Samsung Electronics Philippines Manufacturing Corporation

May 10, 2007 BIR RULING [DA-296-07] Sec. 23 (F), 28 (B), 42 (C), 108; DA 165-96; DA 173-01 Samsung Electronics Philippines Manufacturing Corporation Block 6, Calamba Premiere International Park Barangay Batino, Calamba City Laguna Attention: Mr. Sang Ho Park Chief Financial Officer Gentlemen : This refers to your letter dated April 18, 2007 requesting for confirmation of your opinion that the service fee to be paid by your company, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL) , to Samsung SDS Asia Pacific Pte Ltd (SDSAP) for the supply of managed application hosting services is not subject to Philippine income, withholding and value-added taxes, pursuant to Section 23 (F), in relation to Sections 28 (B) (1) and 42 (A) (3), and Section 108 (A) of the 1997 Tax Code. It is represented that SEPHIL [formerly Philippines Samsung Electronics Corporation (PSEC)] is a corporation duly organized and existing under Philippine laws with office address at the Calamba Premiere International Park-Special Economic Zone; that SDSAP, on the other hand, is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Singapore with registered office at 3 Church Street #22-01 Samsung Hub, Singapore 04983; that on September 1, 2006, SEPHIL and SDSAP entered into a Supplement Agreement (Agreement) for the supply of managed application hosting service for functional currency recovery as supplemental agreement to the Master Agreement for Application and Hosting, denominated as MH/AP200607DC, executed by the parties on November 1, 2006; that under the Agreement, SDSAP undertakes to render the functional currency recovery managed applications service in favor of SEPHIL; that the applications service is to be performed entirely in Singapore and does not involve any transfer of technology, know-how or other intellectual property rights; and that in consideration therefor, SEPHIL will pay SDSAP service fee in the amount of US dollars 152,000.00 for the period September 2006 up to December 2008. It is your opinion that the service fee to be directly paid by SEPHIL to SDSAP under the Agreement is not subject to Philippine income, withholding and value-added taxes. HcaDTE In reply, please be informed that as follows: I. As a general rule, Section 23 (F) of the 1997 Tax Code as amended by RA 9337, in relation to Section 28 thereof, provides that 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 and received during the taxable year, at the rate equal to thirty-five percent (35%) of the gross income. For purposes of determining which income is considered not of Philippine source, Section 42 (C) of the Tax Code enumerates the following items of gross income as income from sources without the Philippines, to wit: "(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines". Thus, income derived by non-resident foreign corporations for services rendered outside the Philippines is not subject to Philippine income tax; and consequently to withholding tax (BIR Ruling Nos. 59-80 dated December 10, 1980 and 059-98 dated May 21, 1998) Accordingly, since SDSAP is a non-resident foreign corporation who renders its service outside the Philippine taxing jurisdiction, income payments received by it from SEPHIL for such service are considered income from without the Philippines; hence, exempt from income tax and consequently from the withholding tax. CaDSHE II. Pursuant to Section 108 (A) of the 1997 Tax Code, as amended by RA 9337, a value-added tax (VAT) equivalent to twelve percent (12%) shall be imposed on the gross receipts derived by any person engaged in the sale of goods or services in the Philippines. 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. In the instant case, since the service to be rendered by SDSAP will be done outside the Philippines, it shall not be liable to pay the VAT. Hence, since the service fee therefor shall not be subject to the twelve percent (12%) VAT, no VAT may be passed on by SDSAP to SEPHIL. (BIR Ruling No. 110-97 dated October 23, 1997; DA-293-07-00 dated July 28, 2000 and BIR Ruling No. 004-01 dated February, 2001.) 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service