Aranas Consunji & Barleta

January 30, 2007 BIR RULING [DA-046-07] Section 108; DA-598-2006 Aranas Consunji & Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. Dela Costa Sts. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Arenas Gentlemen : This refers to your letter dated January 24, 2007 requesting, in behalf of your client, Philippine TRC Inc. (PTI) for confirmatory ruling on your opinion that the service fee to be directly paid by PTI to Toshin Rubber Chemical Co., Ltd. (TRC) for non-technical management support services is exempt from income, withholding, and value-added taxes as services rendered by a non-resident foreign corporation entirely in Japan are not subject to Philippine tax. It is represented that TRC is a company incorporated and existing under and by virtue of the laws of Japan, with principal office located at 192-4, Minamiyamanoue, Azabu, Oaza, Miyoshi-cho, Nishikamo-gun, Aichi, 470-0206, Japan; that on the other hand, PTI, is a corporation duly incorporated and existing under the laws of the Philippines, with principal office located at EPI Units 1 & 2, Lima Technology Center Special Economic Zone, 4217 Lipa City, Batangas, Philippines; that both TRC and PTI are similarly engaged in the business of manufacturing and assembling rubber, plastic and metal parts for printers, fax machines and related business machines; that on August 1, 2002, PTI and TRC entered into a Management Support Agreement to take effect on the same date; that under the said Agreement, TRC will undertake to render the following offsite assistance or services (to be performed entirely outside the Philippines): a. Marketing and Service activity for overseas customers of PTI; b. To review and analyze the accounting data of PTI; c. To counsel about capital investment and employment of PTI; and d. To perform managemental supporting activity for PTI; that all the above services shall be performed entirely in Japan and shall consist of advisory and consultancy services and shall not involve any transfer of technology, know-how or other intellectual property rights; that in consideration of the foregoing undertaking, PTI shall pay TRC a monthly service fee; and that in the event there will be a need for TRC to send personnel in the Philippines, the same shall not exceed the period or periods aggregating more than six months within any taxable year. In reply, please be informed as follows: The rule in this jurisdiction regarding tax situs is that the source of income is the property, activity or service that produced the income; the test of taxability is the "source" and the source of income is that activity which produced the income ( CIR v. British Overseas Airways Corporation , G.R. Nos. 65773-74, April 30, 1987). With regard to compensation for labor or personal services, the services performed within the Philippines, regardless of the residence of the payor, or of the place in which the contract for services was made, or of the place of payment, shall be considered as part of the gross income from sources within the Philippines (Section 155, Revenue Regulations No. 2). Stated differently, the situs of the income derived from labor or personal services is determined solely by the place where service is rendered ( CIR v. Japan Air Lines, Inc . G.R. No. 60714, October 4, 1991). Compensation from services performed abroad is considered income from sources without the Philippines. (BIR Ruling No. 464-93 dated November 19, 1993) Considering that the services that produce the income on the part of TRC are performed outside the Philippines, it follows that the income derived from the performance of such services is not taxable in the Philippines. Hence, TRC shall not be subject to income tax, and consequently, to the withholding tax on the service fee it receives from PTI pursuant to services under the Management Support Agreement. In regard to the liability for VAT, Section 108 of the Tax Code of 1997, as amended, provides that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. The same provision of the Tax Code provides that 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. Section 108 (A) of the same Tax Code clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines, (BIR Ruling No. DA-ITAD-90-04 dated August 24, 2004). Accordingly, since the subject services under the Management Support Agreement will not be performed in the Philippines, service fees to be paid by PTI to TRC are exempt from VAT. DCTHaS Article 7 of the R.P.-Japan Tax Treaty provides that if a non-resident foreign corporation carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as are attributable to that permanent establishment. "Permanent establishment" is defined under the R.P.-Japan Tax Treaty as follows, "Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes especially a store or other sales outlet, a branch, an office, a factory, a workshop, a warehouse, a mine, an oil or gas well, a quarry or other place of extraction of natural resources, or a building site or construction or installation project lasting more than six months." Since TRC does not have any permanent establishment in the Philippines to which its business profits may be attributed, the service fees paid by PTI to TRC for the management services shall be exempt from income and withholding taxes. (ITAD Ruling No. 056-05 dated June 16, 2005) 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 from that represented, then this ruling shall be considered null and void. tax2007cdasia Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service