Aranas Consunji Barleta

February 5, 2007 BIR RULING [DA-065-07] 23 (F); 28 (B); 42 (A); 108; #165-95;DA-173-2001 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated October 27, 2006 requesting in behalf of your client, SINGAPORE COMPONENT PTE. LTD (hereinafter "SINCOM"), for confirmation that the marketing support service fees to be directly paid to SINCOM by various Philippine corporations for offshore non-technical marketing services are income derived from without the Philippines hence, exempt from income and withholding taxes, pursuant to Section 23 (F) and Section 28(B)(1) in relation to Section 42(A)(3), of the 1997 Tax Code, as amended and Article 7 of the R.P.-Singapore Tax Treaty; not subject to the value-added tax (VAT); and not royalty payments subject to tax on royalties under the R.P.-Singapore Tax Treaty. It is represented that SINCOM is a company incorporated and existing under and by virtue of the laws of Singapore with principal office located at 79 Anson Road #08-01, Singapore, and does not have a permanent establishment in the Philippines as it is defined under the R.P.-Singapore Tax Treaty; that SINCOM entered into a "Marketing Support Service Agreement" with Sagara Metro Plastics Industrial Corporation, Miyasaka Polymer (Philippines), Inc., Nanbu Philippines Incorporated & J.F. Rubber Phils. Inc. (hereinafter collectively referred to as PHILIPPINE CORPORATIONS); that Sagara Metro Plastics Industrial Corporation has principal office at Brgy. Paciano Rizal, Calamba City, 4027 Laguna Philippines; that Miyasaka Polymer (Philippines), Inc. has principal office at 20 Ampere Street Light Industry and Science Park of the Philippines I, Brgy. Diezmo, Cabuyao, Laguna; that Nanbu Philippines Incorporated has principal office at Block-5, Lot-7, Road-D, Phase II, Cavite Economic Zone (CEZ), Rosario, Cavite 4106; that J.F. Rubber Phils. Inc. has principal office at Blk. 2 Lot 6 Peoples Technology Complex Special Economic Zone Carmona, Cavite; that under the said Agreement, SINCOM will undertake to render exclusively offshore (i.e. to be performed entirely outside the Philippines) services to the PHILIPPINE CORPORATIONS such as promoting and marketing products of PHILIPPINE CORPORATIONs to Japanese and other foreign clients of SINCOM, assisting PHILIPPINE CORPORATIONs in developing marketing strategies and specific marketing activities outside the Philippines, collecting of various information (such as Production Plans, new parts needed by client, necessary product drawing and product information for the manufacturing of the parts, part qualification, price range) concerning PHILIPPINE CORPORATION's clients, mediating between PHILIPPINE CORPORATION and clients, and undertaking such other incidental marketing activities as may be requested by PHILIPPINE CORPORATIONS to promote the latter's business in other countries; that all the above services shall be performed outside the Philippines, primarily in Singapore and shall not involve any transfer of technology, know-how or other intellectual property rights; that for and in consideration of its services under the aforementioned Agreement, SINCOM shall be paid by the PHILIPPINE CORPORATION a monthly service fee as agreed upon by the parties. In reply thereto, please be informed that Section 23 (F) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, 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. Furthermore, Section 28 (B) (1) thereof states that foreign corporations not engaged in trade or business in the Philippines shall be subject to 35% income tax only from such income that is derived from all sources within the Philippines. Hence, SINCOM, a non-resident foreign corporation not engaged in trade or business in the Philippines, is subject to income tax only from such income derived from all sources within the Philippines. cASTED On this point, Section 42 (A) (3) of the Tax Code, as amended, states that: "Sec. 42. Income from Sources Within the Philippines. (A) Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines. xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines ." (emphasis supplied) Since the services rendered by SINCOM are performed outside the Philippines, the compensation for such services constitutes income from sources without the Philippines and not subject to Philippine income taxes. Even under the provisions of the RP-Singapore tax treaty, the service fees paid by the PHILIPPINE CORPORATIONS to SINCOM are still exempt from Philippine withholding taxes since SINCOM does not have any permanent establishment in the Philippines to which the said business profits may be attributed. Pursuant to Article 7 of RP-Singapore Tax Treaty, the profits of a foreign enterprise shall be taxable in the Philippines only to the extent that such enterprise is carrying on business in the Philippines through a permanent establishment situated therein, such as a branch, and only so much of the profits as may be attributable to that permanent establishment. The term "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 183 days. It has been consistently ruled in BIR Ruling Nos. DA-ITAD-063-05, DA-ITAD-143-04, DA-ITAD-59-03, DA-ITAD-26-03, and DA-ITAD-293-00 that the rendering of services by a foreign corporation such as SINCOM to a Philippine domestic corporation is not subject to income and withholding taxes on business profits to the extent that they are not attributable to a permanent establishment in the Philippines. Since SINCOM does not have a permanent establishment in the Philippines, the service fees paid by the PHILIPPINE CORPORATIONS to SINCOM being income not derived from sources within the Philippines are exempt from income and withholding taxes. Similarly, the service fee is not subject to ten percent (10%) [now 12%] value-added tax (VAT) imposed under Section 108 (A) of the Tax Code: "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including 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. . . " Section 108 (A) clearly states that the sale or exchange or services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will be done entirely outside the Philippines, the service fee to be paid therefor by PHILIPPINE CORPORATIONS to SINCOM is therefore exempt from VAT. ( BIR Ruling No. DA-ITAD 063-05 dated June 27, 2005 ) Like any other business tax, VAT is subject to the inherent limitation of taxation, among others, the principle of territoriality that is, taxation may be exercised only within the territorial jurisdiction of that taxing authority ( BIR Ruling No. 165-95, 23 October 1995, citing Jose C. Vitug, Tax Law and Jurisprudence, 1993, 3rd Revised Edition, p. 9 citing 51 Am. Jur. 88 ) With respect to royalties, Article 12 (3) of the RP-Singapore tax treaty provides that: Article 12 Royalties xxx xxx xxx (3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright or literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or mode, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx The treaty defines "royalties" to include "payment of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (royalties), (C) 1998, p. 151), such information alludes to the concept of "know-how". The definition of know-how, which has been adopted by the said Committee, is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agree to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. (BIR Ruling No. DA-ITAD No. 59-03 dated April 21, 2003). Furthermore, in the case of Philippine Refining Company (PRC) vs. CIR CTA Case No. 2872 dated January 15, 1986 , the Court of Tax Appeals had occasion to rule on the distinction of service fees from royalties, to wit: "To distinguish between compensation for service and royalty payment, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. If the payee has none, then the payment is a compensation for personal services, if the payee has proprietary interest then the payment is royalty." Furthermore, the BIR ruled in ITAD Ruling No. 92-04 that: Applying the above discussions to the case at hand, it is clear in the Sales and Marketing Agreement that the service fees do not fall within the definition of "royalties" under Article 12 of the Philippines-Singapore tax treaty. Specifically, nothing in the Agreement, as represented herein, would require transfer into the Philippines of technology, equipment or other property where the payee has proprietary interest or would otherwise permit Hyatt to impart to NCHI their special knowledge and experience, which remain unrevealed to the public. Inasmuch as Hyatt shall render these services using their customary skills, then the compensation to be received therefor shall not constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of technology. Thus, the subject sales and marketing fees to be paid by NCHI to Hyatt shall not be considered as royalties but shall constitute as business profits. ( BIR Ruling No. DA-ITAD-59-03 dated April 21, 2003 ) In view of the foregoing, the service fees paid in consideration of services rendered by SINCOM to PHILIPPINE CORPORATION under the Marketing Support Service Agreement are not in the nature of royalties as the same does not involve any transfer of technology, know-how or other intellectual property rights, but as business profits under the provisions of the R.P.-Singapore tax treaty. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service