Puyat Jacinto & Santos

June 5, 2008 BIR RULING [DA-344-08] 23 (F); 42 (A) (3); DA-598-06; 464-93 Puyat Jacinto & Santos 12th Floor, Manilabank Bldg. 6772 Ayala Ave., Makati City Attention: Atty. Virginia B. Viray and Atty. Arnaldo M. Carino Gentlemen : This refers to your letter dated April 30, 2008 on behalf of your client, Hewlett Packard Company, (HP for brevity), requesting for confirmation of your opinion that the service fees, including the penalty interest for the unpaid fees, to be directly paid by Hewlett-Packard Philippines Corporation (HPPC for brevity) to HP for non-technical management support services is exempt from income, withholding and Value-Added Taxes (VAT) as services rendered by a non-resident foreign corporation entirely in the United States of America (USA) are not subject to Philippine tax. aESICD The facts as you represented are as follows: HP is a corporation incorporated and existing under and by virtue of the laws of Delaware USA, with registered office address at 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle with principal office and place of business located at 3000 Hanover Street, Palo Alto, CA 94304 USA. HPPC, on the other hand, is a corporation duly organized and existing under Philippine laws with principal office address at the 37th Floor, Robinson Summit Center, 6783 Ayala Avenue, Makati City, Philippines 1226. Both HP and HPPC are similarly engaged in the business of manufacturing, assembling, and trading of computer and electronic components and parts, computer systems and equipment. TDcCIS On November 1, 2005, HPPC and HP entered into a Miscellaneous Services Agreement to take effect on the same date. Under the said Agreement, HP will undertake to render the following offsite assistance or services ( i.e. to be performed entirely outside the Philippines): 1. Management services on the consulting and integration contracts of HPPC; 2. IT consulting; 3. Tax consulting; 4. Software development services; 5. Consulting services for HPPC's global deals; and 6. Marketing services. All of the above services shall be performed entirely in the USA and shall not involve any transfer of technology, know-how or other intellectual property rights. Furthermore, it shall not involve services relating to research and development or the transfer of manufacture of proprietary products. In consideration of the foregoing undertaking, HPPC shall pay HP a monthly service fee. HP shall also be entitled to charge a penalty interest for the unpaid service fees. In reply, please be informed as follows: A non-resident foreign corporation is taxable only on income derived from sources within the Philippines pursuant to Section 23 (F) in relation to Section 28 (B) (1) and 42 (A) (3) of the Tax Code which provides: aHTCIc "SEC 23. General Principles of Income Taxation in the Philippines . xxx xxx xxx "(F) 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. "SEC. 28. Rates of Income Tax on Foreign Corporations . "(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 subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). (Emphasis supplied) "SEC. 42. Income from Sources Within the Philippines . xxx xxx xxx "(3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" As clearly provided by law, a non-resident foreign corporation is taxable only on income derived from sources within the Philippines. Thus, if HP, a non-resident foreign corporation, furnishes and performs services outside the Philippines for HPPC, the service fees, including the penalty interest, if any, to be paid for by the latter to the former, are not taxable in the Philippines. In Commissioner of Internal Revenue vs. Japan Air Lines, Inc. et al., G.R. No. 60714, October 4, 1991, it was held that the situs of income derived from labor or personal services is determined solely by the place where the service is rendered. Thus, compensation from services performed abroad is considered income from sources without the Philippines (BIR Ruling No. 464-93 dated November 19, 1993) and thus, not subject to Philippine income tax. aSTECI Considering the services of HP to HPPC under the Miscellaneous Services Agreement are rendered outside the Philippines, the payments by HPPC to HP are considered income derived from sources outside the Philippines. Thus, the service fees, including the penalty interest for the unpaid fees, received by HP, a non-resident foreign corporation, for services rendered entirely in USA shall not be subject to income tax and withholding tax. Services rendered outside of the Philippines are not subject to VAT. Section 108 (A) of the Tax Code provides that "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. The application of the aforementioned provisions can be seen in BIR Ruling DA 598-2006 dated October 9, 2006, to wit: In regard to the liability for VAT, Section 108 of the Tax Code of 1997, as amended, provides that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. The same provision of the Tax Code 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 outside the Philippines are not subject to VAT. Section 108 (A) of the same Tax Code clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004). Accordingly, since the subject services under the Marketing Service Agreement will not be performed in the Philippines, service fees to be paid by SUNMEC to MIKOMA are exempt from VAT. Applying the said rule in the case at hand, services rendered by HPPC under the Miscellaneous Services Agreement which are performed entirely in USA are not subject to VAT. AEcTaS 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