BIR Ruling [DA-110-05]

April 5, 2005 BIR RULING [DA-110-05] 23 (F); 28 (A); 42 (A) (3) and (C) (3) DA-037-04; DA-303-03 and DA-293-00 SGV & Co . 6760 Ayala Avenue Makati City Attention: J.A. Osana Tax Division Gentlemen : This refers to your request, dated March 23, 2005 requesting on behalf of your client, Global Turbine Services, Inc. (GTSI) Philippine Branch for confirmation of your opinion that the income derived by the Philippine branch for services rendered abroad are not taxable in the Philippines. It is represented that GTSI is a foreign corporation organized under the laws of Florida, USA; that it is licensed to transact business in the Philippines as a branch office under SEC Company Reg. No. A200210139 issued on December 11, 2002; that its office address is at 2291 Don Chino Roces Avenue Extension, Makati City; that GTSI Philippine branch is authorized "to engage in the business of providing specialty and technical services for the domestic market, including government project through consultancy in respect to, among others, planning, management, procurement, estimation, commissioning, supervision, inspection, labor, provision of domestic and/or international subcontractors, including any other functions and activities in connection with the domestic and or international projects, as well as undertaking and performance of domestic and/or international contracts for related and allied industries." that at present, it is engaged in the business of maintenance of power plants for its foreign clients; and that it employs Filipino staff and engineers and sends them to undertake and supervise such maintenance of various power plants located abroad such as Saudi Arabia, Italy and Iraq. In reply thereto, please be informed that Section 23 (F) of the Tax Code of 1997 states the general rule 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. Thus, a resident foreign corporation shall be subject to tax in the Philippines on its taxable income derived from all sources within the Philippines in accordance with Section 28(A), supra . In this regard, the important factor which determines the source of income, if from services, for purposes of income taxation, is the place where services are normally rendered." ( Mertens, Law of Federal Taxation, Vol. 8 Chap. 45, p. 141; cited in CTA Case No. 2373 and 2561, British Overseas Airways Corp. vs. Commissioner, January 26, 1983 ) Moreover, Section 42(A)(3) of the Tax Code of 1997 provides that gross income from sources within the Philippines includes compensation for labor or personal services performed in the Philippines. Conversely, gross income from sources without the Philippines include compensation for labor or personal services performed without the Philippines ( Section 42(C)(3), Tax Code of 1997 ). Finally, Section 108(A) of the Tax Code of 1997 provides that value-added tax (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 provides that the phrase "sale or exchange or services" means "the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration." Hence, sale of services performed abroad is also not subject to the 10% VAT. cHITCS SUCH BEING THE CASE, since the services rendered by GTSI Phils. Branch are performed abroad, the service fees paid to it shall not be subject to Philippine income tax. Moreover, the said sale of services shall likewise not be subject to the 10% VAT ( BIR Ruling Nos. [DA-037-04] dated February 2, 2004, [DA-303-03] dated September 16, 2003 and [DA-293-00] dated July 28, 2000 ). 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group