BIR Ruling No. 331-12

May 14, 2012 BIR RULING NO. 331-12 23 (F); 42 (C) (3); 108 (A) NIRC of 1997, as amended; BIR Ruling No. 345-2011 dated September 22, 2011 Kajima Philippines, Inc. 12th Floor, 6788 Ayala Avenue Makati City Attention: Erlina M. Marilla Representative Yukio Saito Senior Finance and Admin Manager Gentlemen : This refers to your letter dated February 16, 2010, requesting a confirmatory ruling that your payments to Kajima Designs Asia Pte. Ltd. (hereinafter referred to as "KDA") for the schematic and general design services it provides your company, Kajima Philippines, Inc. (hereinafter referred to as "KPI"),are exempt from Philippine income tax. AcICTS It is represented that KDA is a nonresident foreign corporation organized and existing under the laws of Singapore with principal office address at 80 Marine Parade Road, 06-02/06, Singapore 449269, as evidenced by its Memorandum and Articles of Association; that KDA is not registered either as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on February 19, 2010; and that KPI is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office address at 12th Floor, 6788 Ayala Avenue, Makati City, Philippines. It is further represented that on December 1, 2007, KDA and KPI entered into a Supplemental Agreement for Schematic Design Services (hereinafter referred to as "Service Agreement" );that KPI was selected as the General Contractor to build the Lima Factory Project (hereinafter referred to as "Project" ) of Yamaha Motor Philippines, Inc. (hereinafter referred to as the "Owner" ) at Lots 1 & 2, Block 17 of the said factory; that the Owner desires that the general architectural and engineering services will be rendered by KDA as Design Coordinator; that under the Service Agreement, KDA shall provide architectural, structural and mechanical and electrical engineering services as set forth in and limited in the Agreement (hereinafter referred to as "Basic Services" ): 1. Schematic Design Phase Services 1.1 KDA shall review the Owner's Program and prepare Schematic Design documents consisting of architectural, structural and Mechanical and Electrical drawings and Outline specification. 1.2 KPI shall give KDA full and necessary information regarding the local conditions and regulations. 1.3 The estimation for the Project shall be done by the KPI. That upon the request of the Owner or KPI, the following Additional Services may be provided by KDA: 1. Providing Interior Design Services, Furniture Selection Services and other similar Services. 2. Preparing any additional models, photography, rendering or mock-ups. CTcSAE 3. Providing architectural and engineering services relating to the secondary work, like secondary piping and wiring for the Owner 's equipment. 4. Providing special consulting services such as Micro vibration control. That the services to be rendered by KDA shall be performed in Tokyo, Japan, and Singapore, from the execution of the Agreement on December 2007; that KPI shall compensate KDA in the amount of United States Dollar Thirty Five Thousand and 00/100 (US$35,000.00) for the Basic Services; that the Basic Fee shall be deemed to be inclusive payment for Basic Services and for all costs, expenses and overheads of every kind incurred by KDA in connection with the performance of the Basic Services; that in addition to the Basic Fee, KDA shall be compensated for additional services performed under the Agreement; and that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved, per Certification issued by KPI dated October 6, 2010. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code of 1997 ( "Tax Code" ),as amended, a foreign corporation, like KDA, whether or not engaged in trade or business in the Philippines, is subject to income tax only with respect to income derived from sources in the Philippines, to wit: " SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation ,whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines ." (Emphasis ours) Concerning income from the provision of services, under Section 42 (A) (3) of the Tax Code, income is considered derived in the Philippines only if the services are actually performed in the Philippines, to wit: " Section 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: AIaHES xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines ;" (Emphasis ours) Such being the case and since the subject services are rendered or will be rendered by KDA outside the Philippines, particularly, in Japan and Singapore, the service fees to be paid therefor by KPI to KDA are exempt from income tax. (BIR Ruling No. 345-2011 dated September 22, 2011) Finally, with respect to value-added tax ("VAT"), payments for the sale or exchange of services, including the use or lease of properties are subject to VAT only if the services are performed in the Philippines. Section 108 (A) of the Tax Code, as amended, provides: "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 ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%)... The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. .." Accordingly, since such services are performed by KDA outside the Philippines, the service fees to be paid therefor by KPI to KDA are likewise exempt from VAT. 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 represented are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.