Co Ferrer & Ang-Co Law Offices

September 15, 2008 BIR RULING [DA-(C-063) 215-08] DA604-07 Co Ferrer & Ang-Co Law Offices 11F Atlanta Centre 31 Annapolis Street, Greenhills San Juan, Metro Manila Attention: Atty. Maria Angeli L. Ferrer Gentlemen : This refers to your letter dated August 14, 2008 stating that your client, GeoEstate Development Corporation (GEDC), is a corporation organized and registered under the laws of the Philippines and is engaged in the business of providing project and marketing management services to Philippine real estate companies; that GEDC desires to expand the services it offers to its clientele by exposing the real estate projects of its clients overseas through marketing, sales and communications, providing market research and international representation, including sourcing of foreign suppliers for such projects of its clients in the Philippines; that GEDC intends to enter into a Management Agreement with Bellsund Management Service Limited (BMS), a non-resident foreign corporation organized and registered under the laws of British Virgin Islands with principal office address at Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands; that it has no permanent business establishment in the Philippines; that under the proposed Management Agreement, BMS will provide the following services to GEDC, to wit: (a) act as sales agent of GEDC overseas in relation to the various real estate products of its clients; (b) conduct market research abroad according to the needs, requirements and specifications provided by GEDC; (c) act as marketing arm of GEDC abroad by managing international sales events which shall include, but shall not be limited to, effective marketing and sales promotions via information dissemination through corporate flyers, pamphlets, marketing and sales materials, conduct of exhibits and such other activities to promote internationally the projects managed by GEDC in the Philippines; (d) source prospective foreign suppliers of construction materials and equipment for real estate projects managed by GEDC in the Philippines, conduct evaluation of such suppliers as to their capability to enter into contracts for the purchase and delivery of construction materials and equipment, and initiate negotiations with such suppliers; (e) facilitate and process all documents in relation to the contracts to be entered into with foreign suppliers; and (f) ensure compliance by such foreign suppliers, particularly in respect of their express and implied warranties in the contracts entered into, and as to the quality and quantity of the purchased construction materials and equipment and the timely delivery thereof; that all the foreign services will be provided by BMS outside of the Philippines; and that in consideration for providing the foregoing offshore services, BMS shall be paid a monthly retainer fee, sales commission in respect of each sale transaction consummated outside the Philippines, and facilitation fee in respect of the foreign purchases made by its clients from foreign suppliers. Based on the foregoing representations, you now request confirmation of your opinion that the payments to be made by GEDC to BMS for services rendered outside the Philippines, pursuant to the Management Agreement, are not subject to the Philippine income tax, withholding tax and value-added tax. 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. 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 subparagraph 5 (c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). . . ." In the same manner, Section 23 (F), supra states that "SEC. 23. General Principles of Income Taxation in the Philippines. xxx xxx xxx (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." In the same vein, Section 42 (C) (3), supra provides that "SEC. 42. Income from sources within the Philippines. (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; xxx xxx xxx" Prescinding from the above-cited provisions, it is undisputed that a non-resident foreign corporation is subject to Philippine income tax of 35% only in respect of the gross income received from all sources within the Philippines. Conversely, if the gross income is received from sources outside the Philippines, the same is not subject to Philippine income tax. Thus, the situs of taxation for services is the place where the service is rendered. TCDHIc In stressing the rationale of the above-mentioned principle, this Office elucidated the matter in BIR Ruling No. DA223-04 dated April 29, 2004 , as follows: "The situs of tax for services is the place where the service is rendered. Under the Philippine 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 . . ." IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that the payments to be made by GEDC to BMS for services rendered outside the Philippines are not subject to Philippine income tax, withholding tax and value-added tax. 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