BIR Ruling [DA-534-04]

October 25, 2004 BIR RULING [DA-534-04] 28 (B) (1) DA 293-00 BPI Securities Corporation 8th Floor, BPI Head Office Ayala Avenue corner Paseo de Roxas Makati City Attention: Mr. Jose A. R. Bengzon III Gentlemen : This refers to your letter dated November 10, 2003 stating that BPI Securities, Inc. (BPI-SEC) is a domestic corporation organized and existing under the laws of the Philippines and duly licensed by the Securities and Exchange Commission (SEC) to engage in the stockbrokerage activities; that J.P. Morgan-Securities Asia Pacific, Ltd. (JPMSAPL), a foreign brokerage firm based in Hong Kong, will open a brokerage account with BPI-SEC; that this firm will in turn solicit clients (international/non-domestic) outside of the Philippines and will give orders, in behalf of these clients, to BPI-SEC to buy and sell stocks listed in the Philippine Stock Exchange; that JPMSAPL will charge fees for providing the marketing services, which include soliciting clients outside the Philippines, to BPI-SEC, and in turn, BPI-SEC will pay JPMSAPL the fees; and that the details and nature of the marketing services which will be provided by JPMSAPL shall be covered by a Marketing Service Agreement which will be signed between JPMSAPL (Service Provider) and BPI-SEC (Service Recipient). In connection therewith, you now request for a ruling to the effect that the fees paid by BPI-SEC to JPMSAPL for services rendered and performed outside the Philippines are not subject to income tax and consequently to withholding tax. 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 JPMSAPL, the service fees to be paid by BPI-SEC to JPMSAPL shall not be subject to Philippine income tax and consequently to withholding tax. ( BIR Ruling No. DA293-00 dated July 28, 2000 ) 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 the 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 JPMSAPL will all be performed without the Philippines, the service fees to be paid by BPI-SEC to JPMSAPL shall not be subject to 10% VAT. ( BIR Ruling No. 044-99 dated March 30, 1999 ) IN VIEW OF THE FOREGOING, this Office holds that fees paid by BPI-SEC to JPMSAPL for the brokerage services rendered abroad are not subject to income tax and consequently to the withholding tax. AECacT 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