BIR Ruling [DA-024-03]

January 30, 2003 BIR RULING [DA-024-03] 42, 106, 108 059-98; 39-95 Puyat Jacinto & Santos 12/F Manilabank Building, 6772 Ayala Avenue Makati City 1226 Attention: David B. Puyat Virginia B. Viray Gentlemen : This refers to your letter dated 3 February 2002 requesting on behalf of your client, SWISS-BELHOTEL MANAGEMENT LIMITED ("SwissBel"), for confirmation of the following: 1. The Marketing Fees, paid by Linden to SwissBel for services under the Agreement are considered as compensation rendered outside the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997 (Tax Code), hence, not subject to income tax pursuant to Section 28 of the Tax Code. Consequently, it is not subject to withholding tax; 2. The Marketing Fees paid by Linden to SwissBel for services performed by the latter is an ordinary and necessary business expense of Linden which are allowed as a deduction from its gross income pursuant to Section 34(A)(1) of the Tax Code; and 3. The Marketing Fees received by SwissBel from Linden for services rendered abroad are not subject to 10% VAT pursuant to Section 108 of the Tax Code. cADTSH It is represented that on 11 November 2001, SwissBel entered into a Marketing Agreement ("Agreement") with Linden Suites, Inc. ("Linden"); that Linden is a corporation organized and existing under Philippine laws, and is the proprietor of a mixed-use development known as "The Linden Suites" ("Suites") situated along San Miguel Avenue, Ortigas Center, Pasig City; that the Parties to the Agreement are not related corporations, and do not share any common ownership interests; that under the Agreement, SwissBel shall provide marketing and promotional services for the Suites; that the services shall be undertaken and rendered in areas exclusively outside the Philippines and shall be in relation to the promotion, marketing and publicity of the Suites in international markets world-wide; that it shall not be related to the activities or to promotion, marketing and publicity of the Suites within the territorial limits of the Philippines; that in consideration for the marketing services to be rendered by SwissBel, Linden shall pay marketing fees to the former; Linden shall likewise reimburse SwissBel for direct costs incurred in the performance of the services; and that for ease of reference, the total amount payable by Linden to SwissBel (fees plus reimbursements) shall hereinafter be referred to as "Marketing Fees." In reply, please be informed as follows: 1. The Marketing Fees paid by Linden to SwissBel 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 SwissBel for the Suites, in relation to the promotion, marketing and publicity of the Suites 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 Suites within the territorial limits of the Philippines, the Marketing Fees to be paid by Linden to SwissBel 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. 059-98 dated May 21, 1998 ) 2. With respect to the deductibility as ordinary and necessary business expenses under Section 34(A)(1) of the Tax Code of 1997 of the Marketing Fees to be paid by Linden to SwissBel under the Agreement, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. 3. Marketing Fees to be paid for services which shall be rendered outside the Philippines shall not be subject to the 10% 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 ) HSIDTE Under Section 106 and 108 of the Tax Code of 1997, VAT shall be imposed only on services performed in the Philippines. Since services to be rendered by SwissBel to Linden under the Agreement shall be rendered outside the Philippines, Marketing Fees paid to Linden for said services shall not be subject to the 10% VAT. 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group