Co Ferrer & Ang-Co Law Offices

November 24, 2008 BIR RULING [DA-(C-143) 460-08] DA 054-08 Co Ferrer & Ang-Co Law Offices 11 F Atlanta Center 31 Annapolis Street Greenhills, San Juan Metro Manila Attention: Atty. Maria Angeli L. Ferrer Partner Gentlemen : This refers to your letter dated November 3, 2008 stating that your client, Xurpas, Inc. (Xurpas), is a corporation organized and registered under the laws of the Republic of the Philippines and is engaged in the business of developing, producing, selling, buying, or otherwise dealing in products, goods or services in connection with the transmission, receiving, or exchange of voice, data, video, or any form or kind of communication whatsoever primarily through mobile phones; that in order to provide such services to its clients which are primarily telecommunication companies, Xurpas entered into a Service Order Agreement with Rackspace US, Inc. (Rackspace), a non-resident foreign corporation organized and registered under the laws of the United States of America (US) with principal office address at 9725 Datapoint Drive, Suite 100, San Antonio, Texas which is a web hosting services provider; that Rackspace does not maintain a permanent establishment in the Philippines; that under the Service Order Agreement, Rackspace will provide the following services to Xurpas: (a) bandwidth and networking; (b) deployment of central servers in the US; (c) port monitoring and reports; and (d) management of back-up; that all the foregoing services are provided by Rackspace entirely outside of the Philippines; that in addition, all the infrastructure, equipment, facilities and network technologies of Rackspace are located outside of the Philippines and no facilities or equipment are installed in the Philippines to provide the services; and that in consideration for providing the foregoing offshore services, Rackspace receives a monthly service fee from Xurpas. CacEID Based on the foregoing representations, you now request for confirmation of your opinion that the payments to be made by Xurpas to Rackspace, a non-resident foreign corporation, for services rendered by the latter outside the Philippines is not subject to income tax and consequently to withholding tax and to the 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) Tax on Nonresident Foreign Corporation . (1) 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%)." Corollarily, Section 23 (F), supra provides that "(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." Moreover, Section 42 (C) of the said Code provides that "SEC. 42. Income from sources within the Philippines . xxx xxx xxx (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; acHITE xxx xxx xxx" Prescinding from the above-cited provisions, it is undisputed that a non-resident foreign corporation, like Rackspace, 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. However, in the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines. In stressing the rationale of the above-mentioned principle, 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 foregoing services of MDS: (1) to represent MDPI's interest outside the Philippines in maintaining contracts with overseas suppliers; (2) to negotiate on MDPIs behalf business affairs with the suppliers and expedite delivery of MDPI's purchase orders; (3) to carry out systematic business sourcing and contacts outside the Philippines for the specific purpose of obtaining new business; (4) to assist through MDS international connection in arranging short term and long term finance, when necessary; (5) to advise future trends of financial cost on borrowing funds outside the Philippines, movement of exchange rates of key currencies and potential exchange risk; (6) to provide assistance to MDPI's key personnel when visiting contacts outside the Philippines; and (7) to provide advice and guidance to MDPI in operating Human Resource Management function and provide staff training materials, are done or performed outside of the Philippines, the pertinent service fees paid by MDPI to MDS are therefore not subject to Philippine income tax. (BIR Ruling No. DA 303-03 dated September 16, 2003) Similarly, since the following services of JJSEA in providing and/or assisting MDPI in: (1) financial and treasury functions; (2) corporate and legal matters; (3) internal audit and control services; (4) taxation services; (5) human resource management; (6) corporate communications; and (7) development and implementation of environmental, health and safety management programs, are likewise done or performed outside of the Philippines, the pertinent service fees paid by MDPI to JJSEA are therefore also not subject to Philippine income tax. EAHDac In the same vein, the services of EDS in performing routine IP telephony support services for MDPI and from maintaining and operating the infrastructure and equipment required to enable the IP based telephone services, are likewise not subject to Philippine income tax. xxx xxx xxx Since payments to foreign corporations, like MDS, JJSEA and EDS, are not among those specified in the said regulations, consequently, services rendered abroad by these corporations are not subject to the expanded withholding tax prescribed in Revenue Regulations No. 2-98, as amended. xxx xxx xxx Thus, the services to be rendered abroad by MDS, JJSEA and EDS to MDPI pursuant to their respective agreements are not subject to VAT. Accordingly, no VAT may be passed on by MDPI to MDS, JJSEA and EDS." SUCH BEING THE CASE, this Office hereby confirms your opinion that the payments made by Xurpas to Rackspace for services rendered entirely outside of the Philippines under the Service Order Agreement shall not be subject to the Philippine corporate income tax, withholding tax and to the 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. IcTCHD Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service