BIR Ruling [DA-313-97]

September 10, 1997 BIR RULING [DA-313-97] Tax Counseling, Inc. Unit 2204C Tektite Towers East PSE Bldg., Exchange Road Ortigas Center, Pasig City Attention: Atty. T.A. Tejada Gentlemen : This refers to your letter dated May 26, 1997, requesting this Office to confirm your opinion that the fees to be paid by Andersen Consulting, Inc. (AC-Manila for brevity) to Andersen Worldwide Societe Cooperative (AWSC, for brevity) are not subject to income tax and consequently to withholding tax. It is represented that AC-Manila is a domestic corporation duly organized and existing under the laws of the Philippines and is 100% Filipino-owned; that it is engaged in the business of providing management consulting and management information consulting services, particularly information technology consultancy to its clients, both domestic corporations and multinationals; that AC-Manila is a member firm of AWSC, a legal entity registered under the laws of Switzerland and having its principal office in Geneva, Switzerland; that AWSC was organized at the request of member firms in various countries for the purpose of arranging the coordination, on an international basis, of the professional practices and services of member firms; that AWSC is a non-resident foreign entity not engaged in trade and business in the Philippines. It is further represented that being a member firm of AWSC, AC-Manila is bound to undertake and complete its engagements and services to its clients to the highest standards set by AWSC for and among member firms; that AWSC coordinates the provision for the assistance of member firms by way of certain services provided or rendered either by itself or through one or more of the member firms assigned by AWSC (referred to as the service provides); that such services include (but is not limited to) practice development assistance, quality control, marketing, internal management control and other related support services and activities; that in order that AC-Manila can avail itself of such services from AWSC and/or the service providers, it entered into a Service Agreement with AWSC, effective January 1, 1996 under which AWSC will coordinate the provision of the above-mentioned services to AC-Manila, utilizing AWSC's resources outside the Philippines; that AWSC shall provide and assign from time to time such offshore support staff as may be necessary to render the services to AC-Manila from outside the Philippines, including facilities, furniture, equipment, and materials necessary for the use by the support staff; that the Agreement is in effect for a period of one year, renewable automatically for additional consecutive periods of one year each but is terminable upon written notice from either party in the event that AC-Manila ceases to be affiliated with AWSC; and that in consideration of such services to be rendered to AC-Manila by AWSC and/or the service providers from outside the Philippines, AC-Manila shall pay AWSC an annual service fee which is computed using a consistent basis for charging each member firm for the actual and direct costs expenses, without mark-up or profit element, incurred in connection with the services provided by AWSC and/or the service providers. cAHITS In reply thereto, please be informed that your opinion is hereby confirmed. The payments to be made by AC-Manila to AWSC covering the actual and direct costs and expenses, without mark-up or profit element, incurred by AWSC and/or service providers in rendering the offshore services, are mere reimbursements of actual costs and expenses and, therefore, do not constitute taxable income. (BIR Ruling No. 001-90, dated January 4, 1990) Moreover, the practice development assistance, quality control support, marketing assistance, management control assistance, training programs and development of management skills, reporting and information service, and other related services and activities, involve rendering of professional services. As such, and since such assistance and services will be performed by AWSC and/or service providers outside the Philippines, the fees to be remitted by AC-Manila to AWSC are considered income derived from sources outside the Philippines [Sec. 36 (c) (3), Tax Code, as amended]. Accordingly, and since AWSC, being a non-resident foreign corporation, is subject to Philippine income tax only on income derived from sources within the Philippines, the fees to be paid to it by AC-Manila are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed by Section 25 (b) (1) in relation to Section 50 (a) of the Tax Code, as amended. [BIR Ruling No. 093-89, May 2, 1989; BIR Ruling No. 022-89, dated October 31, 1989; BIR Ruling No. 002-90, dated January 4, 1990] CITSAc Finally, the aforementioned fees are not considered as rentals or royalties within the purview of Section 36 (a) (4) of the Tax Code, as amended, since there is no transfer into the Philippines of technology, equipment, or other property where the payee has proprietary interest. Specifically, under sub-paragraph (c) thereof, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no such transfer of technology as the fees to be paid by AC-Manila to AWSC are for the latter's and/or the service providers' professional assistance and service to AC-Manila all of which are performed outside the Philippines. Thus, the fees to be remitted to AWSC are not royalties, but a virtual compensation for labor or personal services performed outside the Philippines, hence, not subject to Philippine income tax and consequently to withholding tax. [BIR Ruling Nos. 093-89 dated May 2, 1989; 221-89, dated October 31, 1989; 001-90 dated January 4, 1990; 002-90, dated January 4, 1990; and 036-90, dated March 27, 1990] 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. DaTICE Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV OIC, Assistant Commissioner (Legal Service)