DA ITAD BIR Ruling No. 082-08

October 29, 2008 DA ITAD BIR RULING NO. 082-08 Section 23 (F) in relation to Section 42 (A) (3) of National Internal Revenue Code of 1997, as amended; BIR Ruling No. DA-ITAD 105-05 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue cor. H.V. dela Costa St. Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated May 16, 2006 on behalf of your client, FusionSolutions Philippines, Inc. (FS-Philippines), requesting confirmation of your opinion that the advisory fees paid by FS-Philippines to FusionSolutions Pte. Ltd. (FS-Singapore) are considered as income derived outside the Philippines, and are therefore, not subject to Philippine income, expanded withholding and value-added taxes, and that the FS-Philippines shall be allowed to claim such license fees as deduction for income tax purposes. DHEaTS It is represented that FS-Singapore is a corporation organized and existing under the laws of Singapore as shown in its Memorandum and Articles of Association; that its principal office is located at 381 Tanglin Road, #13-03, Singapore, 247965; that FusionSolutions is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration dated July 6, 2006 issued by the Securities and Exchange Commission; that FS-Philippines is a domestic corporation with principal office address at Unit 1807 Cityland Condominium 10 Tower 1, Ayala Avenue, Makati City; that FS-Philippines is primarily engaged in the business of providing consultancy services, advisor on matters relating to banking and financial services and software products. It is further represented that on September 1, 2005, FS-Singapore and FS-Philippines entered into a Marketing Associate Agreement (Agreement) whereby the former bound itself to render the following services to the latter: IDaCcS a) Promotion of the products and services to prospective end-users by: Identification of prospective customers within the territory that may benefit from use of the products and services and are capable of paying the fees/charges imposed under the License Agreement, Maintenance Agreement and the Services Agreement; Contacting of such prospective customers and arranging for presentations and demonstrations relating to the products and services with the assistance of FS-Philippines; Guiding FS-Philippines with regards to channelising its marketing efforts and promotion at appropriate management levels among the prospective customers; Performance of appropriate marketing efforts and promotion necessary for FS-Philippines to obtain duly executed License Agreements, Maintenance Agreements and Services Agreements from potential customers; Helping FS-Philippines to recover amounts due from the customers under License Agreement, Maintenance Agreement and Service Agreement accepted by FS-Philippines. AHcDEI b) Provision of a single point of contact for necessary communications between FS-Philippines and FS-Singapore with respect to this Agreement. That the foregoing services shall be carried out by FS-Singapore in its home office in Singapore and shall perform its duties under this Agreement according to the best-accepted professional standards; that in consideration for the above services, FS-Singapore shall be paid a percentage of the license fees actually collected net of all taxes, under the License Agreements accepted by FS-Philippines from the identified accounts in the Philippines; that FS-Singapore shall be paid a fixed percentage of the Service fees actually collected, under the Service Work Orders accepted by FS-Philippines from identified accounts in the Philippines; that FS-Singapore shall be paid a fixed monthly retainer fee; 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 National Internal Revenue Code of 1997 (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 FS-Singapore 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: ACIDTE xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx" Such being the case and since, as represented, the subject services will be carried out in Singapore, the license fees to be paid by FS-Philippines to FS-Singapore, being income not derived from sources within the Philippines by a foreign corporation, shall be exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) As regards the deductibility of the license fees as an ordinary and necessary business expense on the part of FS-Philippines, this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer from treating such expenses as a deductible item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34 (A) (1) (b) of the National Internal Revenue Code. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003) Lastly, since it is represented that the said services will be rendered in Singapore, the license fees to be paid by FS-Philippines to FS-Singapore will not be subject to VAT pursuant to the underlying principle of the Cross Border Doctrine (Destination Principle) which states that: "The onus of taxation under VAT system is in the country where the goods, property or services are destined, used or consumed. . . . goods, property or services destined to, or used to or consumed in the Philippines are subject to 10% 1 VAT whereas those destined to, or used or consumed abroad are subject to zero percent (0%) VAT." (VAT Ruling No. 044-98) 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. CSHEca Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Now, 12% value-added tax (VAT) pursuant to Section 107 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337.