Exemption from Philippine Income Tax and 35% Withholding Tax - Non-Resident Foreign Corporation

March 27, 1990 BIR RULING NO. 036-90 36-c-3 093-89 036-90 Gentlemen : This refers to your letter dated January 26, 1990 stating that your client, Alfa Laval Food and Dairy International (Alfa Laval) is a non-resident foreign corporation organized under the laws of Sweden; that Alfa Laval has proposed to sell a complete compounding and pasteurizing section for an Infant Nutritional Product Plant to Wyeth-Suaco Laboratories, Inc. (Wyeth); that the Section proposed to be supplied by Alfa Laval will be designed to meet the specific requirements of Wyeth; that the contract price consists of payments for the (1) cost of imported equipment (2) charges for supply of local labor and services as well as stainless steel vessels; and (3) fees for engineering design services to be executed in Sweden; that in respect of the supply of local labor and services (relating to the installation and commissioning of the facility and training of local personnel of Wyeth) as well as stainless steel vessels, these will be supplied by a local company which will be contracted for the purpose. In connection therewith, you now request confirmation of your opinion to the effect that the service fee to be remitted by Wyeth to Alfa Laval for engineering design services and technical documentation is exempt from Philippine income tax and consequently to the 35% withholding tax. In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. The engineering design services and technical documentation involved rendering of professional services. As such, since the services will be performed in Sweden, fees to be remitted by Wyeth to Alfa Laval are considered income derived from sources outside the Philippines. Accordingly, and since a non-resident foreign corporation is subject to income tax only on income derived from sources within the Philippines, fees to be paid by Wyeth to Alfa Laval are not subject to income tax and consequently to the 35% withholding tax prescribed by Section 25(b)(1), in relation to Section 50 (a) of the Tax Code, as amended, (BIR Ruling No. 221-89) Moreover, the aforementioned fee is not considered as rentals or royalties within the purview of Section 36(a)(4) of the Tax Code, since there is no transfer into this country of technology, equipment or other property, where the payee has proprietary interest. Specifically, under sub-paragraph (c) thereof, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no such transfer of technology as the fee to be paid by Wyeth to Alfa Laval is for the latter's engineering design services and technical documentation performed in Sweden. Thus, the fee of Alfa Laval is not considered royalty, but constitutes compensation for labor or personal service performed without the Philippines. The fee is considered income from sources without the Philippines pursuant to Section 36(c)(3) of the Tax Code. Accordingly, and since Alfa Laval is a non-resident foreign corporation, said fee is not subject to Philippine income tax. (BIR Ruling No. 36-c-3-577-88-093-89 dated May 2, 1989). cd Very truly yours, (SGD.) JOSE U. ONG Commissioner