BIR Ruling [DA-393-03]

November 4, 2003 BIR RULING [DA-393-03] 22 (I), 28 (B) (1), 42 (A) (4) (f), 58 & 109 (p) VAT 234-88; 136-89; & DA 32-02 International Legal Advocates Suite 1403, 14/F, Annapolis Wilshire Plaza Condominium No. 11 Annapolis Street, Greenhills San Juan, Metro Manila Attention: Atty. Michael C. Chavez Gentlemen : This refers to your letter dated February 20, 2003 requesting in effect for a ruling exempting your client, Obtech Asia Pacific Pte. Ltd. from payment of the value-added and withholding taxes. It is represented that your client, Obtech Asia Pacific Pte. Ltd. ("Obtech") is a foreign corporation organized and existing under the laws of Singapore; that by virtue of SEC Reg. No. A 20017820, the Securities and Exchange Commission granted to your client a LICENSE TO TRANSACT BUSINESS in the Philippines in accordance with the Corporation Code (Batas Pambansa No. 68) and the Foreign Investment Act of 1991 (Republic Act No. 7042; that consequently, your client established a representative office in the Philippines with address at 24th Floor, Pacific Star Building, Makati Avenue, Makati City; that said office shall perform in particular activities, which promote the interests of its parent company; that your client conducts: 1) conferences and dialogues for the purpose disseminating information regarding the company and its products; 2) promotion of the products and services of the company, through the process of demonstrations; and 3) referral of orders and technical assistance to persons or personnel who have the requisite, expertise and knowledge of the products and services. In reply, please be informed that a representative office is a non-resident foreign corporation not engaged in any income generation business in the Philippines. As can be viewed by its licensed activities, Obtech is a representative office. Accordingly, your client, Obtech is not subject to income tax. Hence, it is exempt from filing of the corporate income tax return (BIR Ruling No. 136-89 dated July 4, 1989) . A person is subject to VAT if it renders service "in the course of trade or business" (Section 105, 1997 Tax Code). Inasmuch as the operation of the representative office is similar to regional or area headquarters of multinational corporations which are exempt from VAT under Section 109(p) of the 1997 Tax Code, representative offices are also exempt from VAT. Moreover, since Obtech Manila Office merely enables the overseas head office to maintain some presence in the country, and is not engaged in any income-generating activity in the Philippines further qualifies said office for exemption from VAT. However, this exemption applies only to VAT directly due from representative offices (VAT Ruling No. 234-88 dated May 25, 1988 and BIR Ruling No. 136-89 dated July 4, 1989) . On the other hand, please be advised that if you will remit technical service fees to your parent company, the said fees are considered royalties (Section 42(A)(4)(f), 1997 Tax Code). Being Philippine source income of a representative office, the technical service fees are subject to Philippine corporate income tax at the rate of 32% (Section 28(B)(1), Ibid ) which you will withhold as the payor-corporation and paid in the same manner and subject to the same conditions as provided in Section 59 of the 1997 Tax Code (Section 58, Ibid ) (BIR Ruling No. 136-89 dated July 4, 1989) . Moreover, you are further advised that if you have employees, they are subject to the following rates pursuant to Section 2.57.1(D) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. No. 6-2001, as further amended by Rev. Regs. No. 12-2001, implementing Section 58 of the 1997 Tax Code: SDHAEC a. If a Filipino citizen, whether resident or non-resident, or a resident alien graduated tax rates of 5%32%; b. If a non-resident alien engaged in trade or business in the Philippines graduated tax rates of 5%32%; c. If a non-resident alien not engaged in trade or business in the Philippines 25% (BIR Ruling No. DA032-02 dated March 7, 2002) . 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group