Cabrera Lavadia & Associates

August 20, 2008 BIR RULING [DA-(VAT-021) 150-08] Sec. 108; DA-598-2008 Cabrera Lavadia & Associates 28th Floor Philamlife Tower 8767 Paseo de Roxas Makati City Attention: George J. Lavadia Partner Gentlemen : This refers to your letter dated May 30, 2008, in behalf of your client, Renoir Consulting Limited ("RCL") , requesting confirmatory ruling on your opinion that the payments made by The Medical City ("TMC") under the Design Services Agreement (DSA) are not subject to Philippine income tax and consequently, to withholding tax and the same payments are likewise not subject to Value-Added Tax (VAT). It is represented that RCL is a non-resident foreign corporation organized and existing under the laws of Mauritius and having a place of business at Manor House, 1st Floor, Cnr St. George/Chazal Streets, Port Louis, Mauritius. TMC is a corporation duly organized and existing under the laws of the Philippines and having a place of business at Ortigas Avenue, Pasig City, Philippines. In order to enhance its competitive strategy and managerial effectiveness, TMC entered into a Design Services Agreement (DSA) with RCL, as the latter has the expertise, experience and skill in relation to the competitive strategy and effective management of industrial and commercial enterprises. Under the DSA, RCL shall provide the following support services for TMC: IDaEHC 1. Design and development of taskforce training and workshops 2. Design and development of management training and workshops 3. Design and development of client installation training and workshops 4. Development of project financial evaluation methodologies 5. Development of project non-financial evaluation methodologies, e.g. change management measurement system 6. Design of compliance auditing systems 7. Analysis and critique of existing supply chain management 8. Analysis and critique of existing activities being carried out 9. Analysis and critique of current state processes 10. Analysis and critique of existing management control systems 11. Develop possible changes to new supply chain management 12. Develop changes and solutions to improve then business processes CIAHaT 13. Develop new performance management systems 14. Analysis and critique of existing business performance management tools 15. Analysis of historical performance 16. Analysis and critique of existing business performance management systems 17. Develop changes and solutions to business performance management 18. develop new business performance management tools cHSTEA All services under the DSA will be performed by RCL entirely outside the Philippines. This is purely a provision of services. In consideration, TMC shall pay RCL certain agreed amount from its services under the DSA. In reply, please be informed as follows: The rule in this jurisdiction regarding tax situs is that the source of income is the property, activity or service that produced the income, the test of taxability is the "source" and the source of income is that activity which produced the income ( CIR v. British Overseas Airways Corporation, G.R. Nos. 65773-74, April 30, 1987). With regard to compensation for labor or personal services, services performed within the Philippines, regardless of the residence of the payor, or of the place in which the contract for services was made, or of the place of payment, shall be considered as part of the gross income from sources within the Philippines (Section 155, Revenue Regulations No. 2). Stated differently, the situs of the income derived from labor or personal services is determined solely by the place where service is rendered ( CIR v. Japan Airlines, Inc. , G.R. No. 60714, October 04, 1991). Compensation from services performed abroad is considered income from sources without the Philippines. Considering that the services that produce the income on the part of RCL are performed outside of the Philippines, it follows that the income derived from the performance of such services is not taxable in the Philippines. Hence, RCL shall not be subject to income tax, and consequently, to the withholding tax on the service fee it receives from TMC pursuant to services under the DSA. 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. Accordingly, since the subject services under the DSA will not be performed in the Philippines, service fees to be paid by TMC to RCL are exempt from VAT. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service