Micro Insurance Associate's Agency Philippines, Inc.

December 22, 2009 BIR RULING [DA-(C-336) 816-09] 28 (B); 42 (C); 105; 108; DA-036-07; 164-95; 057-97; DA-(C-013)065-2008; DA-037-04 Micro Insurance Associate's Agency Philippines, Inc. 3rd Floor, RCBC Savings Bank Building Luna Street, Lapaz, Iloilo City Attention: Ms. Consolacion L. Montelibano Finance Officer Gentlemen : This refers to your letter dated July 29, 2009 which was indorsed by Revenue Region No. 11, Iloilo City on August 17, 2009, requesting for a ruling on the tax consequences of the Administrative Services Agreement ("ASA") entered into between Micro Insurance Associates Agency Philippines, Inc. (MIAP) and Micro Insurance Agency Holdings LLC (MIAH). Background Micro Insurance Associates Agency Philippines, Inc. (MIAP) is a domestic corporation which is an 80%-owned subsidiary of Micro Insurance Agency Holdings LLC (MIAH), a non-resident foreign corporation (organized and existing under the laws of the State of Illinois, USA, not doing business in the Philippines. MIAP acts as insurance agent for life, and non-life companies insuring life, health, accidents, fire and allied lines, motor vehicles, casualty, surety bonds, marine cargo, marine hull, workmens' compensation comprehensive general liability, contractors' all risks, and aviation insurance. MIAH has its roots within Opportunity International, a large microfinance network based in Illinois U.S.A. MIAH was formed for the purpose of serving as an agent to provide insurance to poor persons in developing countries and owns (in whole or in part) insurance agencies serving the poor in developing countries and the transaction if any or all lawful business for which Limited Liability Companies (LLC) may be organized under the Illinois Act, 805 ILCS 180 et. seq. Its principal place of business is 2122 York Road, Suite 340, Oak Road, IL 60523, U.S.A. cIEHAC On January 2, 2008, MIAP and MIAH entered into an Administrative Services Agreement (ASA) for a term of one year, whereby MIAH will provide MIAP support administrative services for general management, product development, market research, strategic relations, public relations and communications, financial advice and other assistance while not physically present in the Philippines. For the services to be provided by MIAH, MIAP agrees to pay MIAH an administrative services fee (management services fee) of US$75,000 for the calendar year 2008. The fee is to be invoiced and paid quarterly. On January 1, 2009, MIAP and MIAH entered into another ASA under the same terms and conditions as that of the 2008 ASA except for the amount of the administrative services fee (management services fee) which was increased to US$150,000 to be invoiced and paid quarterly. All these services were and are entirely performed outside the Philippines. In view thereof, you now request for confirmation that: 1. The administrative service fee paid by MIAP to MIAH under the ASA is not subject to Philippine income tax, and consequently, withholding tax; 2. The administrative service fee constitutes ordinary and business expense deductible for Philippine tax purposes by MIAP; and 3. The administrative service fee is not subject to VAT. We reply, as follows: The administrative service fee paid by MIAP to MIAH under the ASA is not subject to Philippine income tax and to withholding tax being income or revenues by the payee derived from sources outside the Philippines. The administrative service fee is income or revenues derived by MIAH as consideration for services rendered outside the Philippines. Since the payee is a non-resident foreign corporation not engaged in trade for business in the Philippines and the services were rendered outside the Philippines, the administrative service fee will not be considered as taxable income of the payee derived from sources within the Philippines. AaCTID The National Internal Revenue Code ("Tax Code") clearly states that the income of a non-resident foreign corporation is taxed in the Philippines only if the said income is derived from sources within the Philippines. This is pursuant to the provisions of Section 28 (B) (1) of the Tax Code, which provides: "(B) Tax on Nonresident Foreign Corporation. "(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%). In defining what income payments are considered from sources without the Philippines, Section 42 (C) of the Tax Code provides: "Section 42 (C). Gross income from sources without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: (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 EcTaSC (5) Gain, profits and income from the sale of real property located without the Philippines." In BIR Ruling No. DA-036-07 dated January 24, 2007, this Office ruled that ING is a foreign corporation not engaged in trade or business in the Philippines and as such the upfront fees it derived is not subject to Philippine income tax. Thus: "As a general rule, foreign corporations not engaged in trade or business in the Philippines such as Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are taxed only on Philippine-sourced income (Sec. 28(B)(1), 1997 Tax Code, as amended). In the case of services, the situs of taxation is the place where the service is rendered, regardless where the payment is made. Thus, fees for services rendered outside the Philippines are considered foreign-sourced income and will not be subject to Philippine income tax (Sec. 42(C), 1997 Tax Code, as amended). xxx xxx xxx Accordingly, this Office hereby confirms that since the Agents' Fees to be paid to Mizuho Corporate Bank, Ltd. and the Upfront Fee and Cancellation Fee as well as the Commitment Fee to be paid to Calyon, ING Bank N.V., Singapore Branch, Mizuho Corporate Bank Ltd. and Sumitomo Mitsui Banking Corporation are for services performed outside of the Philippines, they are considered income derived from sources outside the Philippines and therefore, are not subject to final withholding tax in the Philippines, pursuant to Section 28 (B) (1) in relation to Section 42 (C) of the 1997 Tax Code, as amended." Consequently, such service fee payments are not also subject to final withholding tax pursuant to Section 2.57-1 (I) (1) in relation to Section 2.57 (A), both of RR No. 2-98, as amended. Section 2.57-1 (I) (1) of the same Regulations provides that non-resident foreign corporations are subject to final withholding tax only on their income derived from all sources within the Philippines. Thus, if the income is derived from sources outside the Philippines, the same is not subject to final withholding tax. MIAP, therefore, is not required to withhold on its payments under the aforementioned administrative service agreement to MIAH. The administrative service fee constitutes ordinary and business expense deductible for Philippine tax purposes by MIAP since these are paid or incurred during in carrying on or which are directly attributable to the operation of MIAP's insurance business. Section 34 (A) (1) of the Tax Code of 1997, as amended, all ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession are allowed as deduction from gross income. TCcIaA It is noted that MIAP availed of the aforesaid services to support its administrative services for general management, product development, market research, strategic relations, public relations and communications, financial advice and other assistance. Since the engagement of MIAH by MIAP to perform services covered under the ASA is directly connected with and appropriate in the conduct of MIAP's business, the same may be considered as ordinary and necessary business expenses pursuant to aforementioned Section 34 (A) (1) of the Tax Code of 1997. Accordingly, the service fees paid to MIAH are deductible expenses from MIAP's gross income pursuant to Section 35 (A) (1) of the Tax Code of 1997, as amended. The administrative service fees are not subject to VAT since these payments are payments for services rendered outside the Philippines. The administrative service fees are not subject to VAT since these are payments for services rendered outside the Philippines. In defining the phrase "sale or exchange of services" subject to 12% VAT, Section 108 of the National Internal Revenue Code (the "Tax Code") provides: xxx xxx xxx "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, . . ." The VAT imposed under Section 108 of the Tax Code applies only to services performed in the Philippines and not to services rendered outside the Philippines. In BIR Ruling No. DA 037-04 dated February 2, 2004, this Office confirmed that the payments for services performed outside the Philippines are not subject to the 12% VAT. Thus: "2. Pursuant to Section 108(A) of the Tax Code of 1997 a VAT equivalent to ten percent (10%) of gross receipts is imposed on 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. ATCaDE Accordingly, VSLPH's payment of service fee to VSLHK pursuant to the aforementioned Services Agreement, shall not be subject to VAT. Consequently, no VAT may be passed on by VSLHK to VSLPH, as conversely suggested under Section 105 of the Tax Code of 1997." This ruling is 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