Gaston Tan & Dy Law Offices

September 10, 2009 BIR RULING [DA-(C-206) 528-09] 23 (F); 28 (1); 42 (3); DA-598-2006; DA (C-169) 444-09; 464-93; DA 037-04; DA-345-06 Gaston Tan & Dy Law Offices 204 First Midland Office Condominium 109 Gamboa St., Legaspi Village Makati City Attention: Atty. Alfonso V. Tan, Jr. Gentlemen : This refers to your letter dated July 27, 2009 on behalf of your client, Altastrasse Corporation (Altastrasse), requesting for confirmation of your opinion that the service fees to be directly paid by Altastrasse to Jemsoft Internet Systems (Jemsoft) for non-technical management support services is exempt from income, withholding and value-added taxes (VAT) as services rendered by a non-resident foreign corporation entirely in Belize are not subject to Philippine taxes. The facts as you represented are as follows: Altastrasse is a corporation duly organized and existing under the laws of the Philippines, with principal office located at the 3rd Floor, Value Point Exec. Building, No. 227 Salcedo Street, Legaspi Village, Makati City. Jemsoft on the other hand, is a corporation duly organized and existing under the laws of Belize, with business address at P.O. Box No. 2284, 16 Albert Hoy Avenue, Belama Phase 1, Belize City, Belize C.A. Both Altastrasse and Jemsoft are similarly engaged in the business of providing consultancy and advisory services to any and all kinds of corporations, partnerships, enterprises, and programs engaged in scientific, software technology or commercial industries. On January 2, 2009, Altastrasse and Jemsoft entered into a Services Agreement for the latter to render the following offsite assistance or services ( i.e., to be performed entirely outside of the Philippines): DAHEaT 1. Provide management information consulting and support services including, but not limited to business strategic services, change management services, systems integration, systems management, assessment, selection, installation, implementation, configuration, support, operation and related services; 2. Provide advice on general economic trends and competition in the industry; 3. Provide advice on the improvement of management systems and organizational structures; 4. Provide advice and assistance in the preparation of proposals and/or conduct of market research and surveys; 5. Provide updates on market trends, conditions and latest requirements in the industry; cSIHCA 6. Provide advice on financial matters of the Company including budgeting and financial planning; and 7. Such other activities and services, as may be agreed from time to time, that would redound to the benefit of the Company. All of the above services shall be rendered entirely in Belize and shall not involve any transfer of technology, know-how or other intellectual property rights. Furthermore, it shall not involve services relating to research and development or the transfer of proprietary products. In consideration of the foregoing undertaking, Altastrasse shall pay Jemsoft fees based on actual time charges incurred by Jemsoft. In reply, please be informed below: Income Tax and Withholding Tax A non-resident foreign corporation is taxable only on income derived from sources within the Philippines pursuant to Sec. 23 (F) in relation to Sec. 28 (B) (1) and 42 (A) (3) of the 1997 Tax Code, as amended by Republic Act (R.A.) 9337, which provides: "SEC. 23. General Principles of Income Taxation in the Philippines. CaDATc 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. SEC. 28. Rates of Income Tax on Foreign Corporations. "(1) In 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%). (Emphasis supplied) SEC. 42. Income from Sources Within the Philippines. xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" As clearly provided by law, a non-resident foreign corporation is taxable only on income derived from sources within the Philippines. Thus, if Jemsoft, a non-resident foreign corporation, furnishes and performs services outside the Philippines for Altastrasse, the service fees to be paid for by the latter to the former, are not taxable in the Philippines. SDHacT In Commissioner of Internal Revenue vs. Japan Air Lines, Inc. et al., (G.R. No. 60714, October 4, 1991), it was held that the situs of income derived from labor or personal services is determined solely by the place where the service is rendered. Thus, compensation from services performed abroad is considered income from sources without the Philippines (BIR Ruling No. 464-93 dated November 19, 1993) and thus, not subject to Philippine income tax. Considering the services of Jemsoft to Altastrasse under the Services Agreement are rendered outside the Philippines, the payments by Altastrasse to Jemsoft are considered income derived from sources outside the Philippines. Thus, the service fees received by Jemsoft, a non-resident foreign corporation, for services rendered entirely in Belize shall not be subject to income tax and withholding tax. Value-added Tax (VAT) Services rendered outside of the Philippines are not subject to VAT. Section 108 (A) of the Tax Code provides that "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. As such, services performed outside the Philippines are not subject to VAT. The application of the aforementioned provisions can be seen in BIR Ruling No. DA-598-2006 dated October 9, 2006, to wit: CScTED "In regard to the liability for VAT, Section 108 of the Tax Code of 1997, as amended, provides that VAT shall be imposed on gross receipts derived from the sale or exchange of services, and the use or lease of properties. The same provision of the Tax Code 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 outside the Philippines are not subject to VAT. Section 108 (A) of the same Tax Code clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004). Accordingly, since the subject services under the Marketing Service Agreement will not be performed in the Philippines, service fees to be paid by SUNMEC to MIKOMA are exempt from VAT." Applying the said rule in the case at hand, services rendered by Jemsoft under the Services Agreement which are performed entirely in Belize are not subject to VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that that * facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service