National Home Mortgage Finance Corporation

April 17, 2007 BIR RULING [DA-231-07] Sections 28 (B) (1), 42 & 108(A) National Home Mortgage Finance Corporation Filomena Building III 104 Amorsolo St. Legaspi Village, Makati City Attention: Mr. Daniel Q. Lacuata VP-Legal Group Gentlemen : This refers to your letter dated January 11, 2007 requesting for a ruling on whether the National Home Mortgage Finance Corporation ("NHMFC") should withhold income tax on its income payment to Mandel Katz Manna & Brosnan LLP ("MKMB") for consultancy services rendered by the latter to NHMFC. As represented, NHMFC is the major government home mortgage institution. Its main function is to operate a viable home mortgage market, utilizing long-term funds principally provided by the Social Security System, the Government Service Insurance System, and the Home Development Mutual Fund, to purchase mortgages originated by both public and private institutions that are within government-approved guidelines. It is also charged with the development of a system that will attract private institutional funds into long-term housing mortgages. ESCcaT On the other hand, MKMB is a commercial practice U.S. law firm with office at The Law Building, 210 Route 303, Valley Cottage, New York, United States of America. The members of MKMB are members of the New York State Bar, and are not practicing law in the Philippines. On October 7, 2003, NHMFC engaged MKMB to serve as international legal advisor in connection with the sale by the latter of a portfolio of Philippine residential mortgage loans (the "Loans"). The services rendered included assisting NHMFC and its local consultants and advisors in: 1. Reviewing the results of the financial advisor's due diligence analysis and structuring the terms of the proposed sale/auction of the Loans. 2. The development of marketing and disclosure information, and the preparation of materials such as general auction announcements, confidentiality agreements, bidder qualification materials, required government announcements, bidder information packages, bid forms and bid instructions. 3. Preparing the necessary sale documents. The transaction was NHMFC's first major Non-Performing Loan ("NPL") sale and the first international NPL auction to take place in the Philippines. It was therefore extremely important that the transaction be viewed by the international investment community as transparent and completely open. Thus, the services of MKMB, an international legal advisor, were secured by the NHMFC. Pursuant to the engagement, MKMB has billed NHMFC for the services rendered based on MKMB's standard rates. The services required from MKMB under the engagement were rendered in the United States of America. Based on the foregoing, you now request for confirmation that: 1. The legal fees payable by the NHMFC to MKMB are deemed income of a non-resident foreign corporation from sources outside the Philippines, and therefore, not subject to Philippine income tax. Consequently, NHMFC is not required to withhold income taxes from the said fees. 2. The fees are not subject to value-added tax (VAT) since the services were rendered without the Philippines. In reply, please be informed that Section 28 (B) (1) of the Tax Code of 1997, as amended by Republic Act No. 9337 provides: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporations. (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 subparagraphs 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." The above provision imposes tax to nonresident corporations on its income from all sources within the Philippines. Conversely, nonresident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. Section 42 (A) of the Tax Code of 1997 enumerates the items of gross income that are considered income from sources within the Philippines. The legal fees constitute compensation for labor or personal services performed outside the Philippines pursuant to Section 42(C)(3) of the same Code, hence, not subject to Philippine income tax (cited in BIR Ruling No. DA 452-2003 dated December 5, 2003 and DA-037-04 dated February 2, 2004). TEIHDa On the other hand, Section 108 (A) of the Tax Code of 1997 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 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 . . . ." Accordingly, services performed outside the Philippines are not subject to VAT (cited in BIR Ruling No. DA-037-04 dated February 2, 2004). In view of the foregoing, this Office is of the opinion that since MKMB is a nonresident foreign corporation subject to income tax only on income from sources within the Philippines, the legal fees it earned for services rendered in the United States of America are not subject to Philippine income and withholding taxes, as well as VAT. Such being the case, NHMFC is not required to withhold income and value-added taxes from the said fees. SDAcaT 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 as null and void. aIcDCT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service