BIR Ruling No. 068-13

February 18, 2013 BIR RULING NO. 068-13 23 (F); 42 (C) (3); 108 (A); 34 (A) (1) NIRC of 1997, as amended; BIR Ruling No. 345-2011 Bernaldo Directo & Po Law Offices Unit 1807 Cityland Condominium 10, Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Makati City Attention: Pepeto G. Go Partner Gentlemen : This refers to your letter dated July 7, 2010, requesting on behalf of your client, Professor Torsten Calvi Corporation ("PTCC") , confirmation that the service fees paid to Lemmens Consulting Services Ltd. ("Lemmens") for the services which the latter rendered to PTCC are exempt from Philippine income tax and value-added tax (VAT); and that the said service fees are allowable deductible expenses from the gross income of PTCC. CHTcSE It is represented that Lemmens is a nonresident foreign corporation organized and existing under the laws of Thailand with principal office address at 805 Picnic Tower 10E Floor, Srinakarin Road, Suanluang District, Bangkok, Thailand, as evidenced by its Articles of Association; that Lemmens is not registered either as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on March 2, 2010; and that, on the other hand, PTCC, is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office address at 11th Floor, Telecoms Plaza Building, 316 Sen. Gil Puyat Avenue, Makati City, Philippines. It is further represented that on January 7, 2008, Lemmens was engaged by PTCC to help develop its business overseas; that under the agreed business arrangement, Lemmens will provide PTCC with client referrals and PTCC will directly send commercial proposals to their potential clients; that PTCC will pay Lemmens in advance based on a project-to-project basis for which it received the corresponding service fees, viz. : Project Invoice Number Amount Date of Payments (in Euros) Millennium Towers TH-2009-07002 2,000 July 24, 2009 Lagos Project Millennium Tower TH-2009-09002 4,500 September 29, 2009 ZERO Project Borg Arab International TH-2009-09003 2,000 October 8, 2009 Airport in Egypt Project Kuwait Project TH-2009-01005 6,000 January 29, 2009 Vietnam Project TH-2009-04005 1,200 April 29, 2009 that based on the Certification issued by PTCC dated May 18, 2010, the services provided by Lemmens to PTCC were performed outside the Philippines; and that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. IcADSE In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, a foreign corporation, like Lemmens , whether or not engaged in trade or business in the Philippines, is subject to income tax only with respect to income derived from sources in the Philippines, to wit: '' SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: 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 ." (Emphasis ours) Concerning income from the provision of services, under Section 42 (A) (3) of the Tax Code, income is considered derived in the Philippines only if the services are actually performed in the Philippines , to wit: " Sec. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines ;" (Emphasis ours) In Commissioner of Internal Revenue v. Marubeni Corporation, 1 the Supreme Court held that only services rendered in the Philippines under a single contract are subject to the taxing jurisdiction of the Philippines and consequently subject to Philippine income tax. The Supreme Court ruled in this wise: DCcHAa "Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. . ." of two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment of the NDC project and ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the offshore portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax ." (Emphasis Supplied) Such being the case and since the subject services are rendered by Lemmens outside the Philippines, the service fees to be paid therefor by PTCC to Lemmens are exempt from income tax. ( BIR Ruling No. 345-2011 dated September 22, 2011 ) Finally, with respect to value-added tax ("VAT"), payments for the sale or exchange of services, including the use or lease of properties are subject to VAT only if the services are performed in the Philippines. Section 108 (A) of the Tax Code, as amended, provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 2 raise the rate of value-added tax to twelve percent (12%). . . IHEAcC 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. . . " Accordingly, since the above services are performed by Lemmens outside the Philippines, the service fees to be paid therefor by PTCC are likewise exempt from VAT. As regards the deductibility of the payments for service fees made by PTCC to Lemmens , the relevant provision is Section 34 (A) (1) (a) of the Tax Code of 1997 which provides that "there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession." In view thereof, the payments made by PTCC to Lemmens for the latter's services, being directly attributable to the development, management, operation and/or conduct of the trade, business of PTCC, are allowable deductible expenses on the part of PTCC, subject to the substantiation requirements provided under Section 34 (A) (1) (b) of the 1997 Tax Code, as amended. 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 represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. G.R. No. 1-37377, 18 December 2001. 2. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006. Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.