BIR Ruling [DA-315-98]

July 16, 1998 BIR RULING [DA-315-98] Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George J . Lavadia Principal Tax and Corporate Services Gentlemen : This refers to your letter dated December 11, 1997 requesting on behalf of your client, OCBC Securities Philippines, Inc. (OSPI), for a confirmation of your opinion that the referral fees received by a foreign affiliate company for services rendered outside the Philippines are not subject to Philippine tax. aisadc It is represented that OSPI is a domestic corporation duly registered with the Securities and Exchange Commission as a securities broker in the Philippines; that OCBC Securities Private Limited (OSPL) is a non-resident foreign corporation engaged in the stock brokerage business existing under the laws of Singapore with no permanent establishment in the Philippines; that pursuant to the contract between OSPI and OSPL, OSPL shall refer, encourage and assist its own clients to invest in Philippine securities through OSPI; and that in consideration of the referral services rendered by OSPL, OSPI shall pay an amount equivalent to 50% of whatever commission OSPI earned from the foreign clients. In reply, please be informed that Section 28 (B)(1) of the Tax Code of 1997 provides viz : "(B) Tax on Non-resident 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 subparagraphs 5(c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). " In order that the source of an income shall be considered as coming from the Philippines, it is sufficient that the income is derived from an activity within the Philippines. (Commissioner vs. BOAC & CTA GR Nos. 65773-74 April 30, 1987) Since the referral services by OSPI are rendered outside the territorial jurisdiction of the Philippines, the commission/fees derived therein are considered as income from without the Philippines, pursuant to Section 42 (C) (3) of the Tax Code of 1997. Accordingly, inasmuch as a non-resident foreign corporation is subject to tax only on income from sources within the Philippines, the referral fees made by OSPI to OSPL are not subject to Philippine income tax, and consequently, OSPI is not required to withhold any tax on such income payments under Section 57 (A) of the Tax Code of 1997. (BIR Ruling No. 74-94 dated March 9, 1994) 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. cd Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)