Dulay Pagunsan & Ty Law Offices

January 21, 2008 BIR RULING [DA-024-08] 23 (F); (28) (B) (1); 57 (A); 108 (A) 173-01 Dulay Pagunsan & Ty Law Offices 4/F Bee Lu Building 103-113 Sen. J. Gil Puyat Avenue 1306 Pasay City Attention: Atty. Brigido J. Dulay Gentlemen : This refers to your letter dated January 21, 2008 requesting on behalf of your client Cyber City Teleservices (Phils.),Inc. (CCTP) for confirmation of your opinion that CCTP's income payments in the form of service fees, to CCT Group Ltd. (CCTG) are not subject to: 1. Income Tax under Sections 23 (F) and 28 (B) (1) of the Tax Code and consequently to Withholding Tax under Section 57 (A) of the same Code; and 2. Value-Added Tax (VAT) pursuant to Section 108 (A) of the same Code. EDACSa It is represented that CCTP is a domestic corporation duly organized and registered under the laws of the Republic of the Philippines; that it is located at 2528 Corporate Office, Cyber City IT Park, Apo Court, Sergio Osmea Road, Clark Freeport Zone, Pampanga, Philippines; that it is a Clark Development Corporation registered service enterprise; that it is duly registered with the Board of Investments and entitled to the income tax holiday incentive; that CCTG, on the other hand, is a foreign corporation organized and existing under the laws of Cayman Islands with address at HSBC Financial Services (Cayman) Limited, 2nd Floor Strathvale House, 90 North Church Street, P.O. Box 1109, Grand Cayman KY1-1102, Cayman Islands; that it is engaged in the business of holding investments; that it has no permanent establishment in the Philippines; that on September 21, 2007, CCTP entered into an Agreement with CCTG whereby CCTG will provide investments services to CCTP and for which CCTG shall receive service fees; and that under the said agreement, CCTG shall perform all the services under the Agreement entirely in the Cayman Islands. cdll In reply, please be informed as follows: 1. As a general rule, Section 23 (F) of the 1997 Tax Code in relation to Section 28 thereof, provides that a foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines and received during the taxable year, at the rate equal to thirty five percent (35%) of the gross income. CcAIDa For the purpose of determining which income is considered not of Philippine source, Section 42 of the Tax Code enumerates the following items of gross income as income from sources without the Philippines, to wit: 1. Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; 2. Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; 3. Compensation for labor or personal services performed without the Philippines; 4. Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or got the privilege of using without the Philippines patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and 5. Gains, profits and income from the sale of real property located without the Philippines. ESHcTD Thus, income derived by non-resident foreign corporations for services rendered outside the Philippines is not subject to Philippine income tax and consequently to withholding tax. (BIR Ruling No. 173-01 dated September 24, 2001) Accordingly, since CCTG shall perform all the services under the Agreement entirely in the Cayman Islands, outside of the Philippine taxing jurisdiction, income payments received by them from CCTP are considered income from without the Philippines, hence exempt from income tax and consequently from the withholding tax. HTaSEA 2. Pursuant to Section 108 (A) of the 1997 Tax Code, a value-added tax (VAT) equivalent to 12 percent (12%) shall be imposed on the gross receipts derived by any person engaged in the sale of goods or services in the Philippines. The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. Conversely, services performed outside the Philippines are not subject to VAT. In the instant case, since the services to be rendered by CCTG will be done outside the Philippines, they shall not be liable to pay the VAT. Hence, since the service fees therefore shall not be subject to the twelve percent (12%) VAT, no VAT may be passed on by CCTG to CCTP. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service