J.D. Llovido and Associates

July 15, 2008 BIR RULING [DA-(VAT-003) 036-08] 22 (1); 28 (B) (1); DA-393-2003 J.D. Llovido and Associates 11-A Apo Street, Sta. Mesa Heights Quezon City Attention: Mr. Armando G. Llovido General Manager Gentlemen : This refers to your letter dated October 22, 2007 requesting, in behalf of your client Fujian Electric Engineering Company (Fujian), relative to its internal revenue tax obligation. Documents submitted disclosed that Fujian Electric Engineering Company is a foreign company organized and existing under the laws of China; that it is engaged as a general contractor of overseas coal-fired projects and domestic international tender projects; that it has an approved contract with the National Power Corporation which will be implemented soon; that an application of a foreign corporation to establish a representative office in the Philippines has been filed with the Securities and Exchange Commission on November 29, 2007; that the Representative Office shall hold office at #1498 Quezon Avenue, Quezon City; and that the representative office in the Philippines does not expect to generate any income as it intends to pursue only the following activities in the Philippines: 1. to act as liaise office; 2. to promote their products; and 3. Information/dissemination. IAcDET In reply, please be informed that a representative office is a non-resident foreign corporation not engaged in any income generating business in the Philippines. Based on the above representation, since the Fujian's representative office does not intend to engage in any income generating activity, it shall not be subject to income tax. Consequently, it is exempt from the filing of the corporate income tax return. (BIR Ruling No. 136-89 dated July 4, 1989) A person is subject to VAT if it renders service "in the course of trade or business" (Section 105, 1997 Tax Code). Inasmuch as the operation of the representative office is similar to regional or area headquarters of Multinational Corporation which are exempt from VAT under Section 109 (p) of the 1997 Tax Code, representative offices are also exempt from VAT. Moreover, since Fujian Electric Engineering Company Philippine Office merely enables the overseas head office to maintain some presence in the country, and is not engaged in any income-generating activity in the Philippines further qualifies said office for exemption from VAT. However, this exemption applies only to VAT directly due from representative offices (VAT Ruling No. 234-88 dated May 25, 1988 and BIR Ruling No. 136-89 dated July 4, 1989). On the other hand, please be advised that if the Representative Office will remit technical service fees to its parent company, the said fees are considered royalties (Section 42 (A) (4) (f), 1997 Tax Code). Being Philippine-sourced income of a representative office, the technical service fees are subject to Philippine corporate income tax at the rate of 35% (Section 28 (B) (I) of the 1997 Tax Code) which it shall withhold as the payor-corporation and shall be paid in the same manner and subject to the same conditions as provided for in Section 59 of the 1997 Tax Code. (BIR Ruling No. 136-89 dated July 4, 1989). Also, you are advised that employees of the said representative office are subject to the following rates pursuant to Section 2.57.1 (D) of Revenue Regulations No. 2-98, as amended, implementing Section 58 of the 1997 Tax Code: a. If a resident Filipino citizen or a resident alien-graduated tax rates of 5-35%; b. If a non-resident alien engaged in trade or business in the Philippines graduated rates of 5%-35%; c. If a non-resident alien not engaged in trade or business in the Philippines 25% (BIR Ruling No. DA-032-02 dated March 7, 2002) for compensation income received within the Philippines. aEcADH 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service