BIR Ruling [DA-272-06]

April 21, 2006 BIR RULING [DA-272-06] Sections 28 (B) (1) & 42 (C) (3) BIR Ruling No. DA-037-2004 Rohm LSI Design Philippines, Inc . 24/F, Tower 1 The Enterprise Center 6766 Ayala Avenue cor. Paseo de Roxas Makati City Attention: Mr. Masaru Kobori Managing Director Gentlemen : This refers to your letter dated March 15, 2005 requesting for a ruling that the payments made to a non-resident foreign corporation for software maintenance services are not subject to income tax and value-added tax. As represented, you are a BOI registered company with "pioneer" status whose activity is research and development with project on design and fabrication of circuits and system. You purchased CAD software from Cadence Design Systems (Ireland) Ltd. ("Cadence") with business address at Block P3, East Point, Business Park, Fairview, Dublin 3 Ireland which is not registered a either as a corporation or as a partnership engaged in trade or business in the Philippines per certification issued by Securities and Exchange Commission dated September 20, 2004. You entered with Cadence for maintenance of the said software, details of which are shown on the Software Maintenance Agreement Standard Terms and Conditions ("Agreement") dated November 17, 2004 in which these are mostly upgrade of new version sent electronically and telephone assistance that needs immediate attention for problems encountered during application of said software. Although a certain provision in the Agreement under 1(g) mentioned that there is a possibility that Cadence representative might visit you, so far, you never experienced such since you entered into the Agreement. If ever they will, you estimate that such stay would only be for three (3) consecutive days in a year or 82% of the total maintenance (3/365 days). DTESIA In support of your request, you have attached photocopies of the following documents: 1) Filled up Application Form 0901; 2) Certification of Rohm LSI Design Phils., Inc.; 3) SEC Certification; 4) Certified true copy of BOI Registration; 5) Software Maintenance Agreement Standard Terms and Conditions; and 6) Software License Agreement Standard Terms and Conditions. In reply, please be informed that pursuant to Section 42(C)(3) in relation to Section 28(B)(1) of the Tax Code of 1997, non-resident foreign corporations deriving income for services performed abroad are not subject to Philippine income tax since such services are considered income from sources without the Philippines. Accordingly, since the services are to be performed abroad by Cadence, the software maintenance services are not subject to Philippine income tax. Consequently, such services are not also subject to final withholding tax required to be withheld pursuant to Section 2.57-1(I)(1) in relation to Section 2.57(A), both of Revenue Regulations (Rev. Regs.) 2-98, as last amended by Rev. Regs. No. 30-2003. Section 2.57-1(I)(1) of Rev. Regs. 2-98, as amended, provides that non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. Thus, if the income is derived from sources outside the Philippines, the same is not subject to final withholding tax. ROHM LSI Design Philippines, Inc. (ROHM) is, therefore, not required to withhold the 32% final income tax on its payments under the aforementioned Software Maintenance Agreement Standard Terms and Conditions. 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 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. The services to be rendered by Cadence to ROHM will be done outside the Philippines. Consequently, software maintenance services pursuant to the Software Maintenance Agreement Standard Terms and Conditions shall not be subject to. VAT. Thus, no VAT may be passed on by ROHM to Cadence. Accordingly, since the services for software maintenance above-mentioned are performed outside the Philippines, no income and value-added taxes shall be imposed. 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. THCSAE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service