BIR Ruling [DA-598-06]

October 9, 2006 BIR RULING [DA-598-06] Section 108; DA-ITAD-90-04 Aranas, Consunji & Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. Dela Costa Sts. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated August 14, 2006, in behalf of your client, SUNMEC CORPORATION, (SUNMEC, for short), requesting confirmatory ruling on your opinion that the fees paid by SUNMEC for services rendered by MIKOMA Engineering Co., Ltd. (MIKOMA, for short), abroad is exempt from income, withholding and value-added taxes. It is represented that SUNMEC is a domestic corporation organized and existing under the laws of the Philippines, with principal office located at 134 East Main Ave., Laguna Technopark, Bian, Laguna; that MIKOMA Engineering Co. Ltd. is a corporation organized and existing under the laws of Japan, with principal office at Shimodaira 874-12, Komagane, Nagano, Japan; that on April 1, 2006, SUNMEC and MIKOMA entered. into a "Marketing Support Agreement" for the latter to render the following offsite assistance or services to be performed entirely outside the Philippines, to wit: 1.) To manage and counsel about financing of SUNMEC; 2.) To analyze the cost based on accounting data of SUNMEC; 3.) To counsel about capital investment and employment of SUNMEC; 4.) To perform managemental supporting ( sic ) activity for SUNMEC; and 5.) To undertake the whole managemental ( sic ) function for SUNMEC." that the advisory and consultancy services shall be performed entirely in Japan and shall not involve any transfer of technology, know-how or other intellectual property rights; that in consideration of the foregoing, SUNMEC shall pay MIKOMA a monthly service fee. Hence, your request. In reply, please be informed as follows: The rule in this jurisdiction regarding tax situs is that the source of income is the property, activity or service that produced the income; the test of taxability is the "source" and the source of income is that activity which produced the income ( CIR v. British Overseas Airways Corporation , G.R. Nos. 65773-74, April 30, 1987). With regard to compensation for labor or personal services, services performed within the Philippines, regardless of the residence of the payor, or of the place in which the contract for services was made, or of the place of payment, shall be considered as part of the gross income from sources within the Philippines (Section 155, Revenue Regulations No. 2). Stated differently, the situs of the income derived from labor or personal services is determined solely by the place where service is rendered ( CIR v. Japan Air Lines, Inc ., G.R. No. 60714, October 4, 1991). Compensation from services performed abroad is considered income from sources without the Philippines. (BIR Ruling No. 464-93 dated November 19, 1993) DSITEH Considering that the services that produce the income on the part of MIKOMA are performed outside of the Philippines, it follows that the income derived from the performance of such services is not taxable in the Philippines. Hence, MIKOMA shall not be subject to income tax, and consequently, to the withholding tax on the service fee it receives from SUNMEC pursuant to services under the Marketing Support Agreement. In regard to the liability for VAT, Section 108 of the Tax Code of 1997, as amended, provides 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 of the Tax Code 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. Section 108(A) of the same Tax Code clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines (BIR Ruling No. DA-ITAD-90-04 dated August 24, 2004). Accordingly, since the subject services under the Marketing Service Agreement will not be performed in the Philippines, service fees to be paid by SUNMEC to MIKOMA are exempt from VAT. Article 7 of the R.P.-Japan Tax Treaty provides that if a non-resident foreign corporation carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as are attributable to that permanent establishment. "Permanent establishment" is defined under the R.P.-Japan Tax Treaty as follows, "Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes especially a store or other sales outlet, a branch, an office, a factory, a workshop, a warehouse, a mine, an oil or gas well, a quarry or other place of extraction of natural resources, or a building site or construction or installation project lasting more than six months." Since MIKOMA does not have any permanent establishment in the Philippines to which its business profits may be attributed, the service fees paid by SUNMEC to MIKOMA for the marketing services shall be exempt from income and withholding taxes. (ITAD Ruling No. 056-05 dated June 16, 2005) 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 from that represented, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service