Service Fees Received by Foreign Consultant are Subject to Income Tax under the Tax Code, as amended

December 13, 1994 BIR RULING NO. 177-94 22 (a) (1) 000-00 177-94 Ermitao, Manzano & Associates Suites 1403, 6776 Ayala Avenue Condominium, Makati Metro Manila Attention: Atty . Luis Manuel D . Ermitao Gentlemen : This refers to your letters dated August 9 and September 22, 1994 requesting on behalf of your client, Moore McKenzie, Inc., (MMI), for a ruling on whether the service fees received by foreign consultant, Mr. Charles Greenwood, whose services are engaged by MMI are subject to income tax under Section 21(a) or Section 21(f) of the Tax Code, as amended. LLphil It is represented that MMI is a corporation organized and existing under the laws of the Philippines, with office address at Units 12 and 22, 1st and 2nd Floors, Legaspi Suites Building 178 Salcedo Street, Legaspi Village, Makati, Metro Manila; that MMI is duly registered and licensed with the SEC as a securities broker with Certificate of Registration No. 0295 and its major objective is to tap various investment markets within the Asia-Pacific Region; that in order to do so, MMI must engage the expert services of individual foreign consultants who are familiar with and have contacts in the various targets countries such as, but not limited to, Singapore and Hongkong; that said foreign consultants will be paid fixed fees for their services; that MMI will have no control over the activities of the individual foreign consultants; that MMI is only concerned with the results of their services; that said foreign consultants have clients other than MMI; that the foreign consultants shall most probably be in the Philippines for at least 183 days in a year; and that MMI shall, for convenience, make available reasonable use of certain MMI facilities (such as fax machines, telephones and computers) to the consultants while they are in the Philippines, but the consultants may elect to use their own facilities. In reply, please be informed that under Section 22(a) (1) of the Tax Code, as amended, foreign consultants (e.g. Mr. Greenwood) are considered non resident alien individuals engaged in trade or business in the Philippines and are subject to Philippine income tax in the same manner as resident citizens and aliens on taxable income received from all sources within the Philippines. Accordingly, considering the nature of their business engagement, and length of aggregate stay in the Philippines, their taxable income from MMI is subject to the graduated rates under Section 21(f) of the Tax Code, as amended by Republic Act No. 7496. Further, under Section 29 of the Tax Code, as amended by Republic Act No. 7496, the said foreign consultants may deduct from their gross income received from all sources within the Philippines, only the following direct costs: (a) Raw materials, supplies and direct labor; (b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light and water; (d) Business rentals; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and (g) Interest paid or accrued within the taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayers profession, trade or business. For individuals whose cost of goods sold and direct cost are difficult to determine, a maximum of forty percent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue