Manabat Sanagustin & Co.

December 27, 2007 BIR RULING [DA-688-07] 28 (B) (1) & 108 (A) DA-514-06 Manabat Sanagustin & Co. 22/F Philamlife Tower 8767 Paseo De Roxas Makati City 1226 Attention: Atty. Herminigildo G. Murakami Tax Principal Gentlemen : This refers to your letter dated June 22, 2007 requesting for a ruling that services done or performed outside the Philippines by non-resident foreign service providers are not subject to Philippine income tax and consequently to Philippine withholding tax and to the value-added tax ("VAT"). It is represented that Jebsen & Jessen Communications (P) Inc. ("J&J" or the "Company"), formerly known as Jebsen & Jensen Business Services (P) Inc., and Jebsen & Jessen Philippines, Inc., is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at Main Avenue, Severina Diamond Industrial Estate, West Service Road, Km. 16, South Expressway, Paraaque City, Philippines; that the Company is primarily engaged in the distribution and assembly of industrial plant and equipment, components, systems and spare parts; that J&J is a member firm of the Jebsen & Jessen Group of Companies. It is further represented that J&J entered into offshore service agreements with various non-resident foreign corporations, namely: 1. JJ-Lapp Cable (S) Pte. Ltd. ("JJLS") is a non-resident foreign corporation duly organized and existing under the laws of Singapore and provides offshore regional services to the Jebsen and Jessen/MHE-Demag Group of Companies; that JJLS has considerable overseas business contacts in the area of electrical materials related products. 2. Jebsen & Jessen Communication (S) Pte. Ltd. ("JJCS") is a non-resident foreign corporation duly organized and existing under the laws of Singapore and provides offshore regional services to the Jebsen & Jessen Group of Companies with considerable overseas business contacts in the communication equipment and solutions related product. that based on their respective Agreement for Offshore Regional Services, JJLS and JJCS provide separately the following services to J&J outside of the Philippines: (1) representing J&J's interest outside the Philippines in maintaining contacts with overseas suppliers; (2) negotiating, on behalf of J&J, business affairs with the principals/suppliers and expedite delivery of purchases; (3) to carry out systematic business sourcing and contracts overseas for new trading business for J&J; and (4) providing training pertaining to the service provider's line of business. 3. Jebsen & Jessen (SEA) Pte. Ltd. ("JJSEA") is a non-resident foreign corporation duly organized and existing under the laws of Singapore and operates a Central Services Unit ("CSU") available to the member companies of the Jebsen & Jessen Group of Companies in South East Asia; that under the Agreement for Offshore Central Services, JJSEA provides and coordinates the following services to be performed in Singapore: (1) financial and treasury functions; (2) corporate and legal matters; (3) internal audit and control services; (4) taxation services; (5) human resource management; (6) corporate communications; and (7) assistance in the development and implementation of environmental, health and safety management programs. AcDaEH 4. Electra (S) Pte. Ltd. ("EDS") is a non-resident foreign corporation duly organized existing under the laws of Singapore and provides data processing and electronic mail transmission services. EDS also owns and operates Multi Protocol Layer Switch ("MPLS") network located in Singapore that allows the voice over internet protocol ("IP") technology to reside; that based on the Agreement for Data Processing Services with J&J, EDS operates the central servers located in Singapore and provides J&J daily and routine data processing, storage, and backup of business transactions data, collectively referred to as "data processing services"; that under the terms of the separate Electronic Mail Transmission Services Agreement, EDS provides daily and routine electronic mail transmission services; that in addition, under the terms of the separate IP Telephony Services Agreement, EDS performs routine IP telephony support services to operate the IP telephony services for the Jebsen and Jessen Group of Companies, which includes J&J, maintains and operates the infrastructure and equipments required to enable the IP based telephone services for the group. that JJLS, JJCS, JJSEA and EDS are non-resident foreign corporation service providers of J&J, which are not doing business in the Philippines; and that finally, the above described services covered by the respective agreements are being performed outside of the Philippines. In reply, please be informed as follows: Services performed abroad by JJLS, JJCS, JJSEA and EDS are not subject to Philippine income tax. Section 28 (B) (1) of the Tax Code of 1997, as amended, provides that non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, non-resident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. Corollarily, Section 42 (C), supra provides, viz: "(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) Services. Compensation for labor or personal services performed without the Philippines;" Since the services by JJLS, JJCS, JJSEA and EDS are performed abroad, the service fees to be paid to JJLS, JJCS, JJSEA and EDS by J&J are not subject to Philippine income tax. Thus, since the services of JJLS and JJCS in representing J&J's interest outside the Philippines in maintaining contacts with overseas suppliers; in negotiating any business affairs with the principals/suppliers and expedite delivery of purchases; in carrying out systematic business sourcing and contracts overseas for new trading business for J&J; and in providing training pertaining to the service provider's line of business, are done or performed outside of the Philippines, the pertinent service fees paid by J&J to JJLS and JJCS are therefore not subject to Philippine income tax. (BIR Ruling DA-303-03, dated 16 September 2003) aITECD Similarly, since the services of JJSEA for providing and/or assisting J&J in: (1) financial and treasury functions; (2) corporate and legal matters; (3) internal audit and control services; (4) taxation services; (5) human resource management; (6) corporate communications; and (7) development and implementation of environmental, health and safety management programs, are likewise done or performed outside of the Philippines, the pertinent service fees paid by J&J to JJSEA are therefore also not subject to Philippine income tax. (BIR Ruling DA-149-98, dated 20 April 1998) In the same vein, since the services of EDS in performing routine IP telephony support services for J&J and from maintaining and operating the infrastructure and equipment required to enable the IP based telephone services, are done or performed outside of the Philippines, the pertinent fees paid by J&J to EDS are likewise not subject to Philippine income tax. (BIR Ruling DA-514-06, dated 25 August 2006) Services performed abroad by JJLS, JJCS, JJSEA and EDS are not subject to withholding tax under RR 2-98, as amended. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income [Section 2.57 (B), Revenue Regulations (RR) No. 2-98, as amended]. Needless to state, the withholding of income/creditable withholding tax on a certain income payment presupposes that the said income payment is considered taxable income to the payee. Therefore, reference must necessarily be made to the income source rules under our tax system. Moreover, pursuant to Section 2.57-1 (I) of RR 2-98, as amended, non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. The same section does not provide that non-resident foreign corporations are subject to final withholding tax on their income derived from sources without the Philippines. Since payments to foreign corporations, like JJLS, JJCS, JJSEA and EDS are not among those specified in the said regulations, consequently, services rendered abroad by these corporations are not subject to the expanded withholding tax prescribed in RR 2-98, as amended. Services performed abroad by JJLS, JJCS, JJSEA and EDS are not subject to VAT under Section 108 of the Tax Code, as amended. Section 108 (A) of the Tax Code of 1997, as amended, states that VAT shall be imposed on gross receipts derived from 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. Accordingly, the services to be rendered abroad by JJLS, JJCS, JJSEA and EDS to J&J pursuant to their respective agreements are not subject to VAT. Thus, no VAT may be passed on by J&J to JJLS, JJCS, JJSEA and EDS. IN VIEW OF THE FOREGOING, this Office confirms your opinion that fees paid or to be paid by J&J to its foreign service providers, which are non-resident foreign corporations that are all based in Singapore are not subject to Philippine income tax and to the VAT. 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 as null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service