DA ITAD BIR Ruling No. 118-07

December 6, 2007 DA ITAD BIR RULING NO. 118-07 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) of the National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD-163-06 OM Electrolyzing Inc. Phase III, Block 15-A, Lot 1 Cavite Economic Zone, Rosario 4106 Cavite Attention: Mr. Yoshinobu Osugi Managing Director Gentlemen : This refers to your tax treaty relief application received by this Office on June 26, 2007, for the service fees that will be paid by OM Electrolyzing, Inc. (OM-Electrolyzing Phils.) to O.M. Co., Ltd (OM-Japan). DSCIEa It is represented that OM-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at 11-1 4 Chome Wakaehigashimachi, Higashi Osaka-shi, Osaka-fu, Japan; that OM-Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on June 20, 2007; that OM-Electrolyzing Phils. is a domestic corporation with principal address located at Phase III, Block 15-A, Lot 1 Cavite, Cavite Export Processing Zone, Rosario, 4106 Cavite; that OM-Electrolyzing Phils. is a PEZA-registered enterprise under Certificate of Registration No. 03-050 issued on July 24, 2003 as an Ecozone Export Enterprise at the Cavite Economic Zone; that OM-Electrolyzing Phils. is engaged in the manufacture of goods such as electrolyzed refining metal; and that in a sworn certification issued by its Corporate Secretary dated June 22, 2007, OM-Electrolyzing Phils. 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. It is further represented that on March 24, 2006, OM-Electrolyzing Phils. and OM-Japan entered into a Contract whereby OM-Japan shall provide the following Services OM-Electrolyzing Phils.: 1. Promotion or marketing of goods in Japan and other foreign clients of, which includes making regular visits and representation with relevant corporate officers of such clients; 2. Advice and assistance in attracting new customers; 3. Advice on business plan for the succeeding years and marketing strategy; 4. Advice and assistance in maintaining and assuring product quality in accordance with the specifications of Japanese customers; 5. Advice on the selection of suppliers from Japan for quality assurance and cost efficiency; and 6. Assistance in the procurement of material needed for production. That OM-Japan shall not be under any obligation to send its employees or representative to the Philippines; that as a consideration for the said services, OM-Electrolyzing Phils. will pay OM-Japan a fee in the amount of Two Million Five hundred Thousand Japanese Yen (JPY2,500,000.00) per month; that the Contract shall be valid and binding for a period of one (1) year born the effectivity date, April 1, 2006 and unless terminated in writing by either party at least thirty (30) days prior to the date of expiration, shall be automatically renewed for successive periods of one (1) year. IDCHTE In reply, please be informed that Section 23 (F) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997) 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 OM-Japan is taxable only on income derived from sources within the Philippines. With respect to 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 stated in Section 42 (A) (3) of the Tax Code of 1997, quoted 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 rendered outside the Philippines, the service fees to be paid therefor by OM-Electrolyzing Phils. to OM-Japan, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling DA-ITAD-163-06 dated December 18, 2006) EaHcDS Similarly, the service fees are not subject to the twelve percent (12%) VAT imposed under Section 108 (A) of the Tax Code of 1997, as amended: "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%) 1 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%), xxx xxx xxx" 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. . . . . xxx xxx xxx" Section 108 (A) above 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 said services will not be performed in the Philippines, the service fees to be paid by OM-Electrolyzing Phils. to OM-Japan 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. cCTaSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. 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) AICEDc