BIR Ruling [DA-162-03]

May 14, 2003 BIR RULING [DA-162-03] BIR Ruling # 044-99 Secs. 42 (C) (3) & 105 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero Street Salcedo Village, 1227 Makati City Attention: Attys. Maria Victoria D. Sarmiento and Karen C. Pioquinto Gentlemen : This refers to your letter dated December 9, 2002 requesting on behalf of your client, Alchemco Philippines, Inc. ("Alchemco"), for confirmation of your opinion that the service fees and reimbursements payable to General Chemical Products, Inc. ("GenChem") under a contract ("Service Agreement") are not subject to Philippine withholding taxes and value added taxes ("VAT"). It is represented that GenChem is a corporation organized and existing under the laws of the United States; that it does not have a branch, office or any form of permanent establishment in the Philippines; that Alchemco is a corporation duly organized and existing under Philippine laws; that a Service Agreement was entered into by and between GenChem and Alchemco, whereby the former undertook to provide the following non-technical (marketing) services outside of the Philippines to Alchemco, to wit: a) sharing of available market and distribution research; b) preparation of training and educational materials; c) provision of reprints of management and other business articles; and d) supply of general information related to Alchemco's business; that in consideration for the rendition of offshore services by GenChem, Alchemco will pay GenChem service fees and will reimburse the latter for costs incurred in the supply of services; and in support of your request you submitted a photocopy of the abovementioned Service Agreement between GenChem and Alchemco. In reply, we confirm your opinion as follows: 1. Section 23(F) in relation to Section 42(C)(3), both of the Tax Code of 1997 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 ." Section 42(C)(3) reads as follows: "(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) Compensation for labor or personal services performed without the Philippines;" Thus, GenChem, as a nonresident foreign corporation, is taxable only on its income from sources within the Philippines. Since the non-technical services rendered by GenChem to Alchemco were performed without the Philippines, any income derived therefrom is considered a non Philippine-sourced income 1 and therefore, exempt from Philippine income tax. Consequently, it is also exempt from any withholding tax. 2. Furthermore, Section 105 of the same Tax Code imposes value added tax on "Any person who in the course of trade or business, sells, barters, exchanges, leases goods or properties or renders services, and any person who imports goods." Considering that GenChem will provide the non-technical (marketing) services to Alchemco outside the Philippines, the provision of Section 105 shall not apply to it. The amount billed by GenChem for costs incurred in the supply of non-technical marketing services, which is reimbursable by Alchemco, is also not subject to VAT since this refers to expenses imputable to services rendered by GenChem abroad. ( BIR Ruling No. 044-99 dated March 30, 1999 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. HSacEI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. Applying by analogy Section 42(C)(3), Tax Code of 1997 re: Gross Income From Sources Without the Philippines . This provision applies only to domestic corporation or resident foreign corporation.