BIR Ruling [DA-178-04]

April 6, 2004 BIR RULING [DA-178-04] DA-576-99; DA-173-01; VAT Ruling No. 086-01 Secs. 42 (C) & 108 (A) Puyat Jacinto & Santos 12/F Manila Bank Building 6772 Ayala Avenue Makati City Attention: Attys. David B. Puyat and Virginia B. Viray Gentlemen : This refers to your letter dated October 28, 2002 on behalf of your client, Style Media, Inc. ("Style"), requesting for confirmation of the following: "1. The income derived by Lifestyle from the sale of advertising space in the Magazine and from services performed in Hong Kong are income of a non-resident foreign corporation from without the Philippines, and thus, are not subject to Philippine income tax. Consequently, Style is not obliged to withhold income taxes on advertising and service fees paid to Lifestyle. "2. The sale of advertising space in the Magazine and the performance of services by Lifestyle are sale of goods and services outside the Philippines, and thus, are not subject to value-added tax (VAT). Consequently, Style is not obliged to withhold VAT on fees paid to Lifestyle and file VAT returns on behalf of the latter. FACTS It is represented that Style is a corporation organized and existing under Philippine laws, and engaged in business as an advertising company and/or agent; that it intends to enter into an advertising contract ("Contract") with Lifestyle, a company organized, existing and operating in Hong Kong; that under the Contract, Lifestyle shall sell to Style advertising space in the Tatler magazine ("Magazine"), thus allowing Style to have the ads of any of its clients printed therein; that the Magazine is published periodically in Hong Kong by Lifestyle, and is sold by Lifestyle entirely in Hong Kong; and that the concept, layout and design of the advertisements to be published in the Magazine, however, shall be subject to approval and/or editing by Lifestyle to conform to the standard and image of the Magazine. It is further represented that the conceptualization, layout and design of the advertisements may likewise be subcontracted by Style to Lifestyle upon agreement of the parties on a "per advertisement" basis; that, however, no part of the services shall be performed by Lifestyle in the Philippines; and that in consideration for the advertisement space and sundry services to be provided by Lifestyle to Style, the latter shall pay Lifestyle advertising and service fees. Hence, this request. In support of your request, you submitted the following documents: 1. Copy of the Articles of Incorporation of Lifestyle; 2. Copy of the Articles of Incorporation of Style; and 3. Certification by the SEC that Lifestyle is not registered to do business in the Philippines. DTAHEC DISCUSSION AND REPLY I. The income derived by Lifestyle on the sale of advertising space in the Magazine and for services performed in Hong Kong are income of a non-resident foreign corporation from without the Philippines, and thus, are not subject to Philippines income tax . Under Section 42(C) of the Tax Code of 1997 the following items of income shall be treated as income from sources without the Philippines: (3) Compensation for labor or personal services performed without the Philippines. (5) Gains, profits and income from the sale of real property located without the Philippines. Anent the above, Sections 155 and 159 of Revenue Regulations No. 2 are relevant in determining whether income from personal services and gain from sale of personal property are income from within or without the Philippines. The said provisions state in part that "Sec. 155. Compensation for labor or personal service Gross income from sources within the Philippines includes compensation for labor or personal services performed within the Philippines regardless of the residence of the payor, or of the place in which the contract for service was made, or of the place of payment." "Sec. 159. Sale of personal property income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which sold. The word sold includes 'exchanged.' The country in which sold ordinarily means the place where the property is marketed." As regards income on sale of personal property, it was ruled in BIR Ruling No. DA-576-99 dated October 6, 1999 that: "thus, while income may be derived from three possible sources: (1) capital; (2) labor; and/or sale of assets, the source of income rule applicable in this case involves the sale of personal property. The determination of tax situs in this regard involves a consideration of two factors: (1) the place where the sale of such personal property occurs; and (2) the place where such personal property was manufactured. If the personal property involved was both produced or manufactured and sold outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines . (Mertens, volume 8, section 45.27, pages 96102) [Emphasis supplied]" Thus, since Lifestyle shall be selling advertising space to Style in a Magazine that is printed and sold by Lifestyle entirely in Hongkong, and also since no part of the services, such as the review and editing of advertisements or the conceptualization, layout and design of the ads, shall be performed by Lifestyle in the Philippines, the income derived therefrom, as well as from the performance of the incidental or subcontracted services, are clearly income from sources outside the Philippines; hence, not subject to Philippine income tax. Consequently, Style is not obliged to withhold income taxes on the advertising and service fees to be paid to Lifestyle. II. The sale by Lifestyle of goods and services to Style is not subject to VAT in the Philippines . Pursuant to Section 108(A) of the Tax Code of 1997, 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 and 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. 1 Furthermore, the onus of taxation under the Philippine VAT system is in the country where the goods, property or services are destined, used or consumed. This is the reason why under our VAT Law, goods, property or services destined to be used or consumed in the Philippines are subject to the ten percent (10%) VAT whereas those destined, used or consumed abroad are subject to zero percent (0%) VAT. 2 Since Lifestyle shall be selling advertising space to Style in a Magazine that is printed and sold by Lifestyle entirely in Hongkong and further, since the services to be performed by it such as the review and editing of advertisements or the conceptualization, layout and design of the ads shall be performed abroad, the gross receipts derived from the sale of advertising space and the service fees for the review and editing of advertisements or the conceptualization, layout or design of the ads shall not be subject to VAT imposed under aforementioned Section 108(A) of the Tax Code of 1997. 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. ADSTCI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. BIR Ruling No. DA-173-01 dated September 24, 2001 . 2. VAT Ruling No. 086-01.