BIR Ruling No. 501-12

July 31, 2012 BIR RULING NO. 501-12 23 (F); 42 (C) (3); 108 (A) NIRC of 1997, as amended; BIR Ruling No. 345-2011; BIR Ruling No. 331-2012 Nonato and Nonato Law Offices Room 406, Tulips Center A.S. Fortuna Street, Bakilid Mandaue City Attention: Rester John L. Nonato Gentlemen : This refers to your letter dated March 15, 2011 requesting confirmation that the payment of service fees by YAMASHIN CEBU FILTER MANUFACTURING CORP. ("YAMASHIN CEBU") to HITACHI INFORMATION SYSTEMS LTD. ("HITACHI") for the software maintenance services rendered by HITACHI entirely in Japan is exempt from Philippine income tax and value added tax (VAT). It is represented that HITACHI is a nonresident foreign corporation organized and existing under the laws of Japan with registered office address at 1-2-1, Osaki, Shinagawa-ku, Tokyo, Japan per Articles of Incorporation and Certificate of Residence issued by the Shinagawa Tax Office in Japan on June 7, 2010; that HITACHI 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 March 22, 2011; and that, on the other hand, YAMASHIN CEBU is a domestic corporation with office address at Mactan Economic Zone 2-Special Economic Zone, Barangay Basak, Lapulapu City, Philippines. It is also represented that on October 1, 2010, YAMASHIN CEBU and HITACHI entered into a SAP Software Maintenance Service Agreement ("Agreement") where HITACHI agreed to provide software maintenance services to YAMASHIN CEBU pertaining to latter's ongoing SBO System. The services will be rendered entirely in Japan by electronic means, particularly, via internet VPN connection, and no personnel of HITACHI will be sent to the Philippines for this purpose. In consideration, YAMASHIN CEBU will pay service fees of Y300,000.00 to HITACHI every month. The services will be done for a period of six months from October 1, 2010 to March 31, 2011, for total service fees of Y1,800,000.00. Full payment thereof is due every six months in advance. Based on the Certification issued by the Corporate Secretary of YAMASHIN CEBU on March 25, 2011, the services subject of the Agreement were all provided by HITACHI online at its office in Japan and that no personnel of HITACHI were sent to the Philippines to perform the services. IcTCHD Lastly, per Sworn Statement of YAMASHIN CEBU dated March 25, 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 HITACHI, 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 software maintenance services subject of the SAP Software Maintenance Service Agreement were done by HITACHI outside the Philippines, particularly, in Japan, the service fees to be paid therefor by YAMASHIN CEBU to HITACHI are exempt from Philippine 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%) . . . DSTCIa 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 HITACHI outside the Philippines, the service fees to be paid therefor by YAMASHIN CEBU 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.