Private and Confidential

To Ms. A Date 9 September 2011

From KPMG Ref

cc Mr. B

Gentlemen:

This refers to your email query dated 05 September 2011 relating to Value Added Tax (VAT) and non-
VAT Official Receipts (ORs) issued by your suppliers.

Background

Our understanding of the facts is as follows:

XXX Company (the Company) is a domestic corporation registered with the Philippine Economic Zone
Authority (PEZA) as 100% exporter of information technology (IT) services. The Company currently
enjoys the 5% preferential tax rate in lieu of all national and local taxes.

Notwithstanding its enjoyment of the 5% preferential tax rate, the Company remains to be a VAT
registered entity.
Currently, the Company receives non-VAT ORs from a third party service provider it contracted for its
accounting requirements.

On the other hand, the Company receives VAT ORs from the lessors of condominium units it leased for
the accommodation of its expatriates. The lessors do not subject the Company’s rental payments to 0%
VAT for the reason that the condominium units being leased are outside the IT Building where the
Company is located.

The Company is now requesting clarification on the following concerns:

1) Are there tax risks to the Company associated with its acceptance of the non-VAT ORs issued by
the provider of the accounting services?

2) Is the Company required to report to the Bureau of Internal Revenue (BIR) its receipt of non-VAT
ORs? Would the obligation to report the Company’s acceptance of non-VAT ORs differ if it would later
on engage 50% in export and 50% in local sales?

3) Since the lessors of the condominium units do not charge the Company 0% VAT, is it possible to
claim that the rentals for the condominium units should be subject to 0% VAT because the Company is a
100% export entity?

Discussion

We provide our comments to your specific queries below.

1) Tax risks on the Company’s acceptance of Non-VAT ORs

We believe that there is no tax risk to the Company in accepting the non-VAT ORs from the accounting
service provider.
The invoicing requirements under the National Internal Revenue Code (Tax Code) and the VAT
regulations are imposed on the seller - the accounting services provider in this case. In the event that
the non-VAT ORs actually pertain to sales subject to 12% VAT or 0% VAT, it is the seller who will be
subject to administrative penalties on erroneous issuance of ORs and potential deficiency VAT.

Further, considering that the Company is registered with PEZA as 100% exporter of IT services and
enjoying 5% preferential tax rate, the Company should not recognize input VAT either for crediting such
input to output VAT or for purposes of refund.

2) Reportorial requirements on VAT exempt purchases as substantiated by Non-VAT ORs

At the onset, we note that as a PEZA registered exporter enjoying 5% preferential tax rate, the Company
should not be a VAT registered entity. It is therefore advisable for the Company to consider amending
its registration with the BIR.

In any case, since the Company is a VAT registered entity, it is obliged to file the pertinent VAT
declarations and returns and the corresponding attachments of such declarations and returns. In this
regard, it is obliged to submit to the BIR its quarterly summary list of purchases which itemizes its
purchases subject to VAT and those which are VAT exempt. We reiterate, however, that there appears
to be no risk on the part of the Company if it reports as part of the quarterly summary list of purchases
the non-VAT purchases from the accounting services provider.

We believe that the obligation of the Company to include the non-VAT purchases in its quarterly
summary list of purchases applies for as long as the Company is VAT registered. This is true whether the
Company engages in local sales. Please note, however, that the Company should comply with PEZA
rules and regulations before engaging in local sales.

3) Lease of condominium units outside the IT Building

Since the condominium units rented by the Company are outside the IT Building, such rent will be
subject to 12%VAT notwithstanding that the Company is a 100% export enterprise.
In BIR Ruling No. DA-202-08, dated 28 March 2008, the BIR categorically ruled that since the hotel in the
said ruling is not in the PEZA zone, the payments of a PEZA-registered customer for accommodation in
such hotel would be subject to 12% VAT. The BIR explained that where the supplier of services is a VAT-
registered taxpayer, the sale of services to a PEZA-registered enterprise may be subject to 0% VAT if the
services are rendered within the PEZA zone and such services are rendered in connection with the
registered activity of the PEZA-registered buyers. On the other hand, if the service is rendered within
the customs territory - i.e. the hotel is outside the PEZA zone - such sale of service by the VAT-registered
person shall be subject to the 12% VAT irrespective of the status of the buyer as PEZA-registered
enterprise.

Also in BIR Ruling No. 033-99, dated 23 March 199, the BIR ruled that the lease of houses for the
expatriate employees of the PEZA-registered enterprise, which houses are outside the PEZA zone, shall
be subject to VAT (then 10%).

Applying the above rulings, regardless of the fact that the Company is a 100% PEZA-registered export
enterprise, since the condominium units being leased are outside the IT Building, the rentals for such
condominium units will be subject to 12% VAT. We believe there is no other basis to claim 0% VAT on
the rentals of the condominium units.

* * *

We trust the foregoing will be sufficient for your purposes. If you have any question, please let us know.

Notice and Disclaimer

Our advice/report is limited to the conclusions specifically set forth herein and is based on the
completeness and accuracy of the stated facts, assumptions and/or representations included. In
rendering our advice, we may consider tax authorities that are subject to change, retroactively and/or
prospectively, and any such changes could affect the validity of our advice. We will not update our
advice for subsequent changes or modifications to the law and regulations, or to the judicial and
administrative interpretations thereof.
This advice/report has been prepared for the sole benefit of XXX Company and is based on the specific
facts and circumstances of XXX Company and is issued pursuant to the terms of our engagement letter.
It should not be relied upon by any other person. Any other person choosing to rely on this advice does
so at their own risk. To the fullest extent permitted by law, Manabat Sanagustin & Co., CPAs accepts no
responsibility or liability to them in connection with the Services.

Very truly yours,

MANABAT SANAGUSTIN & CO., CPAs