CCT Constructors Corporation

November 16, 2007 BIR RULING [DA-596-07] 32 (C) (3), 108 (A); 34 (A) (1) DA-173-2001; DA-148-98; ITAD Ruling No. 023-04; DA-037-04 CCT Constructors Corporation 3rd Floor, Princess Building 104 Esteban St., Legaspi Village Makati City Attention: Ms. Aurora D. Lantin Administration Manager Gentlemen : This refers to your letter dated October 8, 2007 requesting for confirmation of your opinion to the effect that: 1. Service income to be derived from services to be rendered by Toyo Construction Co. Ltd. Japan (TCCL Japan) outside the Philippines under a Services Agreement with CCT Constructors Corporation (CCT) is not subject to income tax and consequently to withholding tax for being derived from sources without the Philippines; 2. Payments for the services derived by TCCL Japan will not be subject to the 12% final withholding value-added tax (VAT); and 3. The service fees paid by CCT to TCCL Japan for services performed by the latter constitute an ordinary and necessary business expenses of CCT which are allowed as a deduction from its gross income pursuant to Section 34 (A) (1) of the Tax Code of 1997. It is represented that CCT is a domestic corporation engaged in the business of providing general and civil construction works in the Philippines; that TCCL Japan is a foreign corporation with principal office at 3-7-1, Kandanishiki-Cho, Chiyoda-Ku, Tokyo, Japan; that TCCL Japan is an acknowledged expert in engineering design services, supply and delivery, erection and installation, supervision, design and construction, marketing and promotion of any general construction activity, work and supply necessary for, incidental to or appropriate under present international industrial practice; that TCCL Japan maintains a branch office in the Philippines which is incorporated as Toyo Construction Co. Ltd. Philippine Branch; that however, the Philippine Branch is not privy to and has no participation whatsoever in the Service Agreement, the transaction being conducted directly by TCCL Japan. It is further represented that in order to effectively perform its business and remain competitive in the Philippines, CCT engaged the services of TCCL Japan, and entered into a Service Agreement whereby the latter shall provide CCT with the following services: 1. Perform market research and analysis for the construction requirements of Japanese companies with operations in the Philippines and elsewhere which may be potential clients of CCT; DcaCSE 2. Promote marketing and promotion in behalf of CCT by presentation and introduction of CCT construction services to Japanese companies with head offices in Japan; 3. Provide non-proprietary technical advise on engineering designs and construction as may be solicited by CCT on a per project basis; 4. The above services shall be rendered and performed exclusively by TOYO through its personnel in Japan but from time to time, TOYO personnel shall be required to attend consultancy meetings in the Philippines as may be required by CCT; In reply, we hereby confirm your opinion as follows: I. On Income Tax Under Section 42 (C) (3) in relation to Section 28 (B) (1) both of the Tax Code of 1997, as amended, 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 TCCL-Japan, the service fees to be paid by CCT to TCCL Japan shall not be subject to Philippine income tax. Consequently, such payments are not also subject to final withholding tax pursuant to Section 2.57-1 (I) (1) in relation to Section 2.57 (A), both of Revenue Regulations (RR) No. 2-98, as amended. Section 2.57-1 (I) (1) provides that non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. Thus, if the income is derived from sources outside the Philippines, the same is not subject to final withholding tax. CCT as such is not required to withhold the 35% final income tax on its payments under the aforementioned Service Agreements with TCCL-Japan. It is to be noted that the aforementioned fee is not within the contemplation of "Rentals and Royalties" as enunciated under Section 42 (A) (4) of the Tax Code of 1997, as amended, since as represented, there is no transfer into this country of technology, equipment or other property where the payee has proprietary interest. (BIR Ruling DA-148-98 dated April 20, 1998) Moreover, while TCCL-Japan maintains a Philippine branch, it is represented that said branch is not privy and does not have any participation in the Service Agreement, the same being conducted directly by TCCL-Japan. Hence, any income derived by TCCL-Japan independently of its Philippine Branch shall be considered income of the parent company alone, applying the rule stated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), portion of which is pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (ITAD Ruling No. 023-04 dated March 9, 2004) DHcTaE II. On Value-Added Tax Pursuant to Section 108 (A) of the Tax Code of 1997, as amended, a VAT equivalent to twelve percent (12%) of gross receipts is imposed on the sale or exchange of services, and the use or lease of properties. 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. Since the services are to be performed in Tokyo, Japan, the same are outside the coverage of the VAT. Accordingly, CCT's payment of service fee to TCCL-Japan pursuant to the aforementioned Service Agreement shall not be subject to VAT. Consequently, no VAT may be passed on by CCT to TCCL-Japan as conversely suggested under Section 105 of the Tax Code of 1997, as amended. III. On Deductible Business Expense Section 34 (A) (1) of the Tax Code of 1997 states that all ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession are allowed as deduction from gross income. It is represented that CCT entered into a Service Agreement with TTCL-Japan for necessary services in order to effectively perform its business and remain competitive in the Philippines. Since the engagement of TCCL-Japan by CCT to perform services covered under the Service Agreement is directly connected with and appropriate in the conduct of CCT's business, the same may be considered as ordinary and necessary business expenses pursuant to the aforesaid provision. Accordingly, the service fees paid to TCCL-Japan are deductible expenses from CCT's gross income pursuant to Section 34 (A) (1) of the Tax Code of 1997, as amended, subject, however, to substantiation requirements. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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