Aranas Consunji Barleta

March 14, 2008 BIR RULING [DA-165-08] 23 (F), 42 (A), 108 (A); DA 598-2006; DA 577-99 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 January 3, 2008 requesting on behalf of your client, Takenaka Corporation Japan (Takenaka), that the service fees paid to Takenaka by TI Joint Venture (TIJV) for offshore services are not subject to the Value-added tax (VAT), and constitute income derived from without the Philippines, hence, not subject to Philippine income and withholding taxes. It is represented that Takenaka is a corporation duly organized and existing under the laws of Japan with principal office at 21-1, 8-chome, Ginza, Chuo-ku, Tokyo, Japan; that TIJV is a joint venture between Takenaka-Philippine Branch and ITOCHU Corporation for the purpose of undertaking the New Bacolod (Silay) Airport Construction Project; that Takenaka directly entered into a Project Support Agreement with TIJV on July 22, 2002 wherein Takenaka shall render exclusively offshore ( i.e. to be performed entirely outside the Philippines) services to TIJV such as: quantity survey, international business promotion, general affairs, accounting, human resources, purchasing, mechanical and electrical services, and any other services which may be requested by TIJV; that the said agreement expressly provides that all the above services shall be performed outside the Philippines, primarily in Japan and shall not involve any transfer of technology, know-how or other intellectual property rights; and that such services shall be undertaken by Takenaka in Japan independently of and without the participation or intervention, whether directly or indirectly of Takenaka-Philippine Branch; that for and in consideration of its services Takenaka shall be paid by TIJV in Japanese Yen. HCEISc In reply, please be informed that as a rule, services rendered outside of the Philippines are not subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997. The said provision of law was interpreted and applied in BIR Ruling DA 598-2006 dated October 09, 2006 where it was held that: "In regard to the liability for VAT, Section 108 of the Tax Code of 1997, as amended, provides that 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 of the Tax Code provides that 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. Conversely, services performed outside the Philippines are not subject to VAT. Section 108(A) of the same Tax Code clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004). Accordingly, since the subject services under the Marketing Service Agreement will not be performed in the Philippines, service fees to be paid by SUNMEC to MIKOMA are exempt from VAT." Therefore, the services rendered by Takenaka under the Project Support Agreement which are performed outside the Philippines are not subject to VAT. With respect to income and withholding taxes, it is well established that a foreign corporation is taxable only on income derived from sources within the Philippines pursuant to Section 23 (F) in relation to Sections 28 (B) (1) and 42 (A) (3) of the 1997 Tax Code which provide: "SEC. 23. General Principles of Income Taxation in the Philippines. xxx xxx xxx "(F) 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. CcAHEI xxx xxx xxx "SEC. 28. Rates of Income Tax on Foreign Corporations. 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 subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). (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; The foregoing position is supported by BIR Ruling No. DA-598-2006 where it was held that: "Considering that the services that produce the income on the part of TRC are performed outside the Philippines, it follows that the income derived from the performance of such services is not taxable in the Philippines. Hence, TRC shall not be subject to income tax, and consequently, to the withholding tax on the service fee it receives from PTI pursuant to services under the Management Support Agreement." caCTHI Since the services rendered by Takenaka under the Project Support Agreement are performed outside the Philippines, the compensation for such services constitutes income from sources without the Philippines and not subject to Philippine income taxes and consequently withholding taxes. Furthermore, Article 7 of the R.P.-Japan Tax Treaty provides that: "Article 7 Business Profits The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." Under the afore-cited provision, 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, but only so much of the profits as may be attributable to that permanent establishment. In this case, although Takenaka has a branch office in the Philippines, which is considered a permanent establishment, the payments made by TIJV to Takenaka are not attributable to the Philippine branch since the branch will have no participation or intervention, whether directly or indirectly, with the performance of the services under the Project Support Agreement. This is in consonance with the ruling of the Supreme Court in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." HTAEIS The same position has already been adopted in BIR Ruling No. DA-577-99, thus: Furthermore, the Agreement is entered into between SLAC Head Office and NEWCO only. Thus, while SLAC has a branch in the Philippines, the payments made by NEWCO to SLAC are not attributable to the Philippine branch since the branch will have no participation or intervention, whether directly or indirectly, with the performance of the administrative services under the Agreement ( Marubeni Corporation vs. Commissioner of Internal Revenue, 177 SCRA 500, September 14, 1989) Based on the foregoing, it is clear that the service fees paid to Takenaka by TIJV under the Project Support Agreement for services rendered outside the Philippines are not subject to Philippine income and withholding taxes. 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