Mahle Filter Systems Philippines Corporation

September 9, 2009 BIR RULING [DA-(C-201) 511-09] 23 (F); 42 (C) (3); DA 148-98; DA 385-98; DA 037-94; DA 534-04; DA 496-05 Mahle Filter Systems Philippines Corporation Block 8 Lots 5, 6, & 7 PEZA Drive First Cavite Industrial Estate Brgy. Langkaan, Dasmarias Cavite Attention: Eleonor F. Ledesma Department Head-General Accounting and Tax Gentlemen : This refers to your letter dated May 30, 2009 requesting for a ruling on the proper tax treatment of the service fees to be paid by Mahle Filter Systems Philippines Corporation to Mahle Japan-Limited. It is represented that Mahle Filter Systems Philippines Corporation ("MFSP" for brevity) formerly, Mahle Tennex Philippines Corporation, was incorporated and registered with the Securities and Exchange Commission (SEC) on May 27, 1996. It was registered with the Philippine Economic Zone Authority (PEZA) on June 3, 1996 and the Bureau of Internal Revenue on December 23, 1996. MFSP is primarily engaged in the business of manufacturing of air filter elements and other automotive products. Majority of its product line are now subject to 5% regime in lieu of other taxes under Republic Act No. 7916 after its income tax holiday incentive expired on September 30, 2007. It is further represented that on January 1, 2009, MFSP entered into a Comprehensive Service Agreement with Mahle Japan-Limited ("MJ"). MJ is a company duly incorporated and existing under the laws of Japan and engaged in providing services related to accounting and information technology (IT) to related companies. It is not doing business and has no permanent establishment in the Philippines as evidenced by a certification issued by SEC. For tax purposes, it is, therefore, considered as a non-resident foreign corporation. CHIScD Under the Agreement, MJ will provide qualifying services to MFSP in the areas of accounting and finance, IT, quality control and sales activities. In consideration thereof, MFSP will pay MJ a flat reasonable monthly service fee renewable yearly and subject to any adjustment as agreed upon. Under Article III of the Agreement, MJ will provide the services in Japan. Upon the foregoing, you now request for opinion that the service fees to be paid by MFSP to MJ represent compensation for services rendered outside the Philippines. Thus, they are not subject to Philippine income taxes and consequently to withholding taxes. In reply, please be informed that Section 23 (F) of the Tax Code of 1997, as amended, provides 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." Relative thereto, Section 42 (C) (3) of the same Code states that: "Sec. 42. Income from Sources Within the Philippines . xxx xxx xxx C) Gross Income from Sources Without the Philippines. xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines." Based on the foregoing, non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, these corporations are not subject to income tax on income derived from sources outside the Philippines. On the other hand, Section 42 (C) (3) provides that labor personal services performed without the Philippines are considered income from sources without the Philippines. Hence, non-resident foreign corporations deriving income for services performed abroad are not subject to Philippine income tax since such services are considered income from sources without the Philippines. Accordingly, since the services of MJ are to be performed abroad, the service fees to be paid by MFSP to the former shall not be subject to Philippine income tax and consequently to withholding tax. CITDES Moreover, it is well to emphasize that Section 108 (A) of the Tax Code provides that value-added tax (VAT) shall be imposed on gross receipts derived from sale or exchange of services, and use or lease of properties. It further provides that 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 without the Philippines are not subject to VAT. Since the services to be rendered by MJ will be performed without the Philippines, the service fees to be paid by MFSP to MJ shall not be subject to the 12% VAT. In view of the foregoing, this Office is of the opinion as it hereby holds that service fees paid by MFSP to MJ as consideration of the services rendered abroad by the latter are not subject to income tax and consequently to the 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. cADEHI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service