Commission/Fees Paid to the Japanese Broker are Not Subject to Income Tax

May 10, 1990 BIR RULING NO. 074-90 36 (a) (3) 00-082 074-90 Gentlemen : This refers to your letter dated October 19, 1989 stating that your client is engaged in overseas shipping; that it operates a 160 DWT bulk Carrier which is trading worldwide; that your client acquired and operates the ship under a bareboat contract from its foreign owner; that your client has, in turn, time-chartered the ship to a Japanese company on a long-term basis; that the time charter was obtained by your client through a Tokyo-based broker which is also a Japanese firm; that the negotiation of the time charter contract was done entirely in Japan through the mediation and assistance of said broker. Based on the foregoing, you request confirmation of your opinion that since the services of the Japanese broker are done outside of the Philippine territorial jurisdiction, the commission/ fees paid by your client to the Japanese broker are not subject to income tax; hence, your client is not required to withhold any tax from the broker's commission/fees paid to the Japanese broker. In reply, please be informed that under Section 22(b) in relation to Section 36(a)(3) of the Tax Code, as amended, a non-resident alien not engaged in trade or business in the Philippines is subject to income tax only on income derived from sources within the Philippines. A Philippine source income, means compensation/ commission/fees paid for, among others, labor or services performed in the Philippines. Thus, salaries paid by Philippine juridical entities to non-resident Japanese performing services in Japan are taxed only in Japan and not in the Philippines. In the instant case, since the Japanese broker rendered services for your client in Japan, the commission/fees received by said broker from your client are not subject to Philippine income tax, and consequently, your client is not required to withhold any tax from such income payments under Section 50(a) of the Tax Code. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner