BIR Ruling [DA-269-06]

April 21, 2006 BIR RULING [DA-269-06] DA 024-03 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms . Maria Victoria C . Espao Tax Partner Gentlemen : This refers to your letter dated July 21, 2005 stating that your client, Florentino III International, Inc. (F3 Cebu), is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in the manufacture and export of high-end furniture; that it is currently operating at Old National Highway, Mactan, Lapu-Lapu City, Cebu Province; that on January 1, 2005, F3 Cebu and Florentino III (BVI), Inc. (F3-BVI), a corporation duly organized and existing under the laws of British Virgin Islands, entered into a Marketing Agreement (the Agreement); that under the said Agreement, F3 BVI renders the following services to F3 Cebu: 1. Promote or market the products of F3 Cebu in the USA, Europe and other neighboring countries; cCAIES 2. Assist F3 Cebu in developing marketing strategies and specific marketing activities outside the Philippines; 3. Represent F3 Cebu in various marketing activities outside the Philippines such as furniture shows, etc.; and 4. Undertake such other incidental marketing activities as may be requested by F3 Cebu to promote the latter's product in other countries. that in general, F3 BVI shall perform the aforementioned services outside the Philippines; and that as a consideration for the services, F3 Cebu will pay F3 BVI a monthly fee, as indicated in the Agreement. In connection therewith, you now request confirmation of your opinion that the marketing fees paid by F3 Cebu to F3 BVI, pursuant to the Marketing Agreement, are not subject to Philippine income tax and to the 10% value-added tax (VAT) because the services will be performed abroad. In reply thereto, please be informed that the marketing fees paid by F3 Cebu to F3 BVI for services rendered under the Agreement are considered income from sources without the Philippines under the Tax Code of 1997 and, as such, are not subject to income tax and consequently, to withholding tax. Section 42, supra enumerates those which shall be considered as income from sources without the Philippines. It provides "Sec. 42. Income from Sources Within the Philippines . "xxx xxx xxx "(C) Gross Income from Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (3) Compensation for labor or personal services performed without the Philippines; "xxx xxx xxx" Under the Agreement, since the services to be provided by F3 BVI will be performed outside the Philippines, the marketing fees to be paid by F3 Cebu to F3 BVI shall be considered as income from sources without the Philippines and therefore not subject to the Philippines income tax. ( BIR Ruling No. 059-98 dated May 21, 1998 ) Moreover, since the marketing fees to be paid by F3 Cebu shall be for services rendered outside the Philippines, the same shall not be subject to the 10% VAT since VAT is imposed only on the sale or exchange of goods and services performed in the Philippines, in accordance with the provisions of Sections 106 and 108 of the Tax Code of 1997. ( BIR Ruling No. 039-95 dated February 23, 1995 ) Under Sections 106 and 108, supra , VAT shall be imposed only on services performed in the Philippines. Since services to be rendered by F3 BVI to F3 Cebu under the Agreement shall be rendered outside the Philippines, the marketing fees paid to F3 BVI for said services shall not be subject to VAT. ( BIR Ruling No. DA024-03 dated January 30, 2003 ) ISDHEa 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service