Agan & Montenegro Law Offices

May 9, 2007 BIR RULING [DA-288-07] 42 (C) (3), 108; DA-223-2004/DA-514-2006 Agan & Montenegro Law Offices 3rd Floor, P&L Bldg., 116 Legazpi St. Legazpi Village, Makati City Attention: Attys. J. Carlito M. Montenegro and Rommel S. Agan Gentlemen : This refers to your letter dated April 3, 2007 requesting on behalf of your client, Isuzu Philippines Corporation (Isuzu for brevity), for confirmation of opinion that the payment of service fees made by Isuzu to ICL Company Limited (ICL), shall not be subject to Philippine income tax and consequently not subject to withholding tax and the value-added tax (VAT), pursuant to Section 28 (B) (1) in relation to Section 42 (A) (3), both of the Tax Code of 1997. The facts as you represented are as follows: ICL is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Japan with registered office at 3-26-7, Minami-ohi, Shinagawa-ku, Tokyo, Japan. On the other hand, Isuzu is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with registered office at 114 Technology Avenue, Phase 11, Laguna Technopark, Bian, Laguna. Sometime in March, 2006, a Service Agreement was executed by and between Isuzu and ICL, wherein the former contracted the services of the latter for the purpose of undertaking research, development, design and engineering of new parts to be installed in 2007 models of TBR (to be released) model vehicles of Isuzu. In accordance with the agreement, all services by ICL shall be performed within the territorial jurisdiction of Japan. Upon accomplishment and conclusion of the agreement ICL shall completely deliver to Isuzu the development results and all proprietary rights thereto. In return, Isuzu shall fully compensate ICL for services rendered, inclusive of all expenses thereof in the total amount of Thirty Million Twenty Two Thousand Japanese yen (JPY30,022,000.00). In reply, please be informed that under Section 28 (B) (1) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, provides: "Sec. 28. Rates of Income Tax on Foreign Corporations . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(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 subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). TCDcSE Moreover, Section 23 (F) of the same Tax Code states that: "Sec. 23. General Principles of Income Taxation in Philippines . xxx xxx xxx (F) 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." According to Section 23 (F), a foreign corporation like IPC is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, as state in Section 42 (C) (3) of the 1997 Tax Code below: "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: "xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines; Such being the case and since the services rendered by IPC consisting of research, development, design and engineering are all carried out beyond the territorial jurisdiction of the Philippines, the payment of fees to be made by the Isuzu to IPC under the said Agreement, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax and consequently from withholding tax. In BIR Ruling [DA-223-04] dated April 29, 2004, the BIR likewise had the opportunity to rule that: "The situs of tax for services is the place where the service is rendered. Under the Philippine source of income rules for income tax purposes, service income will be considered Philippine source income only if the services are rendered in the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income. Thus, Section 42 of the Tax Code provides: Moreover, pursuant to BIR Ruling [DA-514-2006] dated August 25, 2006, this Office opines that: "Section 108(A) of the Tax Code of 1997 states 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 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. (emphasis supplied) aCcSDT "Accordingly, the services to be rendered abroad by IGCL to BWSI pursuant to the "Mobile Server System Service Agreement" and the "Content Aggregation Portal Service Agreement" are not subject to VAT. Thus, no VAT may be passed on by BWSI to IGCL. "IN VIEW OF ALL THE FOREGOING, this Office confirms your opinion that fees to be paid by BWSI to its foreign service provider which is a non-resident foreign corporation based in Hong Kong are not subject to Philippine income tax and to the 10% VAT." On the basis of the foregoing, we hereby confirm your opinion that the payments to be made by Isuzu to ICL under the aforestated Service Agreement shall not be subject to Philippine income tax, and consequently to withholding tax and likewise the VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. ATcEDS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service