Santiago & Santiago Law Offices

June 16, 2010 BIR RULING [DA-(C-022) 097-10] 28 (B) (1); 42 (C) (3); 108 (A); DA 293-00; DA 173-01; 514-06; BIR Ruling No. 110-97 Santiago & Santiago Law Offices Ground Floor, Ortigas Building Ortigas Avenue cor. Meralco Avenue 1605 Pasig City Attention: Atty. Manuel C. Carlos Gentlemen : This refers to your letter dated December 23, 2009 following up your letter dated October 14, 2009, requesting, on behalf of your client, NEGROS NAVIGATION CO., INC. ("NENACO"), confirmation of your opinion that payments made by your client to Maritime Global Consulting Group ("MGCG") for consultancy services rendered outside the Philippines are not subject to income, withholding and value-added taxes. It is represented that NENACO, with Tax Identification Number 000-199-315-000, is a corporation organized and existing under and by virtue of the laws of the Republic of the Philippines, with address at Pier 2, North Harbor, Port Area, Tondo, Manila and registered with the Securities and Exchange Commission (SEC) as evidenced by SEC Registration No. 1275 dated July 26, 1932. On July 21, 2009, NENACO entered into a Consultancy Agreement with MGCG and Negros Holdings and Management Corporation (NHMC). MGCG is a non-resident foreign corporation, organized and existing under the laws of the Cayman Islands, with office address at Walkers Corporate Services Ltd., Walker House, 87 Mary Street Georgetown, Grand Cayman, Cayman Islands, KY1 9005. MGCG is not engaged in trade or business and is not licensed to do business in the Philippines. On the other hand, NHMC is a corporation organized and existing under and by virtue of Philippine laws with office address at 1103 Pearl of the Orient Building, Roxas Boulevard, Ermita Manila. In the said Consultancy Agreement, MGCG and NHMC agreed to provide, for a period of five (5) years from May 14, 2008, subject to an automatic renewal for a similar period, technical and consultancy services to NENACO, as NENACO may reasonably require to carry out its business and operations. MGCG is providing technical and consultancy services to NENACO exclusively in Cayman Islands. acHTIC As consideration for the technical and consultancy services of MGCG and NHMC, the Consultancy Agreement provides that NENACO shall compensate MGCG and NHMC with an annual consideration equivalent to ten percent (10%) of the Net Income Before Taxes (NIBT) of NENACO, which compensation shall be directly remitted to the bank accounts of MGCG in the Cayman Islands and NHMC in the Philippines. It is your opinion that as regards MGCG, the consideration it receives from NENACO for services it renders in the Cayman Islands is not subject to Philippine income tax and value-added tax because MGCG is a non-resident foreign corporation and the payments made to it by NENACO represents consideration for services performed outside the Philippines. In reply, please be informed as follows: I. Section 28 (B) (1) of the 1997 National Internal Revenue Code, as amended (1997 Tax Code) 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. (BIR Ruling DA-514-06 dated August 25, 2006) Relative thereto, Section 42 (C) (3) of the same Code 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) Compensation for labor or personal services performed without the Philippines. . . ." Based on the foregoing provisions, non-resident foreign corporations deriving income for service performed abroad are not subject to Philippine income tax since such services are considered income from without the Philippines. (BIR Ruling No. 293-00 dated July 28, 2000) Accordingly, since the services under the Consultancy Agreement are to be performed abroad by MGCG, the fees to be paid by NENACO to MGCG constitute compensation for labor or personal services performed outside the Philippines. As such, income payments received by MGCG are considered income from without the Philippines; hence, exempt from income tax and consequently from the withholding tax. (BIR Ruling No. DA-173-01 dated September 24, 2001) aSDHCT II. Pursuant to Section 108 (A) of the 1997 Tax Code, as amended by Republic Act No. 9337, a value-added tax (VAT) equivalent to twelve percent (12%) shall be imposed on the gross receipts derived by any person engaged in the sale of goods or services in the Philippines. 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. (BIR Ruling No. DA-173-01, supra) In the instant case, since the services to be rendered by MGCG will be done outside the Philippines, MGCG shall not be liable to pay the VAT. Since the fees therefor shall not be subject to the twelve percent (12%) VAT, no VAT may be passed on by MGCG to NENACO. (BIR Ruling No. DA 173-01, supra, citing BIR Ruling No. 110-97 dated October 23, 1997, DA-293-07-00 dated July 28, 2000 and BIR Ruling No. 004-01 dated February, 2001.) 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group