BIR Ruling No. 187-83

October 25, 1983 BIR RULING NO. 187-83 Gentlemen : This refers to your letter dated June 23, 1979 requesting confirmation of your opinion to the effect that 80% of the fees payable to your client, Response Systems International Ltd. for services rendered outside the Philippines for Manila Bankers Life Insurance Corporation (MBLI) and Seaboard-Eastern Life Insurance Corporation (SELI) is exempt from Philippine income tax. It is represented that Response Systems International Ltd. (RSI) is a non-resident foreign corporation duly organized and existing under the laws of HongKong with principal office address at Suite 1104, World Trade Centre, HongKong; that RSI is a professional firm and acts as consultants to insurance mass marketing programs; that Manila Bankers Life Insurance Corporation (MBLI) and Seaboard-Eastern Life Insurance Corporation (SELI) are both domestic insurance companies with principal office address at the Manila Bank Bldg., Ayala Avenue, Makati, Metro Manila; that MBLI and SELI on December 6, 1978 separately entered into an agreement with RSI engaging the services of the latter for research, development, general consulting and servicing in the area of life, accident, health and casualty insurance and associated products; that specifically RSI undertakes to develop programmes for the solicitation and resolicitation of markets available to the clients, including policyholders, captive groups, other groups developed as a result of RSI activity, and general population segments; that RSI also undertakes to consult and where appropriate to do analyses, products development, and mailing programmes, establish criteria to determine desirable characteristic of mass markets, assist in determination of promotion strategy and generally to assist the client in related administrative preparation; that in accordance with the supplemental agreement of January 29, 1979, the services to be rendered by RSI shall include the employment by RSI of the services of Pouliot, Guerard and Clare (PG &C) a consulting actuarial firm based in Montreal so as to assist RSI in the development of premium rates, benefits and related asset shares on behalf of MBLI and SELI; that the contract provides that all actuarial and computer charges of PG & C shall be borne by RSI; that in consideration for the services to be rendered by RSI both MBLI and SELI in their respective contracts have agreed to pay the former an initial sum of US $12,500 each, payable upon signing of the agreements, a semi-annual fee of US $5,000 each, payable throughout the term of their agreement or any extension thereof, the first sum payable six months following the signing of their respective agreements, a proportionate or incentive fee for sales resulting from activities conducted under the agreements for products developed for mass marketing and/or as a result of RSI activity. As provided in their respective Supplemental Agreements, the proportionate fee shall range from 5% of first year and renewal premiums to 12% of first year and renewal premiums, with the average being between 7-1/2% and 10% each year; that most of the services to be performed by RSI under the agreement will be performed outside the Philippines; that basically, this work will involve the following: (1) In conjunction with its consulting actuaries PG & C, of Montreal, Canada, RSI will develop premium rates, benefits, suggested policy and administrative forms; (2) In conjunction with marketing and advertising consultants employed by RSI in various parts of the world, RSI will develop the advertising and sales material including copywriting and rough artwork; (3) RSI's work will also involve comparisons of Philippine experience and market with other international insurance centers; and (4) that during the term of the contract an RSI senior executive will be spending one week out of five in the Philippines for the purpose of implementing the results of RSI's work outside the Philippines. In reply, please be informed that payments by MBLI and SELI to your client RSI for its aforesaid services constitute compensation for the supply of technical and commercial information, which falls under the expanded definition of "royalties" and are thus income from sources within the Philippines, pursuant to Section 37(a)(4)(c) of the Tax Code, as amended. In view thereof, and considering that a non-resident foreign corporation is subject to income tax on income from sources within the Philippines, this Office is of the opinion as it hereby holds that remittances of payments by MBLI and SELI to RSI are subject to Philippine income tax and consequently, to the 35% withholding tax prescribed by Section 24(b)(1) in relation to Section 53(e)(2) of the Tax Code, as amended. cdtech Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue