35% Final Withholding Tax on Royalties

May 2, 1989 BIR RULING NO. 093-89 36-c-3 19-00 577-88 093-89 S i r : This refers to your letter dated March 22, 1989 stating as follows: cdta "To have an external check against technical smuggling the Philippine Government concluded in 1986 a contract with the Societe Generale de Surveillance, S.A. (SGS) for a Comprehensive Import Supervision Scheme (CISS). Thereunder, SGS conducts pre-shipment inspection of goods to be exported to the Philippines from Japan, Taiwan and Hong Kong. Inspection is conducted at the manufacturer or suppliers site or at the point of loading, by their very nature, the services are performed in the country of exportation and consists of physical inspection to determine the quality and quantity of goods to be shipped their price/Home Consumption Value, Tariff classification and rates. "After inspection is completed, SGS issues reports of its findings (CRF) which are transmitted from abroad to the Bureau of Customs and the importer's bank in the Philippines. While this can be done directly by mail or courier, the contract stipulated that SGS shall maintain a liaison office in the Philippines (operated by a separate corporation organized in the Philippines) to coordinate the transmission of said reports and like dispatches. "SGS is paid for such service rendered abroad fees based on the invoice value of the goods inspected. Payment is made to SGS through a revolving foreign Letter of Credit. "The above contract is still in force and will remain operative for one more year. Meanwhile, the Government would like to expand the CISS by concluding similar contracts with the SGS and/or other international inspection companies (surveyors) for the purpose of covering Philippine imports from countries other than Japan, Taiwan and HongKong. "In our discussions on the proposed contracts, the Taxability of the service fees have come up because of its bearing in the amount to be stipulated. The fees are quoted net of any Philippine tax or levy. If these fees are tax exempt under Philippine law; we could stipulate an amount which in effect would be net fees; otherwise, there would have to be provided additional amounts to cover whatever Philippine tax may be due." In connection therewith, you now request a ruling on the following: (1) "Are the fees subject to Philippine income tax? Are they compensation for personal services performed abroad? Or do they constitute taxable "rentals" or royalties" under Section 36(a)(4) of the Tax Code which in general speaks of income arising from the use of intellectual property in, or transfer of technology to, the Philippines?" (2) "Are the fees subject to any excise tax?" In reply thereto, I have the honor to inform you that in BIR Ruling No. 36-c-3-19-00-000-00-027-89 dated February 20, 1989, this Office ruled 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(a)(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. The aforementioned ruling was issued also to Societe Generale de Surveillance S.A. (SGS) likewise for a Comprehensive Import Supervision Scheme (CISS) under the same facts and circumstances as stated in your aforesaid query. However, after a restudy, this Office agrees with you that to be considered as rental or royalties within the purview of Section 36(a)(4) of the Tax Code, there must be transferred 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 remuneration paid by the Government to SGS is for the latter's service of physical inspection so as to provide a clean report of findings on the quantity, quality and price comparison of imported goods in the country of supply. In other words, the remuneration of SGS under the facts of this case, is not considered royalty; it constitutes compensation for labor or personal service performed without the Philippines hence, the same is considered income from sources without the Philippines [Sec. 36(c)(3), Tax Code]. Accordingly, and since SGS being a non-resident foreign corporation is subject to income tax only on Philippine source income, said remuneration is not subject to Philippine income tax. This revokes BIR Ruling No. 027-89 dated February 20, 1989. Very truly yours, (SGD.) JOSE U. ONG Commissioner