Teresa Marble Corporation

January 11, 2008 BIR RULING [DA-008-08] 25 (B); 42 (C) (3), DA-175-07 Teresa Marble Corporation 117 Shaw Boulevard Pasig City Attention: Ms. Annie G. Dee Gentlemen : This refers to your letter dated October 22, 2007 stating that Teresa Marble Corporation (TMC) is a domestic corporation engaged in mining, supply, distribution and installation of marble and marble products to local and foreign buyers. In a Consultancy and Sales Commission Agreement between TMC and Mr. Kim Kihyun, a national and resident of South Korea, whose principal address is at 85-7 Hyun Hi Dong, Seodaemum-Gu, Seoul, Republic of Korea, the latter will provide TMC with the following services: cIEHAC 1. Perform market research and analysis in South Korea for TMC produced marble and marble products; 2. Promote TMC products by presentation and introduction of TMC made marbles to South Korean buyers; 3. Provide technical advice to TMC on the designs and quality of marble products acceptable by South Korean clients; 4. Provide technical as well as market advice to TMC on the latter's marble and marble products for sale and distribution to the Philippine-based South Korean clients or buyers with approving offices in Korea; and TAIEcS 5. From time to time, attend consultancy meetings with TMC not exceeding 120 days in a given year. the foregoing services are to be performed in South Korea but from time to time, Mr. Kim would need to visit the Philippines for consultancy meetings and other purposes which stay does not exceed 30 days at any given period and does not exceed 120 days in any given year. In the course of the Agreement, and through the efforts of Mr. Kim, TMC marbles were pre-qualified and approved in South Korea as to their design and quality, resulting in the sales and subsequent installation of the same with SH Enterprise, Inc., a South Korean company with operations at Subic Bay Freeport Zone. TMC as a result shall pay Mr. Kim in South Korea the sum of P4,008,782.64 representing his consultancy and commission fee as agreed upon in their Agreement. It is your opinion that payments made by TMC to Mr. Kim are not subject to Philippine income tax and so, TMC as the payor-corporation is not duty bound to withhold the taxes from the said income payment. Likewise, Mr. Kim being a non-resident alien individual not doing business in the Philippines and his professional fees deemed as income derived from sources outside the Philippines, the same should not be subjected to income tax and as such TMC need not file the BIR Form 1604-E (Annual Information Return of Creditable Income Taxes Withheld) for the said transaction. In reply, please be informed that Section 25 (B) of the Tax Code of 1997, as amended provides: "(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every non-resident alien individual not engaged in trade or business within the Philippines as . . . salaries, wages, premiums, annuities, compensation, remuneration, . . . a tax equal to twenty-five percent (25%) of such income." IDASHa Moreover, Sec. 23 (D) of the same Tax Code states that: "(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;" According to Section 23 (D), an alien individual like Mr. Kim is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, as stated in Section 42 (C) (3) of the 1997 Tax Code below: DcaECT "Sec. 42(C)(3). Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines;" Accordingly, since Mr. Kim is a non-resident alien individual not doing business in the Philippines and since his professional fees constitute income derived from sources outside the Philippines, it can be said that the same are not subject to income tax. It is to be noted that under Sec. 25 (A) (1) of time Tax Code of 1997, portions of which states that: ". . . A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'non-resident alien doing business in the Philippines', Section 22 (G) of this Code notwithstanding." The converse of the above-mentioned rule would mean that Mr. Kim is a non-resident alien individual who is not doing business in the Philippines, inasmuch as he had not stayed here for an aggregate period of 100 days during any calendar year. cHECAS In addition, the provisions of Article 14 of the RP-Republic of Korea Tax Treaty will show that the latter country was given the primary right to tax income derived by its residents from independent personal services, thus: "ARTICLE 14 INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable in that State. However, such income may be taxed in the other Contracting State: DaACIH a) if he has a fixed base regularly available to him in that other State for the purpose of performing his activities but only so much of the income as is attributable to that fixed base; or b) if his stay in that other State is for a period or periods aggregating 120 days or more in the calendar year. 2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." In the light of the foregoing, this Office is of the opinion that since the remuneration paid to Mr. Kim is not subject to Philippine income tax, TMC is not therefore mandated to deduct and withhold the income tax from the said income payment. DECSIT Corollary to the non-taxability of the income payment which, under both the 1997 Tax Code and the aforesaid Tax Treaty was not derived from sources within the Philippines, TMC is not required to withhold income tax from the amount of such payment under RR 2-98, as amended, thus: "Sec. 2.57.5. Exemption from Withholding The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, . . ." SHDAEC The payor-corporation is not duty-bound to file the BIR Form 1604-E on income subject to the expanded withholding tax, if the income is not in effect subject to income tax. The very purpose of requiring the filing of BIR Form 1604-E covering income payment which is not subject to the expanded withholding tax is to provide the BIR with a means to monitor the income taxation of taxable income. The requirement to file BIR Form 1604-E, however, with respect in particular to the income payments to Mr. Kim is unnecessary and redundant because, in the event that the nature of his income is changed to Philippine-source income and which correspondingly will change his status to that of a non-resident alien individual subject to Philippine income tax, TMC, under existing rules, is required to make an update of his registration status. (BIR Ruling No. DA-175-07 dated March 23, 2007) In view of the foregoing, this Office hereby confirms your opinion that: (1) the income payments to Mr. Kim are not subject to Philippine income tax; (2) the same are not subject to the expanded withholding tax; and, (3) TMC is not required to file BIR Form 1604-E (Annual Information Return of Creditable Income Taxes Withheld), with respect to such non-taxable income payments. 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 as null and void. DcCASI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service