Whether Payments Under a Technical Assistance Agreement by the DBP of Consultancy Fees, Accommodations and Transportation Expenses without Any Markup or Profit, as Well as Payrolls and Other Operating Expenses, to and Its Foreign Consultants to Cover the Contract Price for Rendering Consultancy and Technical Services, are Subject to Philippine Income Tax and Consequently to the Withholding Tax

May 5, 1995 BIR RULING NO. 079-95 24 (a) 22 (a)(1) 000-00 079-95 Development Bank of the Philippines Makati, Metro Manila Attention: Hon . Ernesto M . Ordoea Undersecretary Department of Trade and Industry and Mr . Alfredo C . Antonio Chairman Gentlemen : This refers to your letter dated January 25, 1995, requesting confirmation of your opinion that the payments under a Technical Assistance (TA) Agreement by the Development Bank of the Philippines (DBP) of consultancy fees, accommodations and transportation expenses without any markup or profit, as well as payrolls and other operating expenses, to Corporate Synergy Development Center (CSDC) [formerly CSDI Industrial Coordination Center (CSD)] and its foreign consultants to cover the Contract Price for rendering consultancy and technical services, are not subject to Philippine income tax and consequently to the withholding tax under Section 25(b)(1) in relation to Section 50(a) both of the Tax Code. cdll It is represented that CSDC is a foreign agency founded by the Industrial Development Bureau of the Ministry of Economic Affairs of Taiwan in July, 1990; that the Government of Taiwan (Republic of China) holds majority ownership of CSDC; that it entered into a Technical Assistance Agreement with the DBP and the Department of Trade and Industry (DTI) to develop the Center Satellite (C-S) System in the local small and medium-scale industries (SMIs) involving manufacture of furniture, electronics, metalworking and machineries; that the financing of the technical assistance will be sourced from a loan granted by the International Economic Cooperation Development Fund (IECDF), a Taiwanese Government Agency, through the International Commercial Bank of China (ICBC); and that under the Technical Assistance Agreement, the loan (ICBC) funds shall be released to DBP which shall then pay the same to CSDC. You contended that in the foregoing transaction, CSDC is exempt from income tax pursuant to Section 28(b)(8)(B) of the Tax Code, as amended, stating that income derived from any public utility or from the exercise of any essential governmental functions accruing to the Government of the Philippines or to any political subdivision thereof shall not be included in the gross income and shall be exempt from income tax. In reply, please be informed that the payments to CSDC under its Technical Assistance Agreement with DTI and DBP do not fall within the contemplation of "income derived from any public utility or from the exercise of essential government functions accruing to the government of the Philippines or to any political subdivision thereof" which is excludible from gross income and therefore exempt from income tax under Section 28(b)(8)(B) of the Tax Code. The service rendered by CSDC through its foreign consultants is not a government service. Moreover, in this case, the government is the payor of the remuneration (Contract Price) for consultancy and technical services rendered by CSDC and not the recipient of the income payment; hence, the aforesaid provision cannot be invoked. Tax exemption cannot be established by vague implication but must be clearly expressed. (Wander Mechanical Corporation vs. C.T.A., et. al., 64 SCRA 555) Such being the case, as a resident foreign corporation CSDC is subject to the Philippine corporate income tax of 35% on the aforesaid consultancy and technical service fees, and consequently to the withholding taxes imposed under Section 25(a)(1) in relation to Section 50(a) and (b), both of the Tax Code, as amended. aisadc On the other hand, under Article 2.3 of the aforesaid Technical Assistance Agreement, the foreign consultants shall be taxable as non-resident aliens doing business in the Philippines, considering that the projected term of completion of their work is fifteen (15) months which means that their stay in the Philippines shall last for more than 180 days. Accordingly, on their remuneration for services rendered, they are subject to the schedular individual income tax rules under Section 21(a) in relation to Section 22(a)(1) of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue