SGV & Co.

February 10, 2009 BIR RULING [DA-(C-022) 075-09] DA 054-08 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Mark Anthony P. Tamayo Partner Gentlemen : This refers to your letter dated November 18, 2008 stating that your client, Automatic Data Processing Limited (ADP Australia), is a non-resident foreign corporation duly organized and existing under the laws of Australia; that it is engaged in the business of providing outsourced payroll services to various clients; that ADP Australia also maintains a shared services centre in Australia, where a software required to run the payroll processing programs is kept and operated; that in line with its business activities, ADP Australia entered into a Local Outsourcing Agreement (Agreement) with a Philippine customer, Celestica Philippines, Inc. (Celestica); that ADP Australia will basically render payroll services to Celestica, which will involve the processing of payroll data using ADP Australia's template and software, printing of pay-slips and other employer-related record keeping functions; that ADP Australia will basically process the data compiled by Celestica to derive payroll output, which will in turn be conveyed to Celestica; that ADP Australia's payroll services will be carried out in different project phases, as follows (1) analysis, (2) set-up and implementation, (3) client briefing, and (4) recurring services. Analysis Phase The analysis phase will be carried out in Australia. However, before the analysis process is done, ADP Australia specialists will gather information from the Philippines to ascertain Celestica's requirements. Such information and requirements will then be conveyed to Australia for analysis. Set-up and Implementation Phase The set-up and implementation phase will mostly be carried out in Australia. This phase typically involves customizing and putting in place the equipment and software for the processing of data into the form required by Celestica. Client Briefing Phase ADP Australia will conduct a client briefing to Celestica, which basically aims at introducing the systems previously set-up by ADP Australia, after implementation and before the recurring services start. Recurring Services Phase The recurring services phase will be carried out in Australia. This phase basically involves recurring data processing functions. HESCcA Celestica, on its part, will pay services fees to ADP Australia in consideration of the above-mentioned services. Lastly, the services that may be rendered by ADP Australia, particularly those under the Agreement, would neither involve the transfer of any technology, know-how, and intellectual property, nor otherwise require or permit ADP Australia to impart special knowledge and experience, which remain unrevealed to the public. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The payments to be made by Celestica for the services rendered by ADP Australia outside the Philippines are in the nature of services fees, hence, not subject to Philippine income tax, and consequently, to withholding tax; and 2. ADP Australia's outsourced payroll services which are rendered outside the Philippines are not subject to value-added tax (VAT). In reply thereto, please be informed that Section 28 (B) (1) of the Tax Code of 1997 provides that "Sec. 28. Rates of Income Tax on Foreign Corporations. (B) Nonresident Foreign Corporations . (1) In General. Unless otherwise provided, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines such as interest, dividends, rents, royalties, salaries, premiums, (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodical, or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph (5)(c) and (d): . . . ." Corollarily, Section 42 (C) (3) of the said Code likewise provides that "(C) Gross Income from Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: EDCTIa xxx xxx xxx (2) Compensation for labor or personal services performed outside the Philippines; xxx xxx xxx" In stressing the rationale of the above-mentioned principles, this Office elucidated the matter in BIR Ruling No. DA 054-08 dated January 30, 2008 , as follows: "Since the services by MDS, JJSEA and EDS are performed abroad, the service fees to be paid to MDS, JJSEA and EDS by MDPI are not subject to Philippine income tax. Thus, since the following services of MDS, JJSEA and EDS are done or performed outside the Philippines, the pertinent service fees paid by MDPI to MDS are therefore not subject to Philippine income tax." Moreover, ADP Australia's outsourced payroll services which are rendered outside the Philippines are not subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended. This is so because Section 108 of the said Code provides that "Sec. 108. Value Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) [now 12%] of gross receipts derived from sale or exchange of services, including 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, . . . ." Inasmuch as the service fees paid to ADP Australia for outsourced payroll services are performed outside the Philippines the said services are not subject to VAT. This is fortified in BIR Ruling No. DA 054-08 dated January 30, 2008 , where this Office ruled 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." IcHEaA IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that 1. The payments to be made by Celestica for the services rendered by ADP Australia outside the Philippines are in the nature of service fees, hence, not subject to Philippine income tax and consequently to withholding tax; 2. ADP Australia's outsourced payroll services which are rendered outside the Philippines are not subject to 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 null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service