BIR Ruling [DA-014-05]

January 19, 2005 BIR RULING [DA-014-05] 25 (B); 42 (C) (3); #059-98; #132-97 George V. Ongkeko 398 F. Ortigas, New Zaniga Mandaluyong City S i r : This refers to your letter dated October 2, 2004 requesting on behalf of your clients, Zarcon Development Corporation ("ZDC"), Orzat Development Corporation ("ODC") and Carosal Development Corporation ("CDC") for a ruling that the professional fees paid and to be paid to Atlantic 3-Financial (Aust) Pty. Ltd of Australia are exempt from income tax and consequently to the creditable withholding tax because the services are rendered outside the Philippines. It is represented that ZDC, ODC and CDC, all affiliated companies, own a real estate property consisting of seven (7) contiguous lots for a total of 9,756 square meters located at the corner of EDSA and Guadix Drive ("Guadix Property"); that ZDC owns 3,911 square meters or 40.09%, ODC 2,845 square meters or 19.16% and CDC 3,000 square meters or 30.75%; that in 1998, CDC on its and its affiliates' behalf entered into a Financial Services Consultancy with Atlantic 3-Financial (Aust) Pty. Ltd. of Australia per enclosed Notice to Proceed for their planned Mixed-Use Development Project for their Guadix Property at total cost of $61,819; that when the financial structure and methodology showed favorable results, the affiliated companies agreed to proceed with the next step of the project that included the updating of financial model, test marketing of the project to prospective foreign investor, developers and financiers abroad, and drafting and finalizing the project document "Call for Expressions of Interest"; that the estimated cost for the above services was US$325,000 as defined in the proposal of Atlantic 3-Financial to ODC; that all the above services including the preparation of a financial mode, test marketing to prospective foreign clients, preparation of a "Call for Expressions of Interest" document were rendered abroad; and that the aforementioned costs were and still being shared by the affiliates based on their percentage of ownership in the Guadix Property. IDTcHa In reply, please be informed that Section 28(B)(1) of the Tax Code of 1997 which provides, to wit: "(B) Tax on Nonresident Foreign Corporation . (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%)." (Emphasis supplied) limits the taxability of a foreign corporation not engaged in trade or business in the Philippines to the income it derives from sources within the Philippines. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from a activity within the Philippines . ( Commissioner vs. BOAC & CTA, G.R. Nos. 65773-74, April 30, 1987 ). Since the services rendered by Atlantic 3-Financial (Aust) Pty. Ltd. of Australia consisting among others, the preparation of a financial model, test marketing to prospective foreign clients, preparation of a "Call for Expressions of Interest" are done outside the territorial jurisdiction of the Philippines, the professional fees to be paid to Atlantic 3-Financial (Aust) Pty. Ltd. of Australia are considered as income from without the Philippines pursuant to the aforequoted provision of the Tax Code of 1997. Accordingly, inasmuch as a nonresident foreign corporation is subject to tax only on income from sources within the Philippines, the professional fees made by ZDC, ODC and CDC to Atlantic 3-Financial (Aust) Pty. Ltd. of Australia are not subject to income tax and consequently to the creditable withholding tax. TDcEaH This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group