Asia Pacific Business Legal Consulting

December 22, 2009 BIR RULING [DA-(OSL-038) 810-09] 28 (B) (1); 42 (A) (3); 108; DA-(C-024) 079-09; DA-036-07; DA-117-06; ITAD 113-03 & 097-87 Asia Pacific Business Legal Consulting 2/F, B. Mactan Marina Mall, Mactan Economic Zone I Ibo, Lapulapu City, Cebu Attention: Atty. Lauris L. Dela Pea Managing Partner Gentlemen : This refers to your letter dated October 6, 2009 requesting confirmation that the commission fees paid by Tsuneishi Heavy Industries (Cebu), Inc. ("THI") to Tsuneishi Holdings Corporation ("THD") under the two (2) Commission Agreements are exempt from income/withholding tax and from the value-added tax (VAT) imposed under the Tax Code of 1997, as amended. It is represented that THI is a domestic corporation duly organized and existing under Philippine laws with principal office at West Cebu Industrial Park-Special Economic Zone (WCIP-SEZ), Buanoy, Balamban, Cebu. It was registered with the Securities and Exchange Commission (SEC) to engage in and carry on the business of shipbuilding, ship repair and manufacturing of outfittings for ships and vessels, primarily for export. The Company is also registered with PEZA on September 16, 1998 as an Ecozone Export Enterprise under Registration Certificate No. 98-055 to engage in shipbuilding and ship repair for export. It is currently entitled to a 5% special tax on gross income in lieu of payment of all national and local taxes. It is also represented that THD is a non-resident foreign corporation organized and existing under the laws of Japan with office address at Tsuneishi, Numakuma-cho, Fukuyama City, Hiroshima Prefecture, Japan. THD is not engaged in trade or business in the Philippines as evidenced by a Certificate of Non-Registration of Corporation issued by the SEC. On December 19, 2008, THI and THD entered into two (2) Commission Agreements ("Agreements"). Under the said Agreements, THD shall act as Pledgor for THI with respect to the Loan Agreements entered into by THI with Japan Bank of International Cooperation (JBIC) and with Mitsubishi UFJ Lease Singapore Pte. Ltd. (MUFJ). HCSAIa As Pledgor, THD has created a pledge upon certain of its holdings or equity shares in various Japanese companies and/or upon certain of its holding of Japanese government bonds and/or created any other charges over any of its assets which JBIC and MUFJ deem necessary to secure the due and punctual payment of principal, interest or any other amounts due to JBIC and MUFJ by virtue of their respective Loan Agreement. In acting as Pledgor, THI shall pay THD a commission fee in respect to the grant of the subject loan facility at 0.5% per year on the remaining balance of the loan. As Pledgor, THD shall perform the act or service entirely in Japan (in case of the Commission Agreement pertaining to the loan with JBIC) and entirely in Singapore (in case of the Commission Agreement pertaining to the loan with MUFJ). Based on the foregoing, you now request a confirmation of your opinion that: (a) The commission fees payable to THD under the Agreements constitute income from sources outside the Philippines of non-resident foreign corporation which are not subject to Philippine income tax and consequently to withholding tax; and SADECI (b) The commission fees payable are not subject to value-added tax (VAT) since the services being remunerated are performed entirely outside of the Philippines. In reply, please be informed as follows: Income Tax Consequence Section 28 (B) (1) of the Tax Code of 1997, as amended, provides: "Sec. 28. Rates of Income on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident 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 subparagraphs 5 (c) and (d): . . ." (Emphasis supplied) SHADcT Accordingly, a foreign corporation like THD is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42 (A) (3) of the Tax Code of 1997, as amended, as follows: "Sec. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines;" From the above-cited sections, it is clear that a non-resident foreign corporation is liable to Philippine tax only on income derived from sources within the Philippines. Since in acting as Pledgor, the act or service shall be performed by THD entirely in Japan and in Singapore where JBIC and MUFJ is located, respectively, the commission fees to be paid to THD would be considered as income from sources outside of the Philippines of a non-resident foreign corporation and therefore, not subject to Philippine income tax. (BIR Ruling Nos. DA-(C-024) 079-09 dated February 12, 2009, DA-036-07 dated January 24, 2007, DA-117-06 dated March 16, 2006, ITAD 113-03 dated August 1, 2003 & 097-87 dated April 6, 1987) Accordingly, this Office hereby confirms that the commission fees payable to THD pursuant to the Commission Agreements are not subject to income tax and therefore THI is not obliged to withhold any tax on the said commission fees payable to THD. Value-Added Tax Consequence Section 108 (A) of the 1997 Tax Code, as amended, provides: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange or services, including 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. . . ." (Emphasis supplied) Considering that the services under the Agreement are to be performed by THD outside the Philippines, then, the service fees paid by THI are considered as income derived from services rendered outside the Philippines of a non-resident foreign corporation and therefore, not subject to the 12% value-added tax. (BIR Ruling No. DA-117-06, supra. ) 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. ECTSDa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service