BIR Ruling [DA-303-03]

September 16, 2003 BIR RULING [DA-303-03] DA-145-97 dtd 4-7-97 1-90 dtd 1-4-90 044-90 dtd 3-30-99 Itochu Corporation Manila Branch 16th Flr. 6788 Ayala Avenue, Quedan Square Makati City Attention: Mr. Takaharu Tamuro Adm. & Finance Manager Gentlemen : This refers to your letter dated August 5, 2003 requesting for a confirmation of your opinion that the service fee paid by ITOCHU CORPORATION Manila Branch (Itochu-Manila) to ITOCHU Hongkong Branch (Itochu-Hongkong), a non-resident foreign corporation for services rendered outside the Philippines shall not be subject to income tax, withholding and value-added (VAT) taxes in the Philippines. It is represented that Itochu-Manila is the Philippine branch office of Itochu Corporation, a Japanese corporation with head office in Tokyo; that Itochu-Manila is duly registered as branch office with the Securities and Exchange Commission under SEC Registration #F-507; that Itochu-Manila will be entering into a Business Consultancy Service Agreement with Itochu Hongkong; Ltd. with address at 28th Flr., United Center, 95 Queensway, Hongkong; that Itochu-Hongkong is a subsidiary of Itochu Corporation head office in Tokyo but is duly organized and incorporated under the laws of Hongkong as a separate corporation; that Itochu-Hongkong was tasked to provide business and management consultancy services to Itochu corporation's subsidiaries or branch offices in the Asian Region; that in view of this, Itochu-Manila would like to avail of its services and therefore intends to enter into the said Business Consultancy Services Agreement (BCSA) with Itochu-Hongkong; that the said BCSA between the parties clearly indicates that the services of Itochu-Hongkong in favor of Itochu-Manila shall be rendered entirely in Hongkong; that there is no existing tax treaty between Philippines and Hongkong. In reply, please be informed that 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 Itochu Corporation, the service fees to be paid by Itochu-Manila to Itochu-Hongkong shall not be subject to Philippine income tax. Furthermore, since the service fees consist only of actual and direct costs and expenses incurred by Itochu-Hongkong in rendering the services to Itochu-Manila, such fees are mere reimbursement of costs which are not subject to income tax and consequently, to withholding tax. HSCAIT 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 Itochu-Manila to Itochu-Hongkong are considered ordinary and necessary business expenses which are directly connected with and appropriate in the conduct of Itochu-Manila's business, the same are deductible from Itochu-Manila'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) 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 Itochu Corporation will all be performed without the Philippines, the service fees to be paid by Itochu-Manila to Itochu-Hongkong shall not be subject to the 10% VAT. (BIR Ruling No. 044-99 dated March 30, 1999) 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group