BIR Ruling [DA-613-99]

November 3, 1999 BIR RULING [DA-613-99] Punongbayan & Aurallo Ernst & Young International 6/F Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated April 28, 1999 requesting on behalf of your client, Ernst & Young Consulting, Inc . (EYCI) , for a confirmation of your opinion on the following: prcd "1. The consideration paid by Metrolab and MBWC to EYCI is to be treated as service fees or compensation for services rendered in accordance with the Services Agreement and does not constitute royalties under the 1997 Tax Code. Accordingly, such amount shall form part of the taxable income of EYCI from sources within the Philippines subject to the income tax rate of thirty-three percent (33%) effective January 1, 1999 and thirty-two percent (32%) effective January 1, 2000. The said service fees paid to EYCI shall be subject to a credible withholding tax of 5% on gross payments made therein which shall be withheld by Metrolab Industries and Metro Bottled Water Corporation; and "2. The services rendered by EYCI shall be subject to the value added tax (VAT) at 10% on gross payments made by Metrolab and MBWC." It is requested that your client, Ernst & Young Consulting, Inc. (EYCI) is a corporation organized and existing under the laws of the Republic of the Philippines and registered with the Securities and Exchange Commission with principal address located at 11/F, Vernida IV Building, Alfaro Street, Salcedo Village, Makati City; that the primary purpose of EYCI is: "to engage in, conduct and carry general consulting business, as well as to engage in the management of any and all projects and businesses, and in particular to engage in Enterprise Resource Planning (ERP) consulting engagements, including but not limited to ERP software advice, assessment, selection, installation, implementation, configuration, support, operation and related consulting services, including training, project management, testing and software development; to provide management and technical advice for commercial, industrial, manufacturing and other kinds of enterprise." that EYCI entered into Services Agreement with Metrolab Industries, Inc. (Metrolab) and Metro Bottled Water Corporation (MBWC); that both Metrolab and MBWC are corporations duly organized and existing under the laws of the Republic of the Philippines with their principal office address at Km. 21, West Service Road, Sucat, Muntinlupa; that under the Services Agreement, EYCI will assist Metrolab and MBWC in implementing an integrated, on-line and real time management information system to support their operational requirements in finance, manufacturing, production planning, sales and distribution, and materials management; that the Services Agreement provides that EYCI shall render the following services: "1. Provide SAP R/3 implementation consulting services, including assistance with the configuration of the SAP R/3 system, conduct conceptual training for the project team, and hands-on configuration training while implementing the project; and "2. Provide training to the Project Team composed of employees from both Metrolab and MBWC in the operation of the SAP R/3 system, such that the roll-out to their manufacturing office(s) located in Gateway, Cavite, sales and distribution center and finance center shall be the responsibility of the Project Team." that under the Services Agreement, the SAP R/3 system shall be procured by both Metrolab and MBWC from SAP AG Germany, a German resident company, which shall be covered by a separate licensing contract and supplemented by a separate service agreement between the Metrolab and MBWC on one hand and SAP Philippines, Inc., a domestic corporation, on the other; that EYCI shall not be responsible for the functionality of the SAP R/3 software; that in consideration for the services performed, Metrolab and MBWC are paying EYCI a fixed consultancy or service fees payable in accordance with the billing schedule as stated in the Service Agreement. In reply, please be informed of the following: 1. Pursuant to Section 2.57.2 (B) of Revenue Regulations No. 2-98, professional fees, promotional and talent fees or any other form of remuneration paid to taxable juridical persons are subject to the 5% creditable withholding tax. Thus, the service fees to be paid by Metrolab and MBWC to EYCI are subject to the 5% creditable withholding tax. (BIR Ruling No. 040-97 dated April 4, 1997) Moreover, EYCI shall be subject to the corporate income tax at the rate of thirty-three percent (33%) effective January 1, 1999 and thirty-two percent (32%) effective January 1, 2000 and thereafter pursuant to Section 27 (A) of the Tax Code of 1997. 2. The gross receipts of EYCI for the services rendered to Metrolab and MBWC are subjected to the 10% value added tax as prescribed under Section 108 (A) (6) of the Tax Code of 1997. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group