Meaning of “accounted for in accordance with the rules and regulations of the BSP” in sales of services to non-residents subject to 0% VAT

[Originally posted on 07Dec2012]

[Last updated on 13Nov2023]

Under Section 108(B)(1) and (2) of the Tax Code, as implemented by RR No. 16-2005 as amended, the following services performed in the Philippines by VAT- registered persons 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 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, 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). 

So what exactly is “accounted for in accordance with the rules and regulations of the BSP” in relation to the VAT zero-rating on certain sales of services to non-residents? 

In VAT Ruling No. 047-00 dated October 26, 2000, the BIR had the occasion to interpret the meaning of the said phrase, citing BSP Circular No. 1389, as follows: 

The term "and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)" is implemented by BSP Circular No. 1389 dated April 13, 1993 the pertinent portion of which provides: 

Sec. 20. Disposition of Export Proceeds. — Foreign exchange receipts, acquisitions or earnings of residents from exports may, at the option of said exporter, be sold for pesos to AABs or outside the banking system, retained, or deposited in foreign currency accounts, whether in the Philippines or abroad and may be used freely for any purpose. 

Over time, BSP Circular No. 1389 has been replaced by the BSP with the Manual of Regulations on Foreign Exchange Transactions or simply the “FX Manual” which provides for the consolidated regulations governing all foreign exchange transactions. Section 20 now reads as follows: 

Section 20. Disposition of Export Proceeds. Foreign exchange receipts, acquisitions or earnings of residents from exports may be used freely for any purpose. Such proceeds may, at the option of the exporter, be sold for pesos, retained, or deposited in foreign currency accounts, whether in the Philippines or abroad. 

Under the latest FX Manual issued by the BSP, exporters are thus given the following options regarding the disposition of their foreign currency earnings and proceeds, to wit: 

(1) be sold for pesos 

(2) retained 

(3) deposited in foreign currency accounts, whether (a) in the Philippines or (b) abroad. 

In practice, the disposition of foreign currency proceeds is usually done via a combination of these options. 

In an export sale of services, it is more common for sellers to require payment via wire transfer to their nominated foreign currency deposit account in the Philippines (i.e., deposited in foreign currency accounts in the Philippines as described under #3) and have the said bank convert a specified amount to pesos upon the seller’s instruction (i.e., be sold for pesos under #1). 

As proof of compliance with being “paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP” for VAT zero rating purposes, sellers of services falling Section 108(B)(1) and (2) of the Tax Code would traditionally present to the BIR a copy of their validated bank statements, or a certificate of inward remittance issued by the bank. 

But while this arrangement is not common, what would happen if the foreign currency proceeds were instead deposited by the seller to its bank account maintained abroad? Can the seller still enjoy VAT zero-rating on their sale of services to non-residents in this case? 

In BIR Ruling DA-(VAT-020) 341-08 dated October 24, 2008, the BIR held that in order for the sale of services by a VAT-taxpayer to non-resident foreign clients be qualified for VAT zero rating, the services should be paid for in foreign currency and accounted for through our local banking system. 

In the above ruling, the use of the phrase “accounted for through our local banking system” implies that the remittance and maintenance of proceeds in a local bank is a requirement for the satisfaction of the condition that the foreign currency is “accounted for in accordance with the rules and regulations of the BSP”. 

The same conclusion was likewise reached by the BIR in BIR Ruling No. 455-11 dated November 16, 2011 and subsequently in BIR Ruling No. 413-12 dated June 15, 2012, where the BIR held in both rulings that in order that the sale of service to a non-resident foreign corporation will qualify for VAT zero-rating the same should be "remitted inwardly and accounted for in accordance with the rules and regulations of the BSP". 

It may be recalled that an "inward remittance" of foreign currency was required by the previous VAT law under Executive Order No. 273 dated July 25, 1987 as a condition to qualify a transaction as subject to 0% VAT. It should be noted that this requirement can no longer be found in the provisions of the current VAT law, i.e., Republic Act 9337 and its later amendments. 

However, as it is, this requirement appears to be contrary to the old BSP Circular No. 1389 and the following BSP FX Manual which expressly allow exporters to deposit their foreign currency proceeds to their bank account abroad. 

Nonetheless, in BIR Ruling No. VAT-104-2022 dated March 30, 2022, the BIR appears to require only the reporting of the foreign currency collection to the BSP. Citing the case of Commissioner of Internal Revenue vs. Citco International Support Services Limited-Philippine ROHQ (C.T.A. EB Case No. 2015 dated November 29, 2019), the BIR held that the proceeds of the foreign currency that was paid and received by the seller in consideration for the services rendered to non-residents must be accounted for to the BSP. While the BIR did not explicitly mention any requirement that the foreign currency proceeds be remitted inwardly, the BIR likewise did not elaborate on the manner of the said reporting to the BSP. 

However, it is clear that failure to show that the services were paid for in acceptable foreign currency, regardless of the disposition of such foreign currencies - whether in a bank account maintained abroad or in a foreign currency bank deposit account maintained locally, will result to the disqualification of such sales for VAT zero-rating, or even worse, such sale will be subjected to 12% VAT in the Philippines.  

To avoid potential VAT exposure, sellers of services to non-residents falling under Section 108(B)(1) and (2) of Tax Code must maintain a local bank account where clients could remit the foreign currency payments, pending the final resolution on this issue.

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