BIR Ruling No. 345-11

September 22, 2011 BIR RULING NO. 345-11 23 (F); 42 (C) (3); 108 NIRC; BIR Ruling No. DA-512-04; BIR Ruling No. DA-010-05; VAT Ruling No. 007-03; VAT Ruling No. 008-03; CIR vs. Marubeni Corp. G.R. No. 137377 Puno & Puno Law Offices 12th Floor East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center, Pasig City Attention: Attys. Ma. Elizabeth E. Peralta-Loriega Deborah S. Acosta-Cajustin Gentlemen : This refers to your letter dated May 18, 2010 requesting, on behalf of your client HEDCOR SIBULAN, INC. (the "Corporation" ),confirmation of your opinion that only payments made by the Corporation to SOCOIN INGENIERA Y CONSTRUCCION INDUSTRIAL SLU ("Socoin" ) a contractor, for the performance of the onshore portion of the Electrical and Mechanical Works Conditions of Contract dated April 4, 2007, as supplemented by Supplemental Agreement to the Electro-Mechanical Works Conditions of Contract ("Supplemental Agreement to the E&M Contract"),Supplemental Agreement No. 2 of the Electro-Mechanical Works Contract for Sibulan A and B Power Stations ("Supplemental Agreement No. 3") (the "E&M Contract") are subject to Philippine taxes. Specifically, you request for confirmation of the following matters: TIcAaH 1. Payments made by the Corporation to Socoin for the performance of the onshore portion of the E&M Contract, which was executed between the Corporation and Socoin, are subject to the final withholding tax for non-resident foreign corporations at the rate of thirty percent (30%) unless qualified for exemption under the RP-Spain Tax Treaty; 2. Payments made by the Corporation to Socoin for the performance of the offshore portion of the E&M Contract are not subject to Philippine income tax and withholding tax; 3. Gross receipts derived by Socoin for the performance of the onshore portion of the E&M Contract are subject to the twelve percent (12%) value-added tax ("VAT");and 4. Gross receipts derived by Socoin for the performance of the offshore portion of the E&M Contract are not subject to VAT. It is represented that the Corporation, with Tax Identification Number 005-633-984-000, is a corporation duly organized and existing under Philippine laws. It is primarily engaged in the business of owning, developing, constructing, operating, repairing and maintaining the 42.5 MW Sibulan Hydroelectric Power Project (the "Project").Socoin, on the other hand, is a corporation duly organized and existing under and by the virtue of the laws of Spain. It is principally engaged in the construction business. It is not licensed to do business in the Philippines. It is also represented that the Corporation and Socoin executed the E&M Contract, which is a unitary contract that combines the offshore and onshore portions of the services that Socoin will render. Under the E&M Contract, Socoin has undertaken to design, manufacture, supply, deliver, erect, and install and commission all things necessary to complete the generating equipment supply for the project, which will be composed of two Powerhouses: Powerhouse A and Powerhouse B. It is further represented that the Corporation and Socoin supplemented the original E&M contract through the execution of the Supplemental Agreement to the E&M Contract and Supplemental Agreement No. 2 (collectively, the "Supplemental Agreements"),wherein Socoin's scope of work and the fraction of the contract price allocable to each portion of the work have been clarified, identified, and delineated. Under the Supplemental Agreements, Socoin's services were broken down into distinct and separate segments, namely, Off-Shore Services and Off-Shore Works, for works that Socoin will perform outside the Philippines, and On-Shore Works, for works that Socoin will perform within the Philippines. Moreover, the contract price under the E&M Contract was broken down as follows: (a) the Contract Price for the Off-Shore Services; (b) the Contract Price for the Off-Shore Supply of Goods; and (c) the Contract Price for the On-Shore Works. AcHaTE The Off-Shore Services and the Off-Shore Supply of Goods refer to Socoin's procurement, design, engineering, manufacturing, and testing outside the Philippines of the plant, materials and equipment under the E&M contract. In Supplemental Agreement No. 2, the Off-Shore Services were clarified to pertain to off-shore services in connection with the transport of goods and engineering design services while the Off-Shore Supply of Goods were clarified to pertain to the off-shore supply of horizontal pelton turbines, spherical inlet valves, regulation system, lubrication system, synchronous generators, mechanical auxiliary system, medium voltage, low voltage equipment and control equipment. Title to each item of plant imported into the Philippines shall be transferred and consigned to the Corporation. On the other hand, the On-Shore Works refer to the supply, erection, installation, and commissioning of the plant, materials and equipment described in the E&M Contract at the project site in the Philippines. On September 1, 2009, the Corporation and Socoin executed Supplemental Agreement No. 3 wherein the parties agreed to split the On-Shore Works into two, in order to differentiate On-Shore Works for Powerhouse A and On-Shore Works for Powerhouse B (collectively, the "On-Shore-Works"). On the basis of the foregoing representations, you now request for confirmation that: 1. The Contract price for the On-Shore Works by the Corporation to Socoin for the execution of the On-Shore Works is subject to the final withholding tax for non-resident foreign corporations at the rate of thirty percent (30%) while the Contract Price for the Off-Shore Services paid by the Corporation to Socoin for the implementation of the Off-Shore Supply of Goods and the Off-Shore Services, respectively, are not subject to Philippine income tax and withholding tax; and 2. The Contract Price for the On-Shore Works that Socoin will receive for the performance of the On-Shore Works is subject to the twelve percent (12%) VAT, while the Contract Price for the Off-Shore Supply of Goods and the Contract Price for the Off-Shore Services paid by the Corporation to Socoin for the implementation of the Off-Shore Supply of Goods and the Off-shore services, respectively, are not subject to VAT. In reply, pleased be informed as follows: 1. Socoin's income arising from the On-shore works under the E&M Contract is subject to Philippine Income Tax. Pursuant to Section 23 (F) of the Tax Code, a foreign corporation, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Accordingly, under Section 28 (B) (1) of the Tax Code, a non-resident foreign corporation, which is a foreign corporation that is not engaged in trade or business in the Philippines, is subject to income tax of 30% on gross income earned from sources within the Philippines, subject only to any applicable tax treaty relief. ACcEHI Under Section 42 (C) of the Tax Code, compensation for labor or personal services performed outside the Philippines is treated as gross income from sources outside the Philippines. In contrast, under Section 42 (A) of the Tax Code, compensation for labor or personal services performed in the Philippines is treated as gross income from sources within the Philippines. On the other hand, under Section 42 (E) of the Tax Code, the situs of income from the sale of personal property for taxation purposes is the place where the sale is perfected and consummated. A contract of sale is perfected at the moment there is a meeting of the minds upon the thing that is the object of the contract and the price and is consummated upon delivery of the object of the contract (BIR Ruling No. DA-512-04 dated September 30, 2004) . In Commissioner of Internal Revenue v. Marubeni Corporation [G.R. No. 137377, 18 December 2001, 372 SCRA 76 (2001)], the Supreme Court held that only services rendered in the Philippines under a single contract are subject to the taxing jurisdiction of the Philippines and consequently subject to Philippine income tax. The Supreme Court ruled: " Clearly, the service of design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination. .." of two projects involved two taxing jurisdictions .These acts occurred in two countries-Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment of the NDC project and ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the offshore portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's tax .(Emphasis supplied) Considering the unequivocal pronouncement of the Supreme Court on the matter, it is clear that the gross income earned by Socoin (i) from services performed outside of the Philippines (Off-Shore Services) and (ii) from the supply of equipment sold or delivered outside of the Philippines (Off-Shore Supply of Goods) pursuant to the E&M Contract constitute income earned from sources outside of the Philippines, and hence not subject to Philippine income tax, and consequently, withholding tax. On the other hand, gross income earned by Socoin from its performance of services within the Philippines pursuant to the on-shore portion of the E&M Contract (On-Shore works) constitutes income from sources within the Philippines and is subject to final withholding tax of 30%,unless qualified for exemption under the RP-Spain Tax Treaty. It is to be understood, however, that the general engineering services as provided in the Supplemental Agreements should be considered "Off-Shore Services" only if they relate to the design, engineering, manufacturing and testing done outside the Philippines of the Plant, Materials and Equipment. Testing performed in the Philippines of the Plant, Materials and Equipment, which is also required under the main Contract between the parties, should be considered "On-Shore Works",and, thus, payments made relative thereto are subject to Philippine income tax. Furthermore, delivery of equipment to the Sibulan Site in Davao del Sur and rendering of electrical and mechanical services thereon are considered "On-Shore Works" and not "Off-Shore Works" as what the parties stated in the Supplemental Agreement. Thus, payments made relative thereto are also subject to Philippine income tax. DAESTI Likewise, the services and supply of goods, as specified in the Supplemental Agreements, should be considered as "Off-Shore Services/Supply" only if they relate to the design, engineering, manufacturing and testing done outside the Philippines of the Plant, Materials and Equipment. On the other hand, services and supply of goods to the Sibulan Site in Davao del Sur on the installed Plant, Materials and Equipment should be considered "On-Shore Services/Supply",and, thus, payments made relative thereto are also subject to Philippine income tax. 2. Gross receipts received by Socoin arising from services rendered in the Philippines under the on-shore works portion of the E&M Contract are subject to value-added tax. Section 108 of the Tax Code 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease properties; ... The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration and consideration, including those performed or rendered by construction and service contractors; ..." In numerous rulings, this Office has applied the foregoing provision in holding that only services rendered in the Philippines arising from a contract that has foreign and domestic portions are subject to VAT. In VAT Ruling Nos. 007-03 and 008-03 both dated 10 January 2003, which both involved project comprising of a "service component" (local construction) and an "imported component" (importation of materials and equipment),this Office held that the contractors are liable to pay the VAT on the gross receipts only the onshore portion. Moreover, in BIR Ruling No. DA-010-05 ,dated January 17, 2005, this Office ruled that only payments corresponding to the onshore portion of a contract are subject to VAT. Accordingly, all gross receipts derived by Socoin for the performance of the On-Shore Works (the Contract Price for the On-Shore Works) are subject to VAT. On the other hand, gross receipts derived by Socoin for the performance of the offshore portion of the E&M Contract (Off-shore Services and Off-shore Supply of Goods) are not subject to VAT. However, the importation of each item of the plant and equipment into the Philippines which shall be consigned to the Corporation shall be subject to VAT. Likewise, it must be made clear that once the Off-shore Supply of Goods are imported into the Philippines, the same shall be subject to VAT pursuant to Section 107 of the NIRC. The Corporation, being the resident withholding agent and a payor in control of payment, is responsible for the withholding of the twelve percent (12%) final VAT on the Contract Price for the On-Shore Works. The Corporation shall then remit the VAT withheld to the BIR. It shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from the Corporation if it is a VAT-registered taxpayer. In addition, the Corporation is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for Socoin and the fourth copy for the Corporation as its file copy (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002). aESTAI 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