BIR Ruling [DA-117-06]

March 16, 2006 BIR RULING [DA-117-06] 28 (B) (1); 097-87 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated September 7, 2005 stating that your client, FG Financial Company, Inc. (FG Financial), is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office address at 3101 West Tower PSE Centre, Exchange Road, Ortigas Center, Pasig City; that on the other hand, Reference Group Holdings, Ltd. (RGHL) is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of British Virgin Islands with offices and registered place of business at Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands; that on December 22, 2004, FG Financial entered into a Third Party Credit Enhancement Agreement with RGHL whereby the latter, in consideration of a semi-annual fee, agreed to secure the payment of any and all indebtedness FG Financial has incurred and may thereafter incur with Security Bank Corporation (SBC) by virtue of the credit facility extended by SBC in favor of FG Financial; and that as a security for the payment of any and all indebtedness of FG Financial, RGHL has agreed to assign and convey in favor of SBC, its assigns and successors-in-interest, through a Hold-Out Agreement, all its rights, title and interest over its US Dollar Optima Deposit with SBC. In connection therewith, you now request for confirmation of your opinion that the semi-annual fees being paid by FG Financial to RGHL under the Third Party Credit Enhancement Agreement as a consideration for the latter in securing the payment of any and all indebtedness of FG Financial under the credit facility extended by SBC is not subject to Philippine income tax pursuant to Section 28(B)(1) in relation to Section 42(A)(3) of the Tax Code of 1997, and therefore FG Financial is not liable to withhold the final tax on such payments under Revenue Regulations No. 2-98; and that the said fees are exempt from value-added tax under Section 108(A) of the said Code. In reply thereto, please be informed that Section 28(B)(1) of the Tax Code of 1997 provides that "(1) In General. Except as otherwise provided in this Code, a foreign corporation engaged in trade or business in the Philippines shall pay a tax equal to . . . 32% 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) and (d): . . . ." AHCaED In relation thereto, Section 42(A)(3), supra provides (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 above-cited sections that a non-resident foreign corporation is liable to Philippine tax only on income derived from sources within the Philippines. Income from services rendered in the Philippines shall be considered derived from sources within the Philippines. Conversely, income from services performed outside the Philippines are considered derived from sources outside the Philippines. Thus, compensation for services performed outside the Philippines is not taxable when received by a non-resident foreign corporation. The semi-annual fees being paid by FG Financial to RGHL are in the nature of service fees. Accordingly, the said fees paid by FG Financial to RGHL in consideration for securing a loan obligation are payment for services performed outside the Philippines and therefore are not taxable in the Philippines. On the other hand, 108(A), supra provides (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 . . . Inasmuch as the fees paid by FG Financial to RGHL are considered as income derived from services rendered outside the Philippines, such fees shall not be subject to the 10% value-added tax. ASTDCH WHEREFORE, in view of the foregoing , this Office hereby confirms your opinion that the semi-annual fees paid by FG Financial to RGHL are considered income derived from sources outside the Philippines and therefore not subject to the Philippine income tax and to the value-added tax. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service