Manabat Delgado Amper & Co.

March 10, 2009 BIR RULING [DA-(C-036) 144-09] Sections 23 (F), 28 (B) (1), 42 (A) (3) & 108 (A) Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo St., Legaspi Village Makati City Attention: Atty. Walter L. Abela, Jr. Tax Director Gentlemen : This refers to your letter dated September 3, 2008 requesting on behalf of your client, Broadway Asia Entertainment, Ltd. ("BAE") for confirmation of your opinion that the service fees to be received by BAE from ACA Foundation, Inc. ("ACA") are not subject to Philippine income tax and consequently from any withholding taxes. aIEDAC As represented, BAE is a non-resident foreign corporation, organized and existing under the laws of the British Virgin Islands, with registered address at PO Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands. BAE is not registered neither as a corporation nor as a partnership licensed to engage in business in the Philippines, as confirmed by the relevant Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 14, 2008. ACA is a non-stock corporation organized and existing under Philippine laws with registered address at Suite 2303-A, West Tower, Philippine Stock Exchange Center, Exchange Road, Ortigas Center, Pasig City, Philippines. CaTcSA BAE and ACA have entered into a Production Consulting Agreement ("Agreement") in connection with the development and creation of the live theatrical production of "Cinderella" ("Play"). The scope of services shall be rendered by BAE under the terms of the Agreement which includes the following: Providing advice regarding the development of new productions; Supervising the casting process; Providing help in securing the services of administrative and creative personnel; Overseeing the creative process for the set, costume, and lighting designs as well as the preparation of the music; Providing assistance in creating a business plan; Providing advice on budgeting for a commercial production; Providing creative producerial services as requested; Providing a development schedule for the creation of the musical; and Providing any and all other advice, counsel, assistance, feedback and services which the parties mutually agree shall be included within the scope of the Agreement. The Agreement also explicitly states that all services and work that BAE will render are to be performed outside the Philippines. Consulting services rendered within the Philippines shall be considered outside the scope of the agreement. In full consideration of the aforementioned services, ACA shall pay a service fee to BAE equivalent to 12% of the gross box office receipts for the production of the Play in Manila, prior to any deductions of taxes of any kind, payable to BAE. The Terms of the Agreement shall commence as of the date of the agreement and continue in full force and effect until the final presentation of the Play or the abandonment of the Play. In reply, please be informed as follows: Services fees to be received by BAE from ACA is income from within the Philippines subject to Philippine income tax. Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, 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 subparagraphs 5(c) and (d): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Section 23 (F) of the same Code also states that "SEC. 23. General Principles of Income Taxation in the Philippines. . . . (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." Section 42 (A) of the Tax Code of 1997, as amended, provides, viz. : "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as income from sources within the Philippines: cTSDAH xxx xxx xxx (3) Services Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" The situs of tax for services is the place where the service is rendered. Under the Philippines 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 (BIR Ruling No. DA-223-2004 dated April 29, 2004). Since the amount of service fees is computed as a percentage of the gross receipts from the production, the income of BAE is contingent upon the success of the theatrical play. Thus, it can be said that BAE will be deriving income from sources within the Philippines. Moreover, it would be very difficult for BAE to perform its obligations as enumerated in the consulting agreement ( i.e., overseeing the creative process for the set and lighting, supervising the casting) without sending some of its personnel to the Philippines. Hence, the service may be regarded as being rendered in the Philippines despite the provision in the contract stating the contrary since the services shall be carried out within the territorial jurisdiction of the Philippines. Such being the case, income payments to be made to BAE by ACA under the Agreement, shall constitute compensation for labor or personal services performed within the Philippines considered as local source income subject to Philippine income tax. ATICcS Income payments by ACA to BAE are subject to Philippine withholding tax. 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), RR No. 2-98). Needless to state, the withholding of income/creditable withholding tax on a certain income payment presupposes that 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. Pursuant to Section 2.57-1 (I) of RR 2-98, as amended, nonresident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. Since the income of BAE are derived from sources within the Philippines, income payments made to BAE by ACA are subject to final withholding tax prescribed in RR 2-98, as amended. Services performed by BAE to ACA are subject to VAT. Section 108 (A) of the NIRC provides that value-added tax (VAT) shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. The same provision states 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. DCcAIS An important requirement for the imposition of the VAT is that a sale or transaction which is sought to be taxed must be entered into by a person in the course of trade or business carried on by such person. Thus, Section 105 of the NIRC provides that any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the VAT imposed in Sections 106 to 108 of the same Code. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Moreover, the last paragraph of Section 105 of the NIRC reads that "(t)he rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." In view of the foregoing, the services to be rendered within the Philippines by BAE to ACA pursuant to the aforesaid Agreement are, likewise, subject to VAT. Accordingly, VAT may be passed on by ACA to BAE. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service