BIR Ruling No. 458-12

July 10, 2012 BIR RULING NO. 458-12 23 (F); 42 (C) (3); 108 (A) NIRC of 1997, as amended; BIR Ruling No. 345-2011; BIR Ruling No. 331-2012 First Philippine Industrial Corporation 20th Floor, JMT Corporation Condominium 27 ADB Avenue, 1605 Ortigas Center Ortigas Complex, Pasig City Attention: Ms. Ana Maria S. Del Rosario VP-Comptroller Gentlemen : This refers to your letter dated April 26, 2011 received by this Office on May 2, 2011 requesting confirmation that the payment of service fees by First Philippine Industrial Corporation ("FPIC") to Bredero Shaw (Singapore) Pte. Ltd. ("Bredero") for the services rendered by Bredero in Indonesia is exempt from Philippine income tax and value added tax (VAT). It is represented that Bredero is a nonresident foreign corporation organized and existing under the laws of Singapore with registered office address at 101 Thomson Road, 17-01/02 Singapore based on the Certificate of Residency issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore dated April 28, 2011; that Bredero is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 8, 2011; and that, on the other hand, FPIC is a domestic corporation with office address at 20th Floor, JMT Corporate Condominium, 27 ADB Avenue, 1605 Ortigas Center, Ortigas Complex, Pasig City, Philippines. It is further represented that FPIC engaged the services of Bredero to do the fusion bonded epoxy coating of pipes as evidenced by its Purchase Orders, viz.: Purchase Order Number Date Amount 1722 March 28, 2011 $136,778.88 1724 April 25, 2011 $8,902.93 that Purchase Order (PO) Nos. 1722 and 1724 dated March 28, 2011 and April 25, 2011, respectively, serve as the contract between FPIC and Bredero per sworn certification issued by the Vice-President of Comptrollership and Office of Strategy Management of FPIC; that the services for the said PO were entirely conducted in Bredero's plant in Indonesia per sworn certification issued by the President and COO of FPIC; and that the payment for the services rendered is evidenced by a Foreign Telegraphic Transfer Application issued by the Bank of the Philippine Island on May 3, 2011 in the amount of US$145,681.81. ECSHAD Lastly, per Certification issued by FPIC on May 13, 2011, the subject transaction is not subject of an investigation, on-going audit, administrative protest, and claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 Bredero, 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 : xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines;" (Emphasis ours) Based on the foregoing and since the subject services were performed by Bredero entirely outside the Philippines, particularly, in Indonesia, the service fees to be paid therefor by FPIC to Bredero are exempt from Philippine income tax. (BIR Ruling No. 345-2011 dated September 22, 2011) CETIDH 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 Philippine for others for a fee, remuneration or consideration ..." Accordingly, since such services are performed by Bredero outside the Philippines, the service fees to be paid therefor by FPIC are likewise exempt from VAT. (BIR Ruling No. 331-2012 dated May 14, 2012) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. 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.