BIR Ruling No. 212-12

March 23, 2012 BIR RULING NO. 212-12 Sections 42 (A) (3); 42 (C) (3); 00-000 Follosco Morallos & Herce 25th Floor, 88 Corporate Center 141 Valero Street corner Sedeo Street Salcedo Village, Makati City Attention: Attys. Rachel P. Follosco Cielito May T. Velasquez Gentlemen : This refers to your letter dated March 18, 2011 stating that your client, Aureos Philippine Advisers, Inc. (Aureos), is a corporation duly registered with the Securities and Exchange Commission (SEC) under SEC Registration No. CS200501182 with TIN 236-075-698-000; that it is organized primarily to generally act as consultants and advisers, primarily to corporations, entities, or organizations which are affiliates, subsidiaries, or in any way related to the Corporation, by identifying/researching and providing financial or investment advice on business or investment opportunities in the Philippines; providing support services in connection with proposed investments in the Philippines; performing investment monitoring and evaluation, financial planning and other related consulting/advisory functions, provided that it shall not engage in the business of being a securities advisor, stock broker/dealer, investment house, dealer of securities and/or fund/portfolio manager; that in August 2005, Aureos established a representative office (RO) in Vietnam; that in connection with the Vietnam RO, Aureos engaged the Services of Vietnamese employees and suppliers; that the services and supplies purchased and utilized by the RO include, but are not limited to the following: 1. Salaries of employees of the Vietnam RO; 2. Rental for the office space occupied by the Vietnam RO; 3. Utilities ( i.e., light, telecommunication and water) incurred by the Vietnam RO; 4. Office insurance for the Vietnam RO; 5. Repairs and maintenance expense incurred by the Vietnam RO; 6. Computer supplies purchased and utilized by the Vietnam RO; 7. Transportation and travel expense incurred by the Vietnam RO including, but not limited to, airfare, taxi fare, parking fee and hotel accommodations; 8. Client-related entertaining expense such as expenses incurred for business lunch meetings or coffee meetings; and 9. Staff-related entertaining expense such as expenses incurred for office meetings and office activities such as the annual Christmas party. that all the foregoing expenses relate exclusively to the Vietnam RO and all purchases are done in Vietnam from Vietnam residents; that Aureos paid the necessary taxes to the Vietnamese taxing authorities for the expenses incurred by the Vietnam RO; that for instance, for salaries paid to personnel employed by the Vietnam RO, the Vietnam RO of Aureos duly withheld and remitted to the government of Vietnam the applicable taxes due on the salaries and wages expense incurred in Vietnam; and that to the extent applicable, the Vietnam RO withholds and remits taxes on such expenses and disbursements but pursuant to Vietnam tax laws. ICTcDA Based on the foregoing representations, you now request confirmation of your opinion that the income payments made by Aureos to suppliers and employees of the Vietnam RO are not subject to Philippine income tax and consequently to withholding tax. In reply thereto, please be informed that Section 42 (A) (3) of the Tax Code of 1997 provides that "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" On the other hand, Section 42 (C) (3), supra provides "(C) Gross Income from Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines; xxx xxx xxx" The situs of tax for services is the place where the service is rendered. Under the Philippine source of income rules for income tax purposes, service income will be considered Philippine source income only if the services are rendered in the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income. Thus, if the services were rendered outside the Philippines by non-resident foreign corporation and Vietnamese citizens and residents, such income will be considered as income from without the Philippines. As such, income payments for services rendered and purchases made and utilized in Vietnam are not subject to Philippine withholding tax since such payments are considered as income of the respective Vietnamese payees from sources outside the Philippines which are not taxable in the Philippines. The rule in this jurisdiction regarding tax situs is: the source of an income is the property, activity or service that produced the income; the test of taxability is the source, and the source of an income is that activity which produced the income (CIR v. British Overseas Airways Corporation, G.R. Nos. 65773-74, April 30, 1987). Stated differently, the situs of the income derived from labor or personal services is determined solely by the place where service is rendered (CIR v. Japan Airlines, Inc., G.R. No. 60714 March 6, 1991) . Compensation from services performed abroad is, therefore, considered income from sources without the Philippines and thus not subject to Philippine income tax. WHEREFORE, in view of the foregoing, this Office hereby CONFIRMS your opinion that the income payment made by Aureos to suppliers and employees of the Vietnam RO is NOT subject to Philippine income tax and consequently to withholding tax. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue