Fernandez Aguja Law Firm

December 3, 2008 BIR RULING [DA-(C-154) 487-08] Sec. 23 (F), 28 (B), 42 (C), 108; DA 165-96; DA 173-01 Fernandez Aguja Law Firm CPA-Lawyers Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated November 15, 2008 requesting on behalf of your client, ESS InfoSolutions, Inc. (ESSi), for confirmation of your opinion that the income payments ESSi makes, in the form of service fees, to Innodata Isogen Technologies Private Limited (IITPL) of New Delhi India and Innodata Isogen, Inc. (III) of Delaware USA are exempt from Philippine income taxes under Sections 23 (F) and 28 (B) (1) of the 1997 Tax Code and consequently to withholding tax under Section 57 (A) of the same Code and to the final withholding taxes and value-added tax (VAT) pursuant to Section 108 (A) of the same Code. It is represented that ESSi is a domestic corporation duly organized and registered under the laws of the Republic of the Philippines with principal place of business at Exchange Corner Bldg. V.A. Rufino cor. Esteban and Bolanos Streets, Legaspi Village, Makati City, Philippines. IITPL, on the other hand, is a non-resident foreign corporation organized and existing under the laws of New Delhi India with principal place of business at 708, Surya Kiran Building, Kasturba Gandhi Marg New Delhi-110001. IITPL is engaged in the business of providing high volume data capture services, data encoding, data conversion, edition, proof reading, image scanning, indexing, abstracting, typesetting, electronic printing and publishing, medical transcription, technical support and programming. It has no permanent establishment in the Philippines and is not duly registered as a corporation in the Philippines per Certificate of Non-registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 8, 2008. It is also represented that III is a non-resident foreign corporation organized and existing under the laws of Delaware USA with principal place of business at 3 University Plaza, Hackensack, NJ 07601 USA. III is organized for the purpose of engaging, directly or indirectly, in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. It also has no permanent establishment in the Philippines and is not duly registered as a corporation in the Philippines per Certificate of Non-registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 8, 2008. EcHaAC It is further represented that on September 3, 2008 and November 12, 2008, ESSi entered into a Service Agreement with IITPL and III, respectively, for technical support services for which IITPL and III shall both receive service provider fees. Under ESSi's agreement with IITPL, the latter shall perform all services within the territory of India and completely outside Philippine Jurisdiction. On the other hand, ESSi's agreement with III provides that latter shall perform all of its services within the territory of the United States of America and likewise completely outside the jurisdiction of the Philippines. In both agreements of ESSi and IITPL and III, respectively, the rendition of services by IITPL and III shall in no way involve a grant of license for the use of intellectual property nor will it involve any transfer of any intellectual property rights. It is your opinion that the service fees to be paid by ESSi to IITPL and III under the agreements are not subject to Philippine income, withholding and value-added taxes. In reply, please be informed as follows: I. As a general rule, Section 23 (F) of the 1997 Tax Code as amended by R.A. 9337, in relation to Section 28 thereof, 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 and received during the taxable year, at the rate equal to thirty-five percent (35%) of the gross income. For purposes of determining which income is considered not of Philippine source, Section 42 (C) of the Tax Code enumerates the following items of gross income as income from sources without the Philippines, to wit: "(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines; (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines". Thus, income derived by non-resident foreign corporations for services rendered outside the Philippines is not subject to Philippine income tax; and consequently to withholding tax (BIR Ruling Nos. 59-80 dated December 10, 1980 and 059-98 dated May 21, 1998) DcCITS Accordingly, since IITPL and III shall perform all the services under the agreements entirely in India and the United States of America, respectively, and completely outside of the Philippine taxing jurisdiction, income payments received by them from ESSi are considered income from without the Philippines, hence, exempt from income tax and consequently from the withholding tax. II. Pursuant to Section 108 (A) of the 1997 Tax Code, as amended by R.A. 9337, 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. In the instant case, since the services of IITPL and III are performed outside the Philippines, they shall not be liable to pay the VAT. Moreover, inasmuch as the service fees shall not be subject to the 12% VAT, no VAT may be passed on by IITPL or III to ESSi. (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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service