BIR VAT Zero-rating in Section 108(B)(2), NIRC on Ph BPOs and service exporters

By: Garry S. Pagaspas, CPA

Philippine manpower is one great economic contributor and no wonder business process outsourcing (BPO) industry is performing well. Notably, a business process outsourcing in the Philippines can be owned 100% by foreign investors provided they export at least 60% of its output to clients/ customers outside Philippines or should they intend to register with Philippine Economic Zone Authority (PEZA) for non-fiscal and fiscal incentives such as income tax holiday (ITH) and/or 5% gross income taxation, they would need to export at least 70% of its output. This allowed foreign ownership explains why business process outsourcing entities in the Philippines could be registered with he Securities and Exchange Commission (SEC) under the Revised Corporation Code (RCC) in a number of legal entities fully owned or controlled by foreign investors, e.g. one-person corporation with foreign investor as single stockholder, Philippine subsidiary, Philippine branch, and regional operating headquarters (ROHQ), among others.  

I have seen a number of BIR findings during tax assessments imposing 12% VAT on supposedly zero-rated sales of BPO and service exporters in Philippines for alleged failure to comply with VAT zero-rating rules under Section 108(B)(2) of the Tax Code, as amended. In my interactions with clients, client-representatives, participants, colleagues, and taxpayers, in general, the question on VAT zero-rating for business process outsourcing in Philippines and service exporters is quite common and this article is humbly presented to share views on requirements and documentation for VAT zero-rating of business process outsourcing and service exporters.

For value added tax (VAT) purposes, Section 108(B)(2) of the Tax Code, as amended, provides for VAT zero-rating of sales of services and quoted hereunder:

“(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:“

“X x x”

“(2)          Services other than those mentioned in the preceding paragraph, rendered to a person engaged in business conducted outside the Philippines or to a nonresident 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 Bangko Sentral ng Pilipinas (BSP);”

From the above provision, what are then the requirements for VAT zero-rating of BPOs and service exporters? Let us answer this as follows:

1. Nature of service provided

First to note in Section 108(B)(2) of the NIRC, as amended, is on the nature of the service, that is other than processing, manufacturing or repacking of goods.

Undeniably, business process outsourcing services in Philippines squarely falls under this nature of service requirement. Accounting services or legal services to foreign clients such as giving opinions and professional assistance on their intention to set-up in Philippines likewise falls under this.

2. Non-resident clients or customers doing business abroad

Second and more technical is that the applicant’s customers or clients are “person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed”.

Some court interpretations (e.g. Chevron case, CTA EB Nos. 1509 and 1509, 21 March 2018) provide that an SEC Negative Certification saying among others that the person or entity named in the certification is not licensed to do business in the Philippines, and the customer’s/ client’s certificate/ articles of incorporation/ association in its home country.

This would mean that the Philippines BPO or service exporter would need to secure with SEC a negative certification for each and every client that would involve some cost, along with the client’s certificate of registration that is normally consularized or apostilled, if applicable and preferred. They are not required to be submitted, but very relevant during tax assessment or upon application for VAT refund on excess input VAT on zero-rating.

3. Foreign currency denomination

Third to note is the phrase “consideration for which is paid for in acceptable foreign currency”.

This could mean that the denomination of such contract or agreement was in foreign currency and that the same is acceptable in Philippines as not all foreign currencies are acceptable in Philippine for trade or commerce. At any rate, actual payment could be more controlling and it should be in such acceptable foreign currency, e.g. US Dollars, Australian Dollars, and Singaporean Dollar, among others.

4. Payment accounted under BSP rules and regulations

The fourth to note is on the phrase “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)”.

This would mean that the payment in foreign currency payment should have been accounted for in accordance with BSP rules and this would relate to BSP rules on disposition of export proceeds (e.g. CB Circular No. 1389). The common practice in this area is inward remittance or wire transfer from foreign bank of the client/ customer of such foreign currency to the local bank account of the Philippine business process outsourcing or service exporter and with the local bank’s reporting with BSP, the requirement is being complied with. To document compliance, the common practice is for the Philippines BPO or service exporter to secure from the local bank a Certificate of Inward Remittance for each and every payment or a Certification on such inward remittances within the covered period.

Some rulings in the past provided for exemptions from inward remittance relative to BSP CB Circular No. 1389, such as offsetting of payables and receivables in both foreign currencies. The current times provides for more options to remit foreign currencies such as online payment platforms, money remittances, and the likes but the question is whether or not they would comply with the requirement on remittance in accordance with BSP rules.

5. VAT Zero-rating substantiations and reports

Aside from the above rules prescribed under Section 108(B)(2) of the Tax Code as amended, Revenue Regulations No. 16-2005 on invoicing requirements, on filing of VAT returns, and submission of reports are also relevant for VAT zero-rating on BPOs in Philippines and service exporters. Zero-rated sales must be issued a BIR-registered official receipts with VAT zero-rated written or imprinted prominently on the face of the official receipts and the other details indicated accordingly. Such zero-rated sales should also be declared in VAT returns or BIR Form Nos. 2550M and 2550Q, and as well indicated in the quarterly summary list of sales.

Summary    

12% VAT is the general rule and 0% VAT is an exception so ensuring compliance with the technical rules and documentation is indispensable to avoid headaches during BIR tax assessments where zero-rated transactions are imposed 12% on alleged failure to comply with VAT zero-rating. Business process outsourcing companies are common targets of this kind of findings and some of them unfortunately ends up paying such an avoidable tax had they just been aware of the proper documentation for VAT zero-rating for BPOs and service exporters.

Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for two (2) decades helping further taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has likewise been helping out local and foreign investors/clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services such as securing Ph Visa, payroll, and business consultancy. He was formerly with the academe and is presently a frequent speaker of Tax and Accounting Center, Inc. and other seminar entities.

Disclaimer: This is for purposes of academic discussions only as personally summarized by the author, not of Tax and Accounting Center, Inc. and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.