Certification of
Non-Registration of Corporation/Partnership' issued by the SEC on December 22,
2006. Likewise, the tolling agreement between SUMISHO and LPC reveals that the
latter will manufacture for the former knocked-down cartons and pads using paper
materials to be supplied by SUMISHO. That in consideration for the performance by
LPC of its obligation under the agreement, SUMISHO shall pay LPC a processing fee
of One hundred twenty five U.S. Dollars (US$125.00) per metric ton of finished KD
cartons, which amount is inclusive of taxes and duties.

In reply, please be informed that Section 4.108-5 of Revenue Regulations (RR)

No. 16-05 implementing Section 108 (B) of the Tax Code, as amended by RA No.
9337, provides that the following services performed in the Philippines by a
VAT-registered person shall be subject to zero percent (0%) VAT rate.

"Section 4.108-5. Zero-Rated Sale of Services. —

xxx xxx xxx

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 (b) Transactions Subject to Zero Percent (0%) VAT Rate. — The
following services performed in the Philippines by a VAT-registered person
shall be subject to zero percent (0%) VAT 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 accumulated for in
accordance with the rules and regulations of the BSP;

(2) Services other than processing, manufacturing or

repacking rendered to a person engaged in business conducted
outside the Philippines or to a non-resident person not
engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for
in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP;
(Emphasis supplied) TIaCAc

xxx xxx xxx

In BIR Ruling [DA-154-06] dated March 27, 2006, this Office had the
occasion to hold that payments made by BEIERSDORF SINGAPORE PTE. LTD., a
non-resident foreign corporation, to all its suppliers of services such as media
advertisers, consultancy and the like which are being paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP,
are subject to 0%. Also in BIR Ruling [DA-167-06] dated March 27, 2006, it was
held that the foreign currency denominated service fees paid by foreign clients to
Zobella & Co., a VAT-registered firm engaged in the business of patent and
trademark registration, maintenance and other related services, are subject to
automatic zero-rated value-added tax (VAT) pursuant to Section 108 (B) (2) of the
Tax Code, as amended by RA 9337.

This principle was recently reiterated in BIR Ruling [DA-094-07] dated

February 15, 2007, wherein it was held that payments received by Meco Manning &
Crewing Services, Inc. (Meco) for providing or furnishing manning and crewing
services to foreign principals may automatically qualify as VAT zero-rated
transaction in accordance with Section 4.108-5 (b) of RR No. 16-2005 if Meco is a
VAT-registered taxpayer and that said services is paid for in U.S. Dollars inwardly
remitted and accounted for through our local banking system.

Accordingly, this Office is of the opinion that the tolling services rendered by
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 LPC to SUMISHO, a non-resident foreign corporation (NRFC) not doing business in
the Philippines, which are paid for in foreign currency inwardly remitted to the
Philippines duly accounted for in accordance with the rules and regulations of the
BSP, and which will be acknowledged by LPC with the issuance of a VAT-registered
receipt duly stamped with the words ZERO-rated, shall be subject to automatic
Zero-rated VAT pursuant to Section 108 (B) (2) of the Tax Code as amended by RA
9337, without need of seeking for prior approval or confirmation from the BIR.

This ruling is being 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,

Commissioner of Internal Revenue

By:

(SGD.) GREGORIO V. CABANTAC

Deputy Commissioner
Bureau of Internal Revenue

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