Berong Nickel Corporation

November 29, 2007 BIR RULING [DA-604-07] 42 (C) (3), 108 DA-514-2006 Berong Nickel Corporation 7th Floor, Quad Alpha Centrum 125 Pioneer Street, Mandaluyong City Attention: Carlos P. Callanga Gentlemen : This refers to your letter dated October 3, 2007 requesting for confirmation of your opinion that payments to China Nickel Corporation (CNC) for services rendered outside the Philippines is not subject to income, withholding and value-added taxes. It is represented that Berong Nickel Corporation is a corporation organized and registered under the laws of the Republic of the Philippines and registered with the Securities and Exchange Commission (SEC) as evidenced by SEC Registration No. CS200414409 dated September 27, 2004. China Nickel Corporation (CNC) , on the other hand, is a non-resident foreign corporation organized and registered under the laws of British Virgin Islands as evidenced by its Certificate of Incorporation with principal office address at Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands. It has no permanent business establishment in the Philippines. Berong Nickel Corporation has entered into a service agreement with CNC whereby the latter will provide the following services to the former, to wit: locate nickel smelters in Asia (specially China and Japan), Europe and Australia which have a requirement for nickel bearing feedstock; advise the client on appropriate methods of marketing ore; to procuring sales contracts from those organizations and making introductions as appropriate; monitor nickel industry developments and processing trends in China and elsewhere in Asia; identify nickel joint venture and equity investment opportunities for future Berong Nickel Corporation planned processing plants in the Philippines; identify raw materials and equipment sourcing opportunities for future Berong Nickel Corporation planned processing plants in the Philippines and undertake other services as may be agreed between the parties. All such services will be provided outside of the Philippines. The Company will pay to CNC the agreed fees and costs for providing the services as set out in the Agreement. The cost of CNC shall include all out of pocket costs incurred in connection with the provision of such services. In reply, please be informed that under Section 28 (B) (1) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, provides: "Sec. 28. Rates of Income Tax on Foreign Corporations . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). Moreover, Section 23 (F) of the same Tax Code states that: "Sec. 23. General Principles of Income Taxation in the Philippines . xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." aAHTDS According to Section 23 (F), a foreign corporation like CNC is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, as stated in Section 42 (C) (3) of the 1997 Tax Code below: "SEC. 42. Income from sources within the Philippines . "xxx xxx xxx "(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; Such being the case and since the services rendered by CNC consisting of locating nickels smelters in Asia and monitoring nickel industry developments and processing trends in China and elsewhere in Asia are all carried out beyond the territorial jurisdiction of the Philippines, all income payments to be made by Berong Nickel Corporation to CNC under the said Agreement, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax and consequently from withholding tax. In BIR Ruling [DA-223-04] dated April 29, 2004, the BIR likewise had the opportunity to rule that: "The situs of tax for services is the place where the service is rendered. Under the Philippine source of income rules for income tax purposes, service income will be considered Philippine source income only if the services are rendered in the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income . . . ." Moreover, pursuant to BIR Ruling DA-514-2006 dated August 25, 2006, fees to be paid by domestic corporation to its foreign service provider which is a non-resident foreign corporation are not subject to Philippine income tax and to the 12% VAT. On the basis of the foregoing, we hereby confirm your opinion that the payments to be made by Berong Nickel Corporation to CNC under the aforestated Service Agreement shall not be subject to Philippine income tax, and consequently to withholding tax and likewise the VAT. However, in the event that CNC performs further services for Berong Nickel Corporation requiring the former's presence in the Philippines and which would qualify as services rendered within the Philippines, CNC shall be subject to income tax and consequently to withholding tax, and to VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. cHaICD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service