Manabat San Agustin & Co.

January 30, 2008 BIR RULING [DA-054-08] 28 (B) (1) & 108 A; DA-514-06 Manabat San Agustin & Co. 22/F Philamlife Tower 8767 Paseo De Roxas Makati City 1226 Attention: Atty. Herminigildo G. Murakami Tax Principal Gentlemen : This refers to your letter dated June 18, 2007 requesting on behalf of your client, MHE-Demag (P) Inc. ("MDPI") for a ruling that services done or performed outside of the Philippines by non-resident foreign corporation service providers are not subject to Philippine income tax; consequently, not subject to Philippine withholding tax, and also not subject to the value-added tax ("VAT"). It is represented that MDPI, formerly known as MHE-Dematic (P) Inc., is a domestic corporation duly organized and existing under the laws of the Philippines with principal place of business located at Main Avenue, Severina Diamond Industrial Estate, West Service Road, Km. 16, South Expressway, Paraaque City, Philippines; that MPDI is primarily engaged in the design, manufacture, process and sale of industrial cranes and hoists, and other material handling equipment and systems; that MDPI is a member firm of the Jebsen and Jessen Group of Companies; that MDPI entered into Offshore Service Agreements with various foreign corporation service providers, namely: MHE-Demag (S) Pte. Ltd. ("MDS") is a non-resident foreign corporation duly organized and existing under the laws of Singapore; that MDS has considerable overseas business and financial contacts in the area of manufacturing and marketing of cranes and hoists, and such other material handling systems and solutions; and that under the Offshore Services Agreement, MDS shall provide the following services to MDPI: (1) to represent MDPI's interest outside the Philippines in maintaining contracts with overseas suppliers; (2) to negotiate on MDPI's behalf business affairs with the suppliers and expedite delivery of MPDI's purchase orders; (3) to carry out systematic business sourcing and contacts outside the Philippines for the specific purpose of obtaining new business; (4) to assist through MDS international connection in arranging short term and long term finance, when necessary; (5) to advise future trends of financial cost on borrowing funds outside the Philippines, movement of exchange rates of key currencies and potential exchange risk; (6) to provide assistance to MDPI's key personnel when visiting contacts outside the Philippines; and (7) to provide advice and guidance to MDPI in operating Human Resource Management function and provide staff training materials; that on the other hand, Jebsen & Jessen (SEA) Pte. Ltd. ("JJSEA") is a non-resident foreign corporation duly organized and existing under the laws of Singapore that operates a Central Services Unit ("CSU") to make available to the Jebsen & Jessen Group of Companies in South East Asia; and that under the Agreement for Offshore Central Services, JJSEA provides and coordinates for the following services to be performed in Singapore: (1) financial and treasury functions; (2) corporate and legal matters; (3) internal audit and control services; (4) taxation services; (5) human resource management; (6) corporate communications; and (7) to assist in the development and implementation of environmental, health and safety management programs; that Electra (S) Pte. Ltd. ("EDS"), formerly known as Electra Data Services Pte., Ltd., is a non-resident foreign corporation duly organized and existing under the laws of Singapore and provides data processing and electronic mail transmission services; that EDS also owns and operates Multi Protocol Layer Switch ("MPLS") network located in Singapore that allows the voice over internet protocol ("IP") technology to reside; that based on the Agreement for Data Processing Services with MDPI, EDS operates the central servers located in Singapore and provides MDPI daily and routine data processing, storage, and backup of business transactions data, collectively referred to as "data processing services"; that under the terms of the separate Electronic Mail Transmission Services Agreement, EDS provides daily and routine electronic mail transmission services; that in addition, under the terms of the separate IP Telephony Services Agreement, EDS performs routine IP telephony support services to operate the IP telephony services for the Jebsen and Jessen Group of Companies, maintains and operates the infrastructure and equipments required to enable the IP based telephone services for the group; and that finally MDS, JJSEA and EDS are non-resident foreign company service providers, which are not doing business in the Philippines, and the above described services covered by their respective service agreements are being performed outside the Philippines. In reply, please be informed as follows: Services performed abroad by MDS, JJSEA and EDS are not subject to Philippine income tax . Section 28 (B) (1) of the Tax Code of 1997, as amended, provides that non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, non-resident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. The above provision should be read together with Section 42 (C) of the same Code which provides, viz .: "(C) Gross Income from Sources Without the Philippines . The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx "(3) Services. Compensation for labor or personal services performed without the Philippines;" Since the services by MDS, JJSEA and EDS are performed abroad, the service fees to be paid to MDS, JJSEA and EDS by MDPI are not subject to Philippine income tax. Thus, since the following services of MDS: (1) to represent MDPI's interest outside the Philippines in maintaining contracts with overseas suppliers; (2) to negotiate on MDPI's behalf business affairs with the suppliers and expedite delivery of MDPI's purchase orders; (3) to carry out systematic business sourcing and contacts outside the Philippines for the specific purpose of obtaining new business; (4) to assist through MDS international connection in arranging short term and long term finance, when necessary; (5) to advise future trends of financial cost on borrowing funds outside the Philippines, movement of exchange rates of key currencies and potential exchange risk; (6) to provide assistance to MDPI's key personnel when visiting contacts outside the Philippines; and (7) to provide advice and guidance to MDPI in operating Human Resource Management function and provide staff training materials, are done or performed outside of the Philippines, the pertinent service fees paid by MDPI to MDS are therefore not subject to Philippine income tax. (BIR Ruling DA-303-03, dated 16 September 2003) cCESaH Similarly, since the following services of JJSEA in providing and/or assisting MDPI in: (1) financial and treasury functions; (2) corporate and legal matters; (3) internal audit and control services; (4) taxation services; (5) human resource management; (6) corporate communications; and (7) development and implementation of environmental, health and safety management programs, are likewise done or performed outside of the Philippines, the pertinent service fees paid by MDPI to JJSEA are therefore also not subject to Philippine income tax. (BIR Ruling DA-149-98, dated 20 April 1998) In the same vein, the services of EDS in performing routine IP telephony support services for MDPI and from maintaining and operating the infrastructure and equipment required to enable the IP based telephone services, are likewise not subject to Philippine income tax. (BIR Ruling DA-514-06, dated 25 August 2006) Services performed abroad by MDS, JJSEA and EDS are not subject to withholding tax under RR 2-98, as amended. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income [Section 2.57 (B), Revenue Regulations (RR) No. 2-98, as amended]. Needless to state, the withholding of income/creditable withholding tax on a certain income payment presupposes that the said income payment is considered taxable income to the payee. Therefore, reference must necessarily be made to the income source rules under our tax system. Corollarily, Section 2.57-1 (I) of RR 2-98, as amended, provides that non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. The said section does not provide that non-resident foreign corporations are subject to final withholding tax on their income derived from sources without the Philippines. Since payments to foreign corporations, like MDS, JJSEA and EDS, are not among those specified in the said regulations, consequently, services rendered abroad by these corporations are not subject to the expanded withholding tax prescribed in RR 2-98, as amended. Services performed abroad by MDS, JJSEA and EDS are not subject to VAT under Section 108 of the Tax Code, as amended. Section 108 (A) of the Tax Code of 1997, as amended, states that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. 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. Thus, the services to be rendered abroad by MDS, JJSEA and EDS to MDPI pursuant to their respective agreements are not subject to VAT. Accordingly, no VAT may be passed on by MDPI to MDS, JJSEA and EDS. IN VIEW OF ALL THE FOREGOING, this Office confirms your opinion that fees paid or to be paid by MDPI to its foreign service providers, which are non-resident foreign corporations based in Singapore, are not subject to Philippine income tax and to the VAT. 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service