DA ITAD BIR Ruling No. 065-07

May 16, 2007 DA ITAD BIR RULING NO. 065-07 Section 23 (F) in relation to Section 42 (A) (3) of the National Internal Revenue Code, as Amended; BIR Ruling No. DA-ITAD 105-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty. Fulvio D. Dawilan Partner, Tax Advisory and Compliance Gentlemen : This refers to your letter dated July 11, 2006 requesting confirmation that the marketing fees paid by KMP Engineering, Inc. (KMP) to T-Net Japan Co., Ltd. (T-Net) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code of 1997) and the Philippines-Japan tax treaty. tax2007 It is represented that T-Net is a nonresident foreign corporation taxable under the laws of Japan with business address at 930-10, Nariai-Cho, Takamatsu-Shi, Kagawa-Ken, 761-8081 Japan and Tax Reference Number 00230286, as certified by the District Director of Takamatsu Tax Office in Japan on April 6, 2006; that T-Net is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission Cebu Extension Office on June 28, 2006; that KMP, on the other hand, is a domestic corporation with principal office at Salvage Road, Looc, Lapu-Lapu City, Cebu; that KMP is engaged in the manufacture of pre-fabricated steel structure. It is further represented that on April 1, 2006, KMP entered into a Marketing Agreement (Agreement) with T-Net; that under the said Agreement, T-Net shall provide the following services to KMP: 1. Promotion or marketing of the products of KMP in Japan and other neighboring countries; 2. Assistance to KMP in developing marketing strategies and specific marketing activities outside the Philippines; 3. Representation of KMP in various marketing activities outside the Philippines; and 4. Undertaking of such other incidental marketing activities as may be requested by KMP to promote the latter's product in other countries. That the foregoing services shall in no case involve the transfer of T-Net's technology, know-how or other intellectual property rights; that the employees and personnel of T-Net shall exclusively perform the services for KMP in Japan or in other countries outside the Philippines; that as compensation for the service performed by T-Net, KMP shall pay Japanese Yen: Seven Hundred Fifty Thousand (JPN750,000.00) per month to T-Net; and that the issue or transaction subject of the above application 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. In reply, please be informed that Section 23 (F) of the Tax Code of 1997, as amended, provides: "Section 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. xxx xxx xxx" According to Section 23 (F), a foreign corporation like T-Net 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 within the Philippines if the services are performed in the Philippines, as stated in Section 42 (A) (3) of the Tax Code of 1997, as amended, below: "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; xxx xxx xxx" Such being the case and since the subject services will be carried out entirely in Japan and other countries, the marketing fees to be paid by KMP to T-Net, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) Lastly, since it is represented that the said services will be rendered in Japan and other countries, the marketing fees to be paid by KMP to T-Net will not be subject to VAT pursuant to Sec. 4.108-2 of the Revenue Regulations (RR) No. 16-2005, 1 as amended which states that: "Sec. 4.108-2. Meaning of 'Sale or Exchange of Services'. The term 'sale or exchange of services' means the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following; . . ." cSIADH 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Consolidated Value-Added Tax Regulations of 2005.