BIR Ruling [DA-293-00]

July 28, 2000 BIR RULING [DA-293-00] SGV & CO. 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan Torres Gentlemen : This refers to your letter dated February 1, 2000 requesting, on behalf of your client, Azimuth Consulting Philippines, Inc . ( Azimuth-Phil .), for a confirmation of your opinion that the service fees paid by Azimuth-Phil to Azimuth Consulting Limited ( Azimuth-NZ ), a non-resident foreign corporation, for services rendered outside the Philippines shall not be subject to income tax, withholding tax and value-added tax (VAT) in the Philippines and that Azimuth-Phil. shall be allowed to claim such service fees as a deduction for income tax purposes. It is represented that Azimuth-Phil. is a domestic corporation engaged in providing business consultancy services, feasibility studies, researches, management consultation, information technology works and development involving local and foreign projects; that Azimuth-NZ is a foreign corporation with principal office in New Zealand engaged in providing or coordinating the provision of certain support services; that to support its business in the Philippines, Azimuth-Phil. entered into a services agreement with Azimuth-NZ whereby the latter shall provide or coordinate the provision of certain services, such as, but not limited to, practice development assistance, quality control, marketing, reporting, and certain related support services and activities; that the Agreement further provides that Azimuth-Phil. shall pay to Azimuth-NZ an annual fee which shall cover the actual and direct costs and expenses incurred by Azimuth-NZ in providing the services to Azimuth-Phil.; that Azimuth-NZ shall utilize its resources outside the Philippines in rendering these services. Based on the foregoing representations, you request for confirmation of the following: "a. The service fees paid by Azimuth-Phil. to Azimuth-NZ for services under the Agreement are considered as compensation for services rendered outside the Philippines pursuant to Section 42(C)(3) the Tax Code, hence, not subject to income tax pursuant to Section 28 of the Tax Code: "b. The service fees paid by Azimuth-Phil. to Azimuth-NZ for services performed by the latter is an ordinary and necessary business expense of Azimuth-Phil. which are allowed as a deduction from its gross income pursuant to Section 34(A)(1) of the Tax Code; and c. The fees received by Azimuth-NZ from Azimuth-Phil. for services rendered abroad are not subject to 10% VAT pursuant to Section 108 of the Tax Code." In reply, please be informed as follows: 1. Pursuant to Section 28(B)(1) of the Tax Code of 1997, non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, these corporations are not subject to income tax on income derived from sources outside the Philippines. Section 42(C)(3) of the Tax Code of 1997 further provides that personal services performed without the Philippines are considered income from sources without the Philippines. Hence, 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 Azimuth-NZ, the service fees to be paid by Azimuth-Phil to Azimuth-NZ shall not be subject to Philippine income tax. Furthermore, since the service fees consist only of actual and direct costs and expenses incurred by Azimuth-NZ in rendering the services to Azimuth-Phil., such fees are mere reimbursement of costs which are not subject to income tax and consequently, to withholding tax. Section 34(A)(1) of the Tax Code of 1997, provides that there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession. Since the service fees to be paid by Azimuth-Phil. to Azimuth-NZ are considered ordinary and necessary business expenses which are directly connected with and appropriate in the conduct of Azimuth-Phil.'s business, the same are deductible from Azimuth-Phil.'s gross income pursuant to Section 34(A)(1) of the Tax Code of 1997. (BIR Ruling, Nos. DA-145-97 dated April 7, 1997; 1-90 dated January 4, 1990) 2. 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 use or lease of properties. It further 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 without the Philippines are not subject to VAT. Hence, since the services by Azimuth-NZ will all be performed without the Philippines, the service fees to be paid by Azimuth-Phil. to Azimuth-NZ shall not be subject to the 10% VAT. (BIR Ruling No. 044-99 dated March 30, 1999) prcd This ruling is being issued based on 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group