BIR Ruling [DA-452-03]

December 5, 2003 BIR RULING [DA-452-03] Secs. 28 (B) (1); 105 044-99 Dow Chemical Philippines, Inc . 23rd Floor 6750 Ayala Avenue Makati City Attention: Minerva C. Adove Country Controller Gentlemen : This refers to your letter dated October 3, 2002 requesting for a ruling on the following queries, to wit: 1. Is the service fee billed by Dow Chemical Pacific Singapore Private Limited (DCPSPL), to Dow Chemical Philippines, Inc., for services rendered by DCPSPL outside of the Philippines subject to the Final Tax imposed on Non-Resident Foreign Corporations under Section 28(B)(1) of the Tax Code? If so, what is the rate and required timing for recognizing the tax liability? 2. Is it subject to the 10% VAT under Section 105 of the Tax Code? If so, what is the required timing for recognizing the tax liability? It is represented that Dow Chemical Philippines, Inc., formerly Union Carbide Phils. (Far East) Inc., is a resident foreign corporation doing business in the Philippines. The company changed its corporate name to DCPI in August 2001 as part of the global merger between its mother company, Union Carbide Corporation (UCC), and the Dow Chemical Company (DCC), both of which are American companies with headquarters in the United States. As part of the Dow group of companies, DCPI is subject to the global functional set-up imposed by TDCC on its affiliates and subsidiaries. One of these functional set-up is the centralization of certain functions in Singapore via the creation of an Accounting Services Center. DCPSPL caters to the Dow affiliates in the Asia Pacific Region by rendering part of the backroom services in the areas of the Accounts Payable, Accounts Receivable, Cost Accounting and Invoicing. It also provides support to DCPI on the areas of Finance, Credit, Marketing, Technical Support & Development Services. For all these services rendered in Singapore, DCPSPL bills its affiliates a fixed service fee. Hence, this request. In reply, please be informed as follows: 1. The service fee billed by DCPSPL to DCPI is not subject to the final tax imposed on non-resident foreign corporation because the services were rendered outside the Philippines. Section 28 (B)(1) of the Tax Code provides: Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporations . (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 subparagraphs 5(c): Provided , That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) TCaEAD xxx xxx xxx It is clear from the aforequoted provision that the tax is imposed to a non-resident corporation on its income from all sources within the Philippines. Section 42 of the Tax Code of 1997 enumerates the items of gross income that are considered income from sources within the Philippines. The services rendered by DCPSPL to DCPI are not among the services listed in the Tax Code, payment of which can be considered as income from sources within the Philippines. 2. Section 105 of the Tax Code provides that any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services , and any person who imports goods shall be subject to the value-added tax. However, in order for the sale or exchange of services to be subject to value-added tax, the performance of the same shall be rendered in the Philippines and not abroad (BIR Ruling No. 044-99 dated March 30, 1999). Since the rendition of service of DCPSPL to DCPI is done outside the Philippines, the same therefore, is not subject to value-added tax. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group