Mahle Filter Systems Philippines Corporation

December 23, 2009 BIR RULING [DA-(VAT-120) 829-09] 109 (k); 23 (F); 42 (C) (3); DA 148-98; DA 385-98; DA 037-94; DA 534-04; DA 580-06 Mahle Filter Systems Philippines Corporation Block 8 Lots 5, 6, & 7 PEZA Drive First Cavite Industrial Estate Brgy. Langkaan, Dasmarias Cavite Attention: Eleonor F. Ledesma Department Head-General Accounting and Tax Gentlemen : This refers to your letter dated October 8, 2009 requesting for a ruling that the service fees paid by Mahle Filter Systems Philippines Corporation ("MFSP") to Mahle Filter Systems Japan ("MFSJ") are not subject to value added taxes and Philippine income taxes. It is represented that MFSP (formerly Mahle Tennex Philippines Corporation) is a corporation duly organized and existing under Philippine laws. It is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise primarily engaged in the business of manufacturing air filter elements and other automotive products. As a PEZA-registered enterprise, MFSP enjoys a 5% preferential tax on gross income for majority of its product lines. It is further represented that on December 27, 2006, MFSP entered into a Consulting and Technical Service Agreement ("CTS Agreement") with MFSJ. MFSJ is a company duly incorporated and existing under the laws of Japan with principal address at 3-1-2 Ikeburo, Toshima-ku, Tokyo, 171-0014 Japan. It is not doing business and has no permanent establishment in the Philippines as evidenced by a certification issued by SEC. For tax purposes, it is, therefore, considered a non-resident foreign corporation. Under the CTS Agreement, MFSJ will provide consultancy and technical services related to the following areas: 1) Procurement and sales of products; aDSTIC 2) Market development; 3) Management of personnel of MFSP; 4) Business decisions and investment; 5) Technical assistance; 6) Research and Design Activities; and 7) Other Services as agreed by MFSJ and MFSP from time to time. Pursuant to Article 2 of the Agreement, MFSJ shall provide all services within the premises of MFSJ either in Japan or at any other MFSJ-related company premises overseas. In consideration thereof, MFSP shall pay MFSJ service fees which shall be calculated on the basis of the standards of MFSJ as provided in Agreement. Upon the foregoing, you now request for opinion that the service fees to be paid by MFSP to MFSJ represent compensation for services rendered outside the Philippines. Thus, they are not subject to value-added tax and Philippine income taxes, and consequently, to withholding taxes. In reply, please be informed that Section 23 (F) of the Tax Code of 1997, as amended, provides that: "Sec. 23. General Principles of Income Taxation in the Philippines. 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." Relative thereto, Section 42 (C) (3) of the same Code states that: "Sec. 42. Income from Sources Within the Philippines. xxx xxx xxx C) Gross Income from Sources Without the Philippines. xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines." EaCDAT Based on the foregoing, non-resident foreign corporations are subject to income tax only on income derived from all sources within the Philippines. Conversely, these corporations are not subject to income tax on income derived from sources outside the Philippines. On the other hand, Section 42 (C) (3) provides that compensation for labor or personal services performed without the Philippines is considered income from sources without the Philippines. Hence, non-resident foreign corporations deriving income for services performed abroad are not subject to Philippine income tax since such services are considered income from sources without the Philippines. Accordingly, since the services of MFSJ are to be performed abroad, the service fees to be paid by MFSP to the former shall not be subject to Philippine income tax and consequently to withholding tax. Moreover, it is well to emphasize that Section 108 (A) of the Tax Code provides that value-added tax (VAT) shall be imposed on gross receipts derived from sale or exchange of services, and use or lease of properties. It further 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 without the Philippines are not subject to VAT. Since the services to be rendered by MFSJ will be performed without the Philippines, the service fees to be paid by MFSP to MFSJ shall not be subject to the 12% VAT. In view of the foregoing, this Office is of the opinion as it hereby holds that service fees paid by MFSP to MFSJ as consideration of the services rendered abroad by the latter are not subject to income tax and consequently to the withholding tax and value-added tax. 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service