SGV & Co.

December 16, 2008 BIR RULING [DA-(C-173) 533-08] 28 (B) (1); 42 (C); 108; RR 2-98; DA-303-03; DA-688-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. R. C. Vinzon Tax Services Gentlemen : This refers to your letter dated December 2, 2008 stating that your client, IMS Health Philippines, Inc. ("IMS HPI"), is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office address at the 15th Floor BPI Buendia Center Building, Sen. Gil Puyat Avenue, Makati City; that it is engaged in the business of publication of directories of the output of marketing research activities in the healthcare industry; that it entered into a Production and Development Agreement dated December 1, 1998 with IMS Data GmbH (IMS Data), a non-resident foreign corporation duly organized and existing under the laws of Germany with registered address at HahnstraBe 30-32 60528 Frankfurt am Main, Germany wherein IMS Data will perform data processing and development work; that the agreement shall be in effect for 12 months from December 1, 1998 and shall be extended automatically for twelve month periods thereafter unless either party gives written notice to the other, at least 90 days prior to the end of such a period, of its intent to terminate the agreement; that it shall pay IMS Data for the services based on volumes and cost and all services shall be performed in Germany; that it also entered into a Services Agreement dated January 1, 2006 with IMS Health Asia Pte Ltd. (IMS HAP), a non-resident foreign corporation duly organized and existing under the laws of Singapore with registered address at 10 Hoe Chiang Road, #23-01/02 Keppel Towers, Singapore 089315 wherein IMS HAP will perform such assistance, administrative and support services which may include but are not limited to the following: A. Coordination of management support; B. Support in developing and implementing a process for internal and external communications; C. Provision of accounting and financial support; D. Provision of internal auditing services; E. Provision of guidance and support on legal and privacy issues; F. Support for strategic planning; G. Assistance with matters involving personnel, recruiting, compensation, and other like issues relating to human resources; H. Assistance with strategic development, advertising and marketing products; I. Assistance with production and printing; J. Provision of tax and treasury advice and support; K. Assistance with client relations, including correspondence with clients when necessary and dealing with client companies; L. Assistance on computer services and information technology; M. Provision of administrative services and assistance normally provided by personnel with regional/multi-country responsibilities; ADcEST N. Provision of other administrative and support services and assistance as deemed necessary by IMS HAP; O. Coordination of third party consultants to provide on matters detailed above; and P. Other services as required. That all the above services are rendered outside the Philippines in IMS HAP's office in Singapore; that as payment for the services rendered by IMS HAP to IMS HPI, IMS HAP shall charge such an amount equal to the costs incurred in providing such services plus a mark-up of eight percent (8%) payable in Singapore dollars; that the agreement shall be in effect from January 1, 2006 to December 31, 2006 and shall be extended automatically for twelve month periods thereafter unless either party gives written notice to the other of its intent to terminate the agreement at least 90 days prior to the end of such a period. Based on the foregoing representations, you now request for a ruling that: 1.) The service fees paid by IMS HPI to IMS Data in consideration for services performed outside the Philippines are considered as income sourced outside of the Philippines and are therefore not subject to Philippine income tax, expanded withholding tax and value-added tax; and 2.) The service fees paid by IMS HPI to IMS HAP in consideration for services performed outside the Philippines are considered as income sourced outside of the Philippines and are therefore not subject to Philippine income tax, expanded withholding tax and value-added tax. In reply thereto, please be informed as follows: 1. Services performed abroad by IMS Data and IMS HAP are not subject to Philippine income tax. Section 28 (B) (1) of the Tax Code of 1997, as amended, provides that non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, non-resident foreign corporations are not subject to income tax on income derived from sources outside the Philippines. Corollarily, Section 42 (C) of the same Tax Code, provides, viz. : "(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) Services. Compensation for labor or personal services performed without the Philippines;" Since the services of IMS Data and IMS HAP are done or performed outside of the Philippines, the pertinent service fees paid by IMS HPI to IMS Data and IMS HAP are therefore not subject to Philippine income tax. (BIR Ruling DA-303-03, dated 16 September 2003) 2. Services performed abroad by IMS Data and IMS HAP are not subject to withholding tax under RR 2-98, as amended. 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), Revenue Regulations (RR) No. 2-98, as amended]. Needless to state, the withholding of income/creditable withholding tax on a certain income payment presupposes that the 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. aDHScI Moreover, pursuant to Section 2.57-1 (I) of RR 2-98, as amended, non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. The same section does not provide that non-resident foreign corporations are subject to final withholding tax on their income derived from sources without the Philippines. Since payments to foreign corporations, IMS Data and IMS HAP, 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 RR 2-98, as amended (BIR Ruling No. DA-688-07 dated December 27, 2007). 3. Services performed abroad by IMS Data and IMS HAP are not subject to VAT under Section 108 of the Tax Code of 1997, as amended. Section 108 (A) of the Tax Code of 1997, as amended, states that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and 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. Conversely, services performed outside the Philippines are not subject to VAT. Accordingly, the services to be rendered abroad by IMS Data and IMS HAP to IMS HPI pursuant to their respective agreements are not subject to VAT. Thus, no VAT may be passed on by IMS HPI to IMS Data and IMS HAP (BIR Ruling No. DA-688-07 dated December 27, 2007). IN VIEW OF THE FOREGOING, this Office confirms your opinion that fees paid or to be paid by IMS HPI to IMS Data and IMS HAP, which are non-resident foreign corporations that are based in Germany and Singapore, respectively, are not subject to Philippine income 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service