Tax Consequence of Future Contracts

February 20, 1989 BIR RULING NO. 027-89 36-c-3 19-00 000-00 027-89 S i r : This refers to your letters dated October 18 and November 15, 1988 requesting further information on the tax consequence, if any, of future contracts that the Philippine Government may enter into for pre-shipment inspection service in connection with the expansion of its Comprehensive Import Supervision Scheme (CISS). In response to your query of October 18, 1988, this Office in BIR Ruling No. 19-00-000-00-537-88 dated November 14, 1988 ruled that Societe General d' Surveillance (SGS) is exempt from all taxes on the consideration paid by the Government to SGS for the latter's service of providing a clean report of findings on the quantity, quality and price comparison of imported goods in the country of supply; that notwithstanding the fact that Executive Order No. 93 has withdrawn the tax incentives granted to government and private entities, the aforesaid tax exemption enjoyed by SGS Under an Agreement with the Government has not been affected because it is protected by the non-impairment clause of the Constitution and the tax exemption is conferred by an affective international agreement to which the government of the Republic of the Philippines is a signatory; and that the opinion finds support in Opinion No. 42, S. 1987 of the Secretary of Justice recognizing that the agreement between the Government and SGS is enforceable against the Government. In reply thereto, please be informed that although the inspection service will be conducted by the foreign corporation, like SGS, in the country of supply nevertheless the report of findings on the quantity, quality and price comparison of imported goods in the country of supply will be mailed or transmitted to the Philippine Importers and the Bureau of Customs aside from the fact that the foreign corporation will maintain a liaison office in the country to coordinate the issuance of requests for inspection, transmittal of shipping documents and the receipt of report of findings. Such being the case, the remuneration of the foreign inspection firm shall be considered as royalties for the supply of scientific, technical, industrial or commercial knowledge or information under Section 36(4)(c) of the Tax Code, as amended subject to the 35% final withholding tax under Section 25(b)(1) in relation to Section 50(a) both of the Tax Code, as amended. In view thereof, the aforementioned BIR Ruling No. 19-00-000-00-537-88 dated November 14, 1988 shall no longer apply to future contracts that the Philippine government may enter into for such inspection service. cdt Very truly yours, (SGD.) JOSE U. ONG Commissioner