BIR Ruling [DA-041-00]

January 20, 2000 BIR RULING [DA-041-00] Punongbayan and Araullo 6th Floor, Vernida IV Bldg. Alfaro SL, Salcedo Village Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated December 18, 1998 requesting on behalf of your client, Ben Line Agencies Philippines, Inc. (Ben Line) for a confirmation of your opinion that: 1. The remuneration paid by your client constitutes compensation for labor or personal service performed without the Philippines; and 2. The said remuneration constitutes as a deductible business expense from the gross income of Ben Line; It appears that your client, Ben Line, is a domestic corporation formed and organized under the laws of the Philippines; that it is registered with the Securities and Exchange Commission (SEC) on May 15, 1997; that it is engaged in the general business of shipping agency providing complete marine services as agents to ship owners, ship operators and managers and to any person, association, firm or corporation engaged in international or inter-island marine and maritime business, such as, but not limited to, acting as managers of ship or the crew, ship chandler, shipbroker and trading in marine supplies equipment, and other related services; that it entered into an agreement with E.G. Thomson (Shipping) Limited, (E.G. Thomson), a non-resident foreign corporation organized and existing under the laws of England; that under said agreement, E.G. Thomson would render the following services: 1) Look for shipowners, charterers, ship brokers or cargo owners overseas and recommend Ben Line to act as their ship agent in the Philippines; 2) Meet with prospective clients overseas to promote Ben Line; 3) Make representations to prospective clients overseas on behalf of Ben Line; and 4) Regularly communicate through telephone or in writing with Ben Line to supply information regarding the above-mentioned services; that Ben Line pays referral fees in consideration for E.G. Thomson's services performed outside the Philippines; that another non-resident Asian Company performed the same services outside the Philippines on behalf of Ben Line for which the former receives referral fees from the latter. In reply, please be informed that Section 42(C) of the Tax Code of 1997 provides, viz: "Sec. 42. Income from Sources within the Philippines "(A) . . . "(B) . . . "(C) Gross Income From Sources Without the Philippines The following items of gross income shall be treated as income from sources without the Philippines. (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 these 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 ; . . ." Likewise, Section 28(B)(1) of the Tax Code of 1997 provides: "Sec. 28. Rates of Income Tax on Foreign Corporations . "(A) Tax on Resident Foreign Corporations. "(B) Tax on Non-Resident Foreign Corporation. (I) 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, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income and capital gains . . ." Since a non-resident foreign corporation is subject to income tax only on income derived from sources within the Philippines, the fees paid by Ben Line to E.G. Thomson, a non-resident foreign corporation, for services performed without the Philippines are not subject to Philippine income tax and consequently to the 33% withholding tax effective January 1, 1999 prescribed by Section 28(B)(1) in relation to Section 57(A) of the Tax Code of 1997. The above-mentioned fees will qualify as a deductible business expense provided, however that no deduction from gross income shall be allowed under Section 34(A)(I) of the Tax Code of 1997 unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or adequate records the amount of the expense being claimed as a deduction and that said expenses are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession of the taxpayer. Expenses which are 'ordinary and necessary' generally contemplate expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. (Gancayco vs. CIR, 1 SCRA 980, cited in BIR Ruling No. 085-89, dated April 26, 1989) Considering that the expenses being claimed by Ben Line are payment for services which are appropriate and helpful in the development of its business and directly related to its business, the same are properly deductible from its gross income. 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group