SGV & Co.

January 5, 2007 BIR RULING [DA-002-07] 42, 106, 108; DA-024-2003 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention : Mr. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated July 6, 2006 requesting, on behalf of your client, International Hotel Licensing Company SA for confirmation of the following: 1. The marketing fees received by International Hotel from Cebu Insular for services under the Agreement are considered as compensation for services rendered outside the Philippines pursuant to Section 42(C)(3) of the Tax Code, hence, not subject to income tax pursuant to Section 28(B)(1) of the Tax Code and consequently, exempt from withholding tax; 2. The marketing fees received by International Hotel from Cebu Insular for services rendered abroad are not subject to 12% VAT pursuant to Section 108(A) of the Tax Code. ICESTA It is represented that Cebu Insular is a corporation organized and existing under the laws of the Philippines; that it entered into an International Services Agreement (Agreement) with Marriott International, Inc., (Marriott) a corporation organized and existing under the laws of the United States of America; that subsequently, Marriott assigned its rights under the Agreement to International Hotel, a non-resident foreign corporation organized and existing under the laws of Luxembourg; that the Agreement in part provides for the rendition of marketing services that consists primarily of the promotion and marketing of Cebu Insular in international markets; that all the marketing work under the Agreement is to be performed outside the Philippines; and that in consideration for such services, Cebu Insular pays a fee equivalent to 1.5% of hotel revenues. DTSaHI In reply, please be informed as follows: 1. The Marketing fees paid by Cebu Insular to International Hotel for services rendered under the Agreement are considered income from sources without the Philippines under the Tax Code of 1997 and, as such, are not subject to income tax and consequently, to withholding tax. Section 42 of the Tax Code of 1997 enumerates those which shall be considered as income from sources without the Philippines. It provides "SEC. 42. Income from Sources Within the Philippines. "xxx xxx xxx "(C) Gross Income from Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (3) Compensation for labor or personal services performed without the Philippines; "xxx xxx xxx" Since the marketing and promotional services which shall be provided by International Hotel for the hotel, in relation to the promotion, marketing and publicity of the Hotels in international markets world-wide, shall be undertaken and rendered in areas exclusively outside the Philippines and shall not be related to the activities or to promotion, marketing and publicity of the Hotels within the territorial limits of the Philippines, the marketing fees to be paid by Cebu Insular to International Hotel for services performed outside the Philippines shall be considered as income from sources without the Philippines which shall not be subject to Philippine income tax. (BIR Ruling No. DA-024-2003 dated January 30, 2003 and BIR Ruling No. 059-98 dated May 21, 1988) 2. Marketing fees to be paid for services which shall be rendered outside the Philippines shall not be subject to the 12% VAT since VAT is imposed only on the sale or exchange of goods and services performed in the Philippines, in accordance with the provisions of Section 106 and 108 of the Tax Code of 1997 (BIR Ruling No. 39-95 dated February 23, 1995) Under Sections 106 and 108 of the Tax Code of 1997, as amended, VAT shall be imposed only on services performed in the Philippines. Since services to be rendered by International Hotel to Cebu Insular under the Agreement shall be rendered outside the Philippines, Marketing fees paid to Cebu Insular for said services shall not be subject to the 12% VAT. HSDCTA This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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