BIR Ruling [DA-398-98]

September 3, 1998 BIR RULING [DA-398-98] Joaquin Cunanan & Company 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 February 23, 1998 requesting for opinion that the payments made by your client, Components Manufacturer of TDK Corporation (CM TDK), to ASD Engineering Co. Ltd. (ASD), a non-resident foreign corporation, for services performed outside the Philippines are not subject to Philippine income or withholding tax. It is represented that CM TDK is a domestic corporation; that ASD is a Hong Kong corporation not engaged in trade or business in the Philippines; that CM TDK and ASD entered into a Professional Services Agreement whereby ASD will provide CM TDK professional services such as facility planning and design, project budgeting, facility equipment and materials sourcing, and plant maintenance training program; that said services with the exception of Item 1.4 of the Agreement (Plant Maintenance Training Program) will be performed and completed by ASD within a period of 12 months from November 22, 1997; that Item 1.4 will be completed on or before the end of September 1997; that as a part of CM TDK's operations, a big MR (Slider-HSA) factory plant with a floor area of 39,730 square meters and with a capacity of 5M MR heads per month will be established by CM TDK on a lot with a land area of 83,820 square meters located at Laguna Technopark Inc., Philippines; that in order to set up and facilitate the big MR (Slider-HSA) factory plant, CM TDK entered into a Professional Services Agreement with ASD, a Hong Kong corporation not engaged in trade or business in the Philippines; that the foregoing services shall wholly be performed by ASD outside the Philippines, more particularly in Hongkong and China. In reply thereto, please be informed that the professional services to be performed by ASD in Hong Kong and China are not subject to income tax and consequently to the final withholding tax prescribed by Sec. 28 (B)(1), in relation to Sec. 57 (A) of the Tax Code of 1997 because Sec. 28 (B)(1) in relation to Section 23 (F), Tax Code of 1997, limits the taxability of a foreign corporation not engaged in trade or business in the Philippines to the income it derives from sources within the Philippines. Accordingly, the services rendered abroad by a non-resident foreign corporation is beyond the taxing jurisdiction of the Philippine Government, except only where the said non-resident foreign corporation has a permanent establishment in the Philippines, in which case, said income from the permanent establishment may be covered by the provisions of the Tax Treaty (if any) between the Philippines and the Contracting State. cdta 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. (BIR Ruling No. 132-97 dated December 11, 1997) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group