WHEN a regional operating headquarter (ROHQ) based in the Philippines renders qualifying services to its affiliates, subsidiaries or branches outside the Philippines but the resulting goods from these services aredirectly exported to the ROHQ’s parent company outside the Philippines, which, in effect, means that the services were directly rendered by the ROHQ to its parent company, is this transaction subject to value-added tax (VAT)?
Section 108 of the National Internal Revenue Code (NIRC) provides for the transactions subject to zero-percent rate of VAT. The processing, manufacturing or repacking of goods for other persons doing business outside the Philippines, which goods are subsequently exported, and the services 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, are subject to zero-percent VAT. It may appear that services rendered by the ROHQ based in the Philippines to its parent company outside the Philippines are subject to zero-percent VAT, but this is not true.
The services rendered by an ROHQ based in the Philippines to its parent company outside the Philippines do not fall under the transactions subject to zero-percent VAT rate.
In the case of Accenture Inc. vs. Commissioner of Internal Revenue (GR 190102, 11 July 2012), the Supreme Court ruled that “the recipient of the service must be doing business outside the Philippines for the transaction to qualify for zero-rating under Section 108[B] of the Tax Code.”
Under Republic Act (RA) 8756, or the Omnibus Investments Code of the Philippines, an ROHQ is defined as 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.
In the decision of the Court of Tax Appeals (CTA) in the case of “Institutional Shareholder Services Inc., Philippine ROHQ vs. Commissioner of Internal Revenue” (CTA Case 7662, 03 June 2010), it held that, from the definition of ROHQ under the Omnibus Investments Code, the recipients of the qualifying services, to be rendered by ROHQ, are limited only to its affiliates, subsidiaries or branches. It pointed out that the phrase “other persons doing business outside the Philippines” contemplated in Section 108 of the NIRC is deemed to pertain only to “affiliates, subsidiaries or branches” of the ROHQ as enumerated under RA 8756.
The CTA further held that the parent company of an ROHQ may not be considered as an affiliate, subsidiary or branch for the simple reason that ROHQ and its parent company must be considered as one and the same entity for purposes of taxation. ROHQ is a mere administrative arm of the parent company, and through the establishment of an ROHQ, the parent company may now do business and derive income in the Philippines from the qualifying services rendered by the ROHQ to its affiliates, subsidiaries or branches. The mother company is considered as doing business in the Philippines through its ROHQ.
The requirement for VAT zero rating that the recipient of the services must be other persons doing business outside the Philippines is not met. Thus, transactions between the ROHQ and its parent company do not fall under zero-rated VAT transactions.
An ROHQ cannot be deemed to enter into “sale transactions” with its parent company since they are considered to be one and the same entity. Thus, there is no transaction where the zero-rated VAT may be applied.
However, as a precautionary measure, it will be more prudent for an ROHQ having this kind of transaction with its parent company to request for a specific ruling from the Bureau of Internal Revenue, so that any issue may be formally and properly ruled upon based on its peculiar circumstances. This way, the taxpayer will have a concrete, valid and legal basis on how it shall treat and apply taxes.
For comments, you may e-mail me at lpkapunan@kapunanlaw.com.