BIR Ruling [DA-496-05]

December 9, 2005 BIR RULING [DA-496-05] 28 (B) (1); DA-534-04 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Services Gentlemen : This refers to your letter dated July 14, 2005 requesting on behalf of your client, Philippine Base Metal Corporation ("PBMC") for confirmation of your opinion that commission payments made by PBMC to its merchandise brokers who are non-resident foreign corporations based in Korea are not subject to Philippine income tax and to the 10% value-added tax (VAT). It is represented that Philippine Base Metal Corporation ("PBMC") is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that it is engaged in the business of buying scrap metals, processing these scrap metals by segregation, re-packing and quality checking, and exporting the processed metals to buyers in countries such as Korea; that PBMC's export sales to Korea are primarily due to the representations and services of Tongwoo International Corporation Limited ("TICL") and SeaKwang Trading Corporation ("SKTC") ,whose businesses are in the nature of merchandise brokers; that TICL and SKTC act as negotiators between PBMC and buyers of processed metals in South Korea; that TICL and SKTC do not have offices or branches in the Philippines; that they likewise do not act through resident agents in the Philippines; that in consideration of the services of TICL and SKTC , PBMC pays commission to these companies, which it remits directly to the companies' bank accounts in Korea. In reply thereto, please be informed that pursuant to Section 28(B)(1) of the Tax Code of 1997, non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, these corporations are not subject to income tax on income derived from sources outside the Philippines. On the other hand, Section 42(C)(3) of the same Code provides that personal services performed without the Philippines are considered income from sources without the Philippines. Hence, non-resident foreign corporations deriving income for services performed abroad are not subject to Philippine income tax since such services are considered income from sources without the Philippines. Accordingly, since the services are to be performed abroad by TICL and SKTC, the service fees to be paid by PBMC to TICL and SKTC shall not be subject to Philippine income tax and consequently to withholding tax. It is well to emphasize that Section 108(A) of the Tax Code of 1997 provides that VAT shall be imposed on gross receipts derived from sale or exchange of services, and use or lease of properties. It further 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 without the Philippines are not subject to VAT. Hence, since the services by TICL and SKTC will be performed without the Philippines, the service fees to be paid by PBMC to TICL and SKTC shall not be subject to the 10% VAT. In view of the foregoing, this Office holds that fees paid by PBMC to TICL and SKTC for the consideration of the services rendered abroad are not subject to income tax and consequently to the withholding tax and value-added tax (VAT). (BIR Ruling No. DA-534-04 dated October 25, 2004) 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 OIC, Commissioner of Internal Revenue