Aranas Consunji Barleta

July 24, 2009 BIR RULING [DA-(C-142) 400-09] Sec. 23 (F); 28 (B); 42 (A); 165-95; DA-065-07; DA(C-047)-167-08; DA-054-08; DA-348-06; DA-037-04 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated May 29, 2009 requesting in behalf of your client, YGP Pte., Ltd. (YGP, for brevity), for confirmation that the marketing support service fees to be directly paid to YGP by its Philippine Corporate Clients for offshore non-technical marketing services shall have the following tax consequences: 1. The income derived by YGP from the Marketing Support Agreement shall not be subject to Philippine income and withholding tax, pursuant to Section 23 (F) and Section 28 (B) (1) in relation to Section 42 (A) (3), of the 1997 Tax Code, as amended; 2. The service fees paid by Philippine Corporate Clients to YGP shall not be subject to VAT imposed under Section 108 of the Tax Code. It is represented that YGP is a company incorporated and existing under and by virtue of the laws of Singapore, with principal office located at 79 Anson Road #08-01, Singapore, and does not have a permanent establishment in the Philippines as defined under the R.P.-Singapore Tax Treaty; that YGP entered into a "Marketing Support Service Agreement" with several Philippine Corporate Clients, namely: 1) SAGARA METRO PLASTICS INDUSTRIAL CORPORATION (SMP), with principal office located at Calamba, Laguna, Philippines; 2) NANBU PHILIPPINES INCORPORATED (NPI), with principal office at Cavite Economic Zone, Rosario, Cavite; 3) TOMS MANUFACTURING CORPORATION (TOMS), with principal office at Maguyam Road, Silang, Cavite; 4) MIYASAKA POLYMER (PHILIPPINES) INC., with principal office at Science Park, Cabuyao, Laguna; 5) J.F. RUBBER PHILS., INC., with principal office at People's Technology Complex, Special Economic Zone, Carmona, Cavite; 6) SEIEN RUBBER PHILIPPINES, INC., (SRPI), with principal office at Special Economic Zone, Carmona, Cavite; that all of the Philippine Corporate Clients are corporations duly organized and existing under Philippine laws; that under their respective Agreements, YGP will undertake to render exclusively the following offshore ( i.e., to be performed entirely outside the Philippines) services for its Philippine Corporate Clients as stated in the respective Marketing Support Agreements: 1) To promote or market products of its Philippine Corporate Clients to Japanese and other foreign clients of YGP with Philippine operations, which include making regular visit and representation with relevant corporate officers of such clients; 2) To assist the Philippine Corporate Clients in developing marketing strategies and specific marketing activities outside the Philippines; 3) Collection of various information (such as Production Plans, new parts needed by client, necessary product drawing and product information for the manufacturing of the parts, part qualification, price range) concerning Philippine Corporate Clients' prospective clients, including existing subsidiaries of Japanese companies in the Philippines, as well as new Japanese companies investing in the Philippines; 4) In case of any issue that is unable to be resolved between the Philippine corporate clients and the client, to help mediate between Philippine Corporate Clients and the client; 5) To undertake such other incidental marketing activities as may be requested by the Philippine Corporate Clients to promote the latter's business in other countries; 6) That all the above services shall be performed outside the Philippines, primarily in Singapore, and shall not involve any transfer of technology, know-how or other intellectual property rights; and 7) That for and in consideration of its services under the aforementioned Agreement, YGP shall be paid by the Philippine Corporate Clients a monthly service fee as agreed upon by the parties. In reply thereto, please be informed as follows: 1. Section 23 (F) of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 9337, provides that 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. Furthermore, Section 28 (B) (1) thereof states that foreign corporations not engaged in trade or business in the Philippines shall be subject to 35% income tax only from such income that is derived from all sources within the Philippines. Hence, YGP, a non-resident foreign corporation not engaged in trade or business in the Philippines, is subject to income tax only from such income derived from all sources within the Philippines. On this point, Section 42 (A) (3) of the Tax Code, as amended, states that: "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 gross income from sources within the Philippines. xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines. " (emphasis supplied) Since the services rendered by YGP are performed outside the Philippines, the compensation for such services constitutes income from sources without the Philippines and not subject to Philippine income taxes. 2. Similarly, the service fee is not subject to ten percent (10%) [now 12%] value-added tax (VAT) imposed under Section 108 (A) of the Tax Code: "Section 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%) of gross receipts derived from the 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. . ." Section 108 (A) supra clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will be done entirely outside the Philippines, the service fee to be paid therefor by the Philippine Corporate Clients to YGP is not subject to VAT. (BIR Ruling Nos. DA-065-07 and DA-ITAD 063-05 dated February 5, 2007 and June 27, 2005, respectively) Like any other business tax, VAT is subject to the inherent limitation of taxation, among others, the principle of territoriality that is, taxation may be exercised only within the territorial jurisdiction of that taxing authority (BIR Ruling No. 165-95, 23 October 1995, citing Jose C. Vitug, Tax Law and Jurisprudence, 1993, 3rd Revised Edition, p. 9 citing 51 Am. Jur. 88) 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service