BIR Ruling [DA-426-06]

July 13, 2006 BIR RULING [DA-426-06] 42 (C) (3); DA-223-04 Agan and Montenegro Law Offices 3rd Floor, P&L Bldg., 116 .Legazpi St. Legazpi Village, Makati City Attention: Attys . Rommel S . Agan and J . Carlito M. Montenegro Gentlemen : This refers to your letter dated May 22, 2006 requesting on behalf of your client, Japan Radio Co., Ltd. (JRC for brevity), for a confirmatory ruling on the tax consequences of the income payments to be made by an unincorporated joint venture (JV) known as "FF Cruz-JRC Joint Venture" to JRC for engineering and technical services rendered in Japan by JRC to the JV relative to the Contract for the Procurement and Installation of Equipment for Vessel Traffic Management System (VTMS) at the Port District of Manila (the "Project") with the Philippine Ports Authority (PPA). The facts as you represented are as follows: JRC is a corporation duly organized and existing under and by virtue of the laws of Japan with registered office at Nittochi Nishi-Shinjuku Building, 10-1, Nishi-Shinjuku 6-chome, Shinjuku-ku, Tokyo 160-0023, Japan. FF Cruz, on the other hand, is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with registered office address at 800 E. delos Santos Avenue, Quezon City. On July 2003, a Joint Venture Agreement (JVA) was executed by and between JRC and FF Cruz for the purpose of submitting joint pre-qualification documents with the PPA for the Project. IDTSEH After the opening of the bid and the conduct of bid evaluation and post-qualification, the PPA awarded the contract to FF Cruz-JRC JV after finding its bid to be the single calculated and responsive bid. Thus, on October 26, 2004, a Contract for the Procurement and Installation of Equipment for VTMS at the Port of District of Manila was executed by and between the PPA, as the implementing agency of the government and FF Cruz and JRC as contractors and members of the FF Cruz-JRC JV. Under the contract, the total contract price shall be paid to the JV only upon full completion of the project and fulfillment by the JV of all the terms and conditions of the contract and issuance by PPA of the corresponding Certificate of Completion and Acceptance. Pursuant to the award by the PPA of the Project to the JV, JRC and the JV executed a contract particularly denominated as "Engineering and Technical Services Agreement" (the "Agreement") whereby JRC undertook to provide engineering and technical services in Japan, consisting of the design, manufacture and supply of all the necessary machinery and equipment in the Project in conformity with the requirements of the PPA. All the machinery and equipment necessary in the Project, as well as the engineering and design services related thereto, will be manufactured, fabricated, completed and performed in Japan. JRC shall deliver such machinery and equipment to the JV on an F.O.B. basis and the JV shall take title to and ownership of the machinery and equipment outside the Philippines. On the basis of the foregoing facts, you now request for a confirmatory ruling that the payments to be made by the JV to JRC under the Agreement shall not be subject to Philippine income tax, and consequently to withholding tax, relative to the services performed by JRC outside of the Philippines pursuant to the income source rules under our tax system. In reply, please be informed that under Section 28(B)(1) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, 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 interest, 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%). Moreover, Section 23(F) of the same Tax Code states that: "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." According to Section 23(F), a foreign corporation like JVC is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, as stated in Section 42(C)(3) of the 1997 Tax Code below: "SEC. 42. Income from sources within the Philippines . "xxx xxx xxx "(C) Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: "xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines; Such being the case and since the services rendered by JRC consisting of engineering and technical services in Japan, particularly the design, manufacture and supply of all the necessary machinery and equipment in the Project in conformity with the requirements of the PPA are all carried out beyond the territorial jurisdiction of the Philippines, the payment of fees to be made by the JV to JRC under the said Agreement, being income not derived from sources within. the Philippines by a foreign corporation, are exempt from Philippine income tax and consequently from withholding tax. HTIEaS In BIR Ruling [DA-223-04] dated April 29, 2004, the BIR likewise had the opportunity to rule that: "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. Thus, Section 42 of the Tax Code provides: On the basis of the foregoing, we hereby confirmation your opinion that the payments to be made by the JV to JRC under the aforestated Agreement shall not be subject to Philippine income tax, and consequently to withholding tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service