BIR Ruling [DA-514-06]

August 25, 2006 BIR RULING [DA-514-06] BIR Ruling No. DA-037-04 SyCip Gorres Velayo & Co . 6760 Ayala Avenue Makati City Attention: Atty. Joel L. Tan-Torres Partner Gentlemen : This refers to your letter dated July 19, 2006 requesting on behalf of your client, Bidshot Wireless Services, Inc . ("BWSI") for confirmation of your opinion that fees to be paid by BWSI to its foreign service provider which is a non-resident foreign corporation based in Hong Kong are not subject to Philippine income tax and to the 10% value-added tax (VAT). As represented, BWSI is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It is engaged in the business of maintaining interactive website that combines traditional online auctioning of various commodities with wireless application. It also provides internet-related services (i.e., access services and processing of transactions) and mobile value-added services (i.e., mobile online auctions, text-based promotions, multi-media messaging, subscription-based services, etc.) via internet and Global System for Mobile Communication (GSM)-based instant messaging facility. BWSI has entered into two (2) agreements with i-Generation Company Ltd. ("IGCL") a "Mobile Server System Service Agreement" and a "Content Aggregation Portal Service Agreement" for the enhancement/development of its "mobile server system" and "content aggregation website." IGCL is a non-resident foreign corporation duly existing and organized under the laws of Hong Kong. IGCL is not licensed to do business in the Philippines. Under the agreements, IGCL will perform and complete the services entirely in Hong Kong or outside the Philippines. Under the agreements, BWSI will pay IGCL fees for the enhancement/development services, which fees will be remitted directly to IGCL's bank account in Hong Kong. In reply, please be informed as follows: Services performed abroad by IGCL not subject to Philippine income tax . Section 28(B)(1) of the Tax Code of 1997 provides that non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, non-resident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. The above provision should be read together with Section 42(C) of the same Code which provides, viz: "(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. . . ." Since the services are to be performed abroad by IGCL, the service fees to be paid to IGCL by BWSI shall constitute compensation for labor or personal services performed outside the Philippines considered as foreign source income, hence, not subject to Philippine income tax. HDCAaS Services performed abroad by IGCL not subject to withholding tax under RR2-98 . Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income [Section 2.57(B), Revenue Regulations (RR) No. 2-98]. Needless to state, the withholding of income/creditable withholding tax on a certain income payment presupposes that said income payment is considered taxable income to the payee. Therefore, reference must necessarily be made to the income source rules under our tax system. Moreover, pursuant to Section 2.57-1(I) of RR 2-98, as amended, non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. The same section does not provide that non-resident foreign corporations are subject to final withholding tax on their income derived from sources without the Philippines. Since payments to a foreign corporation, like IGCL are not among those specified in the said regulations, consequently, services rendered abroad by IGCL are not subject to the expanded withholding tax prescribed in RR 2-98, as amended. Services performed abroad by IGCL not subject to VAT under Section 108 of the Tax Code . Section 108(A) of the Tax Code of 1997 states 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 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. Accordingly, the services to be rendered abroad by IGCL to BWSI pursuant to the "Mobile Server System Service Agreement" and the "Content Aggregation Portal Service Agreement" are not subject to VAT. Thus, no VAT may be passed on by BWSI to IGCL. IN VIEW OF ALL THE FOREGOING, this Office confirms your opinion that fees to be paid by BWSI to its foreign service provider which is a non-resident foreign corporation based in Hong Kong are not subject to Philippine income tax and to the 10% VAT. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service