BIR Ruling [DA-361-06]

June 9, 2006 BIR RULING [DA-361-06] 25 (A) & (B); 28 (B) (1); DA-037-2004 Advincula & Co . Attorneys and Counselors at Law 37 Laguna St., Bonifacio Village Tandang Sora, Quezon City Attention: Atty. Ma. Lerma L. Advincula Partner This refers to your letter dated May 15, 2006 requesting on behalf of your client, Treasure Add International, Ltd . (TAIL), for confirmation of your opinion that the income derived by virtue of its "Chipwashing and Junket Operations" Agreement with the Philippine Amusement and Gaming Corporation (PAGCOR) is not subject to income tax, the 12% value-added tax and to the withholding tax. It is represented that TAIL is a corporation duly organized and existing under and by virtue of the laws of the British Virgin Islands. It is not registered with the Philippine Securities and Exchange Commission or with the Bureau of Internal Revenue because it is not doing business in the Philippines. It does not have a permanent establishment and has not employed any staff or representative in the country. TAIL intends to enter into a contractual arrangement with PAGCOR under the Foreign High Roller Marketing Program. The former will undertake to bring in foreign players ("Patrons") through its own promotional efforts and also through introductions by subagents, to participate in the gaming activities at a casino owned and operated by PAGCOR. TAIL will not operate or manage the casino. Additionally, it will promote the PAGCOR casino in Southeast Asia; will make arrangements for the travel of the foreign players; and will conceptualize innovative promotion and marketing techniques to position the PAGCOR casino as a viable, secure alternative tourism and gaming destination. In consideration thereof, PAGCOR will pay a fee based on a predetermined computation as will be stated in the contract. PAGCOR will provide all personnel for the said casino, as well as contributing management expertise and exercising control over the gaming activities ensued thereat. TAIL will not provide personnel for the casino and will have nothing to do with the casino's operation. In reply, please be informed that Section 28(B)(1) of the National Internal Revenue Code of 1997, provides: "Sec. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident 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 subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). SIcEHD It can be inferred from the foregoing provision that non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Otherwise stated, non-resident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. Since the services mentioned above are to be performed abroad by TAIL, the service fees to be paid by PAGCOR shall constitute compensation for labor or personal services performed outside the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997. Hence, the said service fees shall not be subject to Philippine income tax. ( BIR Ruling No. DA-037-2004 dated February 2, 2004 ) In BIR Ruling No. DA-223-04 dated April 29, 2004, the Bureau ruled as follows: "The situs of tax for services is the place where the service is rendered. Under The Philippine source of income rules for income tax purposes, service income will be considered Philippine source income only if the services are rendered in the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income." Moreover, such payments are not subject to final withholding tax required to be withheld pursuant to Section 2.57(A) in relation to Section 57-1(1)(1), both of Revenue Regulations No. 2-98, as amended. Section 2.57-1(1)(1) provides that non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. ( BIR Ruling No. DA-ITAD-26-03 dated January 30, 2003) With respect to VAT, Section 108(A) of the Tax Code of 1997, as amended by Republic Act No. 9337 provides that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. This 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 ITAD Ruling No. 92-04 dated August 31, 2004, it was held that "inasmuch as it is represented that the sales and marketing services are to be performed by Hyatt outside of the Philippines, then, the service fees to be paid by NCHI are considered as income derived from services rendered outside the Philippines and shall not be subject to the 10% value-added tax." In this case, the services to be performed by TAIL to PAGCOR pursuant to the Service Agreement will be done outside the Philippines. Consequently, PAGCOR's payment of service fee to TAIL shall not be subject to VAT. Thus, no VAT may be passed on by PAGCOR. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service