Crossworld Business Solutions, Inc.

July 26, 2007 BIR RULING [DA-413-07] Sec. 42 (A) (3) DA-598-2006 Crossworld Business Solutions, Inc. 1904 Peak Tower 107 Leviste Street Salcedo Village, Makati City Attention: Peter Raymond T. Santos Gentlemen : This refers to your letter dated April 16, 2007, in behalf of your client, Oncho Philippines, Inc., ("OPI"), requesting for confirmatory ruling on your opinion that the service fees to be directly paid by OPI to Taisei Oncho Co. Ltd. ("TOCL") 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 Japan are not subject to Philippine tax. It is represented that OPI is a domestic corporation organized and existing under the laws of the Philippines, with principal office located at 7th Floor, Rufino Building, 6784 Ayala Avenue, Makati City, 1226 Philippines; that TOCL is a corporation organized and existing under and by virtue of the laws of Japan, with principal office located at 1-47-1, Ooi, Shinagawa-Ku, Tokyo 1408515 Japan; that on December 27, 2006, OPI and TOCL, entered into a "Service Support Agreement" for the latter to render the following offsite assistance or services to be performed entirely outside the Philippines, to wit: 1.) Marketing and service activity for overseas customers of OPI; a) To review and analyze the accounting data of OPI; b) To counsel about capital investment and employment of OPI; and c) To perform managemental supporting activity for OPI; that the advisory and consultancy services shall be performed entirely in Japan and shall not involve any transfer of technology, know-how or other intellectual property rights; that in consideration of the foregoing, OPI shall pay TOCL a monthly service fee; that in the event that there will be a need for TOCL to send personnel in the Philippines, the same shall not exceed the period or periods aggregating more than six months within any taxable year. Hence, your request. IcDHaT In reply, please be informed as follows: As a rule, 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 1997 Tax Code which provides: "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. 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%). (Emphasis supplied) "SEC. 42. Income from Sources Within the Philippines. "(A) Gross Income From Sources Within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx "(3) Services . Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" 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. Considering that the services that produce the income on the part of TOCL are performed outside of the Philippines, it follows that the income derived from the performance of such services is not taxable in the Philippines. Hence, TOCL shall not be subject to income tax, and consequently, to the withholding tax on the service fee it receives from OPI pursuant to services under the Service Support Agreement. TcSHaD In regard to the liability for VAT, it is a rule that services rendered outside of the Philippines are not subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997. The said provision of law was interpreted and applied in BIR Ruling DA 598-2006 dated October 09, 2006. Thus, "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 TOCL under the Service Support Agreement which are performed entirely in Japan are not subject to VAT. Furthermore, Article 7 of the R.P.-Japan Tax Treaty provides that if a non-resident foreign corporation carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as are attributable to that permanent establishment. Thus, "The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." "Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes especially a store or other sales outlet, a branch, an office, a factory, a workshop, a warehouse, a mine, an oil or gas well, a quarry or other place of extraction of natural resources, or a building site or construction or installation project lasting more than six months." cCaSHA Considering that TOCL does not have any business enterprise and consequently has no permanent establishment in the Philippines to which its business profits may be attributed, the service fees paid by OPI to TOCL for the management support services shall be exempt from income and withholding taxes. 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 from that represented, 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