BIR Ruling [DA-173-01]

September 24, 2001 BIR RULING [DA-173-01] Secs. 23 (F); 42; 108 (A) BIR Rulings #059-98; 004-01 Indophil Textile Mills, Inc. Unit A 32nd Floor, Rufino Pacific Tower 6784 Ayala Avenue, Cor. Herrera St. Makati City Attention: B.L. Gupta Senior Finance Manager Gentlemen : This refers to your letter dated August 21, 2001 requesting for confirmation of your opinion of the following: 1. That income derived from services to be rendered outside the Philippines by CTL and ITM under the Import Service Agreement and Export Service Agreement, respectively, both non-resident corporations, is not subject to income tax for being derived from sources without the Philippines and consequently, INDO PHIL is not required to withhold the 32% income tax on its payments; and 2. That said payment for services derived by CTL and ITM will not be subject to VAT since the services will be performed outside the Philippines. It is represented that INDOPHIL TEXTILE MILLS, INC. ("INDO PHIL"), with TIN No. 000-232-943, is a corporation duly organized and existing under Philippine laws; that it is a BOI-registered entity engaged in the manufacture of Spun, PR and PC yarns in the Philippines; that its entire raw material requirement is not locally available and is being procured abroad; that in order to minimize the exchange risk in the procurement, it is obliged to export at least 50% of its production capacity in the world market; that it is necessary for INDO PHIL to engage the services of International Trade and Marketing, Inc. (ITM) of Switzerland to export its products in the world's competitive market; that similarly, since all raw materials like cotton, polyester, rayon, etc. required for manufacturing yarn is not locally available, INDO PHIL shall also engage the services of Catley Trading Limited (CTL) of Hongkong to assist it in sourcing and procurement of the above-mentioned raw materials; that both CTL and ITM do not have a branch or subsidiary in the Philippines; that under both Agreements, the services by CTL and ITM will be rendered outside the Philippines and shall be paid for in US Dollars; and that in support of your request, you attached copies of the draft Export Services Agreement between INDO PHIL and ITM, and Import Services Agreement between CTL and INDO PHIL. In reply, please be informed as follows: I. As a general rule, Section 23(F) of the 1997 Tax Code in relation to Section 28 thereof, 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 and received during the taxable year, at the rate equal to thirty two percent (32%) of the gross income. For the purpose of determining which income is considered not of Philippine source, Section 42 of the Tax Code enumerates the following items of gross income as income from sources without the Philippines", to wit: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines". Thus, income derived by non-resident foreign corporations for services rendered outside the Philippines is not subject to Philippine income tax; and consequently to withholding tax (BIR Ruling Nos. 59-80 dated December 10, 1980 and 059-98 dated May 21, 1998) Accordingly, since CTL and ITM are both non-resident foreign corporations with their corresponding services to be performed outside the Philippine taxing jurisdiction, income payments received by them from INDO PHIL for such services are considered income from without the Philippine; hence, exempt from income tax and consequently from the withholding tax. II. Pursuant to Section 108(A) of the 1997 Tax Code, a value-added tax (VAT) equivalent to ten percent (10%) shall be imposed on the gross receipts derived by any person engaged in the sale of goods or services in the Philippines. 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. In the instant case, since the services to be rendered by ITM and CTL will be done outside the Philippines, they shall not be liable to pay the VAT. Hence, since the service fees therefor shall not be subject to the ten percent (10%) VAT, no VAT may be passed on by ITM and CTL to INDO PHIL. .(BIR Ruling No. 110-97 dated October 23, 1997; DA-293-07-00 dated July 28, 2000 and BIR Ruling No. 004-01 dated February, 2001.) 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 ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group