DA ITAD BIR Ruling No. 077-08

October 29, 2008 DA ITAD BIR RULING NO. 077-08 Sections 23, 42 and 108 of the NIRC of 1997; BIR Ruling No. DA-ITAD-156-05 Samsung Electro-Mechanics Philippines Corp. Blk. 5 Calamba Premier International Park Bgy. Batino, Prinza, Calamba Laguna Attention: Mr. Hoseok Han Finance Group Senior Manager Gentlemen : This refers to your letter dated November 9, 2005, requesting the issuance of a ruling to clarify the tax issues of the payments received by Challenge Sales, Inc. (CSI) from Samsung Electro-Mechanics Philippines Corporation (SEMPHIL), for the services rendered pursuant to a Sales Representative Agreement with other affiliates abroad of SEMPHIL. TEDaAc It is represented that CSI is a corporation organized and existing under the laws of the United States of America with office address at 2678 Bishop Dr. Suite, #120 San Ramon, California, USA; that it is not registered either as a corporation or as a partnership per certification issued by the Securities and Exchange Commission dated April 27, 2005; that SEMPHIL is a corporation organized and existing under the laws of the Philippines with principal address at Blk 5 Calamba Premier International Park, Bgy. Batino, Prinza, Calamba City, Laguna and registered with the Philippine Economic Zone Authority. It is further represented that on April 22, 2003, SEMPHIL, together with other Samsung companies 1 (hereafter collectively referred to as Samsung) entered into a Sales Representative Agreement (Agreement) with CSI; that under the Agreement, Samsung appoints CSI as an exclusive and independent sales representative dedicated to market and sell certain Samsung's Products 2 only in Northern California and Northern Nevada; that the Marketing Authority granted to CSI shall be as follows: (1) Samsung shall have full authority for the acceptance and/or rejection of all sales orders and/or contracts submitted by the CSI. (2) Samsung shall have final authority for the acceptance and/or rejection of all requests for credit terms from the Customers. CaDATc (3) Samsung shall have final authority for all pricing. (4) CSI will not have the authority on behalf of Samsung to accept the return of or to make any allowances with respect to any of the Products, without the prior approval of Samsung. That as Commission for passive components, Samsung agrees to pay and CSI agrees to accept as compensation for the CSI's service, Commission for all orders obtained from and paid by the Customers, and shipped by Samsung; that the Commission rate for Passive Components will be maximum 5% unless otherwise agreed by Samsung and CSI; that in case the product is designed and qualified by a customer in U.S.A. and delivered to another division in U.S.A. or other countries, CSI shall be paid split Commission in accordance with the following guidelines: Design & Qualification 2.0% Purchase Order Issue 2.0% Delivery 1.0% That Samsung shall also pay CSI Commission on Sales through Distribution and Commission for Mobile Products; and that the term of the Agreement shall be for an initial period of one (1) year commencing on April 22, 2003, and shall automatically be renewed for successive terms of one (1) year each unless either party notifies the other in writing of its intention not to renew not less than thirty (30) days prior to the expiration of the initial, or any renewal term. In reply, please be informed that concerning income tax, a foreign corporation like CSI, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines, under Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code), which provides: aTEScI "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." In relation thereto, income from furnishing of services which a foreign corporation carries on outside the Philippines is not considered as derived from sources within the Philippines and as such is not taxable in the Philippines, based on Section 42 of the Tax Code, which provides: "SEC. 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" Accordingly, since the above services are performed by CSI outside the Philippines, and fees paid by SEMPHIL to CSI in consideration for the services furnished by the latter under the Sales Representative Agreement between Samsung and CSI are not subject to income tax. (BIR Ruling No. DA-ITAD-156-05 dated December 12, 2005) CaDSHE Concerning value-added tax (VAT), please be informed that only services performed in the Philippines are subject to VAT. Section 108 (A) of the Tax Code, as amended provides: "Section 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%) 3 of gross receipts derived from the sale or exchange of services, including the use or lease or 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. . . ." Accordingly, since it is represented that the above services will not be performed in the Philippines, the service fees paid by SEMPHIL to CSI in consideration for the subject services are not subject to VAT. 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. ESIcaC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Samsung Electro-Mechanics Co., Ltd., Samsung Electro-Mechanics America (Inc.), Samsung Electro-Mechanics (H.K.) Ltd. 2. Products covered by the Agreement Multilayer Ceramic capacitors (MLCC), Tantalum Chip Capacitors, Thick Film Chip Resistors, Multilayer Chip Inductors and Ferrite Beads, Chip Led, Laser Diode, VCO Module, PLL Module, VC-TCXO Module, SMD Crystal, RF Unit (For CLP), Saw Duplexer, Saw (IF & RF) Filter, Isolator, Ceramic Filter, Microwave Dielectric Filter, Ceramic, Ceramic Resonator, Diplexer (Frequency Separator). 3. Effective February 1, 2006 rate is 12%.