Gain Derived from Sale of Food Products by Non-resident Foreign Corporation Not Considered as Philippine Source Income

September 8, 1998 BIR RULING NO. 126-98 28 (B) (1)-000-00-126-98 Punongbayan & Araullo 6th Floor, Vernida IV Building Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letters dated January 9, 1997 and January 17, 1997 stating that your client, Maha Ahmed Al-Juffali Food Distribution Systems Establishment (MAJ), is a non-resident foreign corporation engaged in the wholesale of foodstuff/confectionery products and an agent by commission of the same products; that MAJ is the exclusive owner of the trademark "Gandour" which is being used on various food products; that it has authorized its branches, affiliates, subsidiaries and licensees to engage in the manufacture and sale of food products under the trademark "Gandour" and its derivatives; that MAJ entered into a Distributorship Agreement with Gandour Philippines, Inc. (GPI), a domestic corporation which is engaged in the manufacture export and wholesale of goods such as candies, gums, sweets, chocolates, preserved fruits and confectionery goods in Saudi Arabia; that under the terms of the Distributorship Agreement, GPI is granted the exclusive right to purchase Gandour products from MAJ; that GPI as buyer shall take delivery of the product F.O.B. Saudi Arabia or any country of origin, and title thereof transfers to GPI as Distributor upon the said delivery abroad; that payment of the products shall be made by GPI to MAJ at the prices agreed upon by the parties, at any banking institution, or in such other currency or at such other place as may be agreed by the parties; that additionally, the customs duties, value-added tax, etc. and costs of transporting the products to the Distributors depot shall be borne by GPI; that for its part, as to the orders placed by GPI, MAJ shall ensure that it supplies the products to GPI at the prices, schedule and terms agreed upon; that MAJ will source the "Gandour" products from its branches, affiliates and subsidiaries; and that for purposes of the sale only MAJ will issue the corresponding invoices. Based on the foregoing representations, you are now requesting for a ruling confirming your opinion that any gain that MAJ may derive from selling Gandour products to GPI will not be considered as Philippine source income and therefore exempt from the Philippine corporate income tax and withholding tax. In reply please be informed that under Section 25(b)(1) of the Tax Code, as amended [now Section 28(B)(1) of the Tax Code of 1997], a foreign corporation not engaged in trade or business in the Philippines shall only be taxed in the Philippines when it derives income from sources within the Philippines, such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits and income and capital gains, except capital gains subject to tax under subparagraph 5(c) (capital gains tax from the sale of shares of stock in any domestic corporation) at the rate of 35% based on gross income during each taxable years. Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). Such being the case, and since under the distributorship agreement, GPI shall take delivery of the product F.O.B. Saudi Arabia or any country of origin and title to the goods sold is transferred to GPI upon said delivery abroad, your opinion that the gain, if any, that may be derived by MAJ from the transactions shall be considered as income from foreign sources, and are therefore, not subject to the Philippine corporate income tax prescribed under Section 25(b)(1) of the Tax Code, as amended [now Section 28(B)(1) of the Tax Code of 1997], and to the final withholding tax imposed under Section 50(a) of the same Code [now Section 57 of the Tax Code of 1997], is hereby confirmed. 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 are different, then this ruling shall be considered null and void. dctai Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue