DA ITAD BIR Ruling No. 105-07

November 16, 2007 DA ITAD BIR RULING NO. 105-07 Articles 10, Philippines-Netherlands Tax Treaty Section 23 (F) in relation to Section 42 (A) (3) of the Tax Code of 1997, as amended; BIR Ruling No. DA-ITAD 82-07 BIR Ruling No. DA-ITAD 105-05 Villanueva Nuez & Associates Law Firm Room 506, Makati Executive Center V.A. Rufino cor. L.P. Leviste Sts. Salcedo Village, Makati City Attention: Atty. Rodeo J. Nuez, Jr. Legal Counsel Gentlemen : This refers to your letter dated July 23, 2007, received by this Office on August 3, 2007, filed on behalf of your client, Schuurmans & Van Ginneken Philippines, Inc. (Schuurmans-Philippines), seeking confirmation on the following: 1. the dividend payments made by Schuurmans-Philippines to ED & F Man Netherlands B.V. (ED & F-Netherlands) is subject to ten percent (10%) income tax; and 2. the service fees paid by Schuurmans-Philippines to ED & F-Netherlands are tax-exempt in the Philippines. It is represented that ED & F-Netherlands is a corporation organized and registered under the laws of the Netherlands as evidenced by its Articles of Association; that its principal office is located at Neslands 5, 1382 MZ Weesp, The Netherlands; that ED & F-Netherlands is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration dated June 26, 2007 issued by the Securities and Exchange Commission of the Philippines; that Schuurmans-Philippines is a domestic corporation with principal address at Rm. B6 WSC Building, Locsin Street cor. San Sebastian Street, Bacolod City; that it is engaged in the business of buying, selling, distributing, marketing at wholesale, including the warehousing and storage of molasses. It is further represented that ED & F-Netherlands is a holder of 110,800 shares of the authorized capital stock of 120,000 shares of Schuurmans-Philippines with an equity participation of 92.33% as evidenced by the duly notarized Secretary's Certificate issued by Schuurmans-Philippines' Corporate Secretary; that Schuurmans-Philippines declared cash dividends payable to stockholders of record as of October 31, 2004 out of its unrestricted retained earnings. It s also represented that on December 28, 2006, ED & F-Netherlands and Schuurmans-Philippines entered into a Services Agreement (Agreement) whereby the former agreed to provide the latter the following services. DHSCEc 1. Advice on trading operations and conditions; 2. Banking advice and. support; 3. Evaluation of markets; 4. Marketing advice; 5. Statistical advice; 6. Electronic Data Processing advice and services; and 7. Accounting system and procedures advice and services; that the foregoing services are rendered entirely in Netherlands through electronic means like long distance calls, cellular calls and through e-mails; that ED & F-Netherlands shall be remunerated by Schuurmans-Philippines in consideration of providing of the said services having monthly or annually invoiced in accordance with the level of services provided, the estimated time spent in dealing therewith and any expenses incurred; that the said Agreement is valid for a period of one (1) year from November 1, 2006; and that the issues or transactions subject of the above application are 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 as regards dividend payments, Article 10 of the Philippines-Netherlands tax treaty provides: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2 However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 percent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the, dividends; b) 15 percent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. DHcESI xxx xxx xxx" Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that ED & F-Netherlands holds more than 10% of the capital of Schuurmans-Philippines, this Office is of the opinion and so holds that the dividend payments by Schuurmans-Philippines pertaining to ED & F-Netherlands shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 82-07 dated July 11, 2007). As regards the service fees paid by Schuurmans-Philippines to ED & F-Netherlands under the Agreement, 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 ED & F-Netherlands 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 Netherlands, the service fees to be paid by Schuurmans-Philippines to ED & F-Netherlands, 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) Lastly, since it is represented that the said services will be rendered in Netherlands, the service fees by Schuurmans-Philippines to ED & F-Netherlands will not be subject to VAT imposed under Section 108 (A) of the Tax Code of 1997, as amended, which 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%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon 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: AcSCaI (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%). 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, . . ." 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 service fees in consideration for the said services to be paid by Schuurmans-Philippines to ED & F-Netherlands are therefore exempt from 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner