BIR Ruling No. 297-11

August 12, 2011 BIR RULING NO. 297-11 Sections 25 (B), 23 (D), 42 (C) (3), 25 (A) (1), 28 (A), 108 (A), 1997 Tax Code; BIR Ruling No. DA-175-07; BIR Ruling No. DA-008-08; VAT Ruling No. 027-04; VAT Ruling No. 087-92 Atty. Cezar S. Ong 54-B Ma. Clara St. Brgy. Lourdes, Quezon City Sir : This refers to your letter dated September 24, 2010 requesting on behalf of your client, STMPI Corporation (STMPI), for a ruling whether or not the service fees paid to Norman Karl S. Bernard and Anthony James Horton by STMPI for services rendered abroad, pursuant to their respective Services Agreement are exempt from income tax and value-added tax (VAT). Documents submitted show that STMPI (TIN 210-062-674) is a corporation duly organized and existing under and by virtue of the laws of the Philippines and is engaged in the business of developing computer technology, hardware and software for all types of applications, as well as providing all types of information technology related services. Aside from STMPI's customers here in the Philippines, part of its target clients are based outside the Philippines and hence, is in need of Service Providers who will be responsible, among others, in management of the software and related needs of STMPI's overseas clients. On September 10, 2010, STMPI entered into Services Agreements with Norman Karl S. Bernard and Anthony James Horton as Service Providers, who are both Australian and are based in Australia. All of the duties of the Service Providers are to be performed outside the Philippines and in favor of STMPI's foreign clientele. EaDATc In reply, please be informed that Section 25 (B) of the National Internal Revenue Code of 1997, as amended, provides: "(A) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as . . . salaries, wages, . . . compensation, remuneration, . . . a tax equal to twenty-five percent (25%) of such income. . . ." Moreover, Section 23 (D) of the same Code, states that: "An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;" According to Section 23 (D), alien individuals like Norman Karl S. Bernard and Anthony James Horton is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources without the Philippines if the services are performed outside the Philippines, as stated in Section 42 (C) (3) of the same Code, viz. : "Section 42(C)(3). Gross income from Sources Without the Philippines. The following shall be treated as income from sources without the Philippines: xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines;" Consequently, since both Norman Karl S. Bernard and Anthony James Horton are non-resident alien individuals not doing business in the Philippines and since their professional fees or compensation constitute income derived from sources outside the Philippines, it can be said that the same are not subject to income tax. ( BIR Ruling No. DA-175-07 dated March 23, 2007 ) It is to be noted that under Sec. 25 (A) (1) of the same Code, portions of which states that: ". . . A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'non-resident alien doing business in the Philippines', Section 22 (G) of this Code notwithstanding." The converse of the above-mentioned rule would mean that the aforesaid Service Providers are non-resident alien individuals who are not doing business in the Philippines, inasmuch as they had not stayed here for an aggregate period of 180 days during any calendar year. ( BIR Ruling No. DA-008-08 dated January 11, 2008 ) Moreover, as to liability to VAT, Section 108 (A) of the same Code, as amended, provides: cECaHA "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration of consideration . . ." Section 108 (A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, the service fees to be paid by STMPI to Norman Karl S. Bernard and Anthony James Horton, to the extent that the subject services are not performed, in the Philippines are exempt from VAT. (VAT Ruling Nos. 027-04 dated October 20, 2004 and 087-92 dated July 2, 1992) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue