DA ITAD BIR Ruling No. 076-07

June 5, 2007 DA ITAD BIR RULING NO. 076-07 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code; BIR Ruling No. DA-ITAD 105-05 Puyat Jacinto & Santos Law Office 12/F Manilabank Building 6772 Ayala Avenue, Makati City Attention: Atty. Virginia B. Viray Atty. Lai-Lynn Angelica B. Barcenas Gentlemen : This refers to your letter dated September 20, 2006 on behalf of your client, IndusInd Bank Limited (IndusInd-India), requesting confirmation of your opinion that the transaction fee paid by Customer Contact Center, Inc. (CCC-Philippines) to IndusInd-India is considered as income earned in India under Article 7 (1) of the Philippines-India tax treaty in relation to Section 23 (F) of the National Internal Revenue Code (Tax Code) of 1997, as amended, and thus not subject to Philippine income tax. TAcCDI It is represented that IndusInd-India is a nonresident foreign corporation organized and existing under the laws of India with registered office at Solitaire Corporate Park, 167 Guru Hargovindji Marg, Andheri (E) Mumbai, 400 018, India; that IndusInd-India is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Securities and Exchange Commission's Certificate of Non-Registration of Corporation/Partnership dated June 28, 2006; that CCC-Philippines is a domestic corporation with principal office at HTMT Cyberpark, 86 E. Rodriguez Jr. Avenue, Brgy. Ugong Norte, Quezon City. It is further represented that on November 6, 2005, IndusInd-India and CCC-Philippines entered into a Financial Advisory Agreement through a letter whereby CCC-Philippines exclusively engaged IndusInd-India as its financial advisor in connection with the raising of long term loan funds involving an amount up to USD 10 Million for use towards capital expenditure and other corporate purposes in one or a series of transaction(s); that IndusInd-India will provide CCC-Philippines financial advice on structuring of the transaction, identification of the most economical source of funds but shall exclude assistance in any legal/statutory compliance requirements; that the said financial services rendered by IndusInd in favor of CCC-Philippines were performed in India and Bahrain where IndusInd-India assisted and advised CCC-Philippines when it negotiated for the release of a loan in its favor from ICICI Bank Limited (ICICI), a bank organized and existing under the laws of India, through ICICI's Bahrain branch, for the loan of USD 10 Million; that in consideration of the said services, CCC-Philippines agreed to pay to IndusInd-India a transaction fee, which would be computed as 50 basis points only (including out of pocket expenses) of the total funds raised out of the transaction; 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 the existing tax treaty between the Philippines and India is for the avoidance of double taxation. Inasmuch as it has been represented that all the services to be performed by IndusInd-India in favor of CCC-Philippines have been performed outside the Philippines, then the Philippines-India tax treaty will find no application as the transaction does not result in a case of double taxation. 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 IndusInd-India 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 as derived from sources within the Philippines if the services are performed in the Philippines, as provided in Section 42 (A) (3) of the Tax Code of 1997, as amended, which states: "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 were actually performed in India and Bahrain, the transaction fee to be paid by CCC-Philippines to IndusInd-India, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) aITECD Lastly, since it is represented that the said services will be rendered in India and Bahrain, the transaction fee paid by CCC-Philippines to IndusInd-India will not be subject to VAT imposed under Section 108 (A) of the Tax Code of 1997, as amended, below: "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. . . . 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, . . ." 1 Section 108 (A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will not be performed in the Philippines, the transaction fee in consideration for the said services paid by CCC-Philippines to IndusInd-India are therefore exempt from VAT. ESDHCa This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And for Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108(A) to read as: "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 selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). xxx xxx xxx" The VAT rate was increased to 12% on 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.