BIR Ruling [DA-103-06]

March 9, 2006 BIR RULING [DA-103-06] Sec. 22 (e), 42 (a), 42 (c); DA-377-2005; ITAD-22-003 WSP Asia (Philippines), Inc . 30th Floor, One San Miguel Avenue Ortigas Center, Pasig City Attention: Mr. Baldomero D. Bongalon, Jr. Consultant Gentlemen : This refers to your letter dated January 3, 2006 requesting for a confirmation that the service fee paid by WSP Asia (Philippines), Inc. to WSP Hong Kong, Ltd., in consideration for services performed by the latter outside of the Philippines is considered as income outside of the Philippines, and therefore not subject to Philippine income tax, expanded withholding tax, and value added tax, and that the former shall be allowed to claim such services fees as deduction for income tax purposes. It is represented that WSP Asia (Philippines), Inc. is a domestic corporation duly organized and existing under the laws of the Philippines, with principal address located at 30th Floor, One San Miguel Avenue, Ortigas Center, Pasig City; that it is engaged in the business of preparing technical drawings, details and designs for the electrical, plumbing, mechanical and civil engineering consultancy business; that WSP Hong Kong, Ltd. (Consultant, for brevity), is a duly registered and existing foreign corporation under the laws of Hong Kong which possesses substantial knowledge of a specialized nature relating to the management and operation of the company's business; that it has no permanent establishment here in the Philippines and is not registered with the Securities and Exchange Commission; that in 2004 and 2005, WSP Asia (Philippines), Inc. entered into a Consultancy Service Agreement with the Consultant and the latter, assigned its Director, Mr. Adrian Marrocco to visit WSP Asia (Philippines), Inc. once in a while; that the Consultancy Service Agreement was signed in the Philippines on February 4, 2005; that in the years 2004 and 2005, the number of days Mr. Marrocco visited the Philippines did not exceed 180 days; and that WSP Asia (Philippines), Inc. is being charged an all-inclusive monthly service fee in the amount of $17,500.00. aTEAHc In reply, please be informed that the fees to be paid by WSP Asia (Philippines), Inc. to WSP Hong Kong Ltd. are considered income derived from sources outside the Philippines the tax consequence of which shall be governed by Section 28(B)(1), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: "SEC 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(1) 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 (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) "xxx xxx xxx. "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; "xxx xxx xxx" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines so that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor is taxable in the Philippines. CSDcTA Therefore, since the consultancy services to be rendered by WSP Hong Kong Ltd. to WSP Asia (Philippines), Inc. shall be performed entirely in Hong Kong, the fees to be remitted by WSP Asia (Philippines), Inc. are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to the withholding tax and value-added tax. (DA ITAD 86-02 dated May 9, 2002) The visit of the Director, Mr. Adrian Marrocco in the years 2004 and 2005, which according to you did not exceed 180 days, does not constitute doing business in the Philippines. As regards your opinion that the consultancy service fees to be paid by WSP Asia (Philippines), Inc. to WSP Hong Kong Ltd. qualify as deductible expense under Section 34(a)(1) of the Tax Code of 1997, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. (DA-ITAD Ruling No. 38-02 dated March 14, 2002) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service