DA ITAD BIR Ruling No. 126-07

December 21, 2007 DA ITAD BIR RULING NO. 126-07 Section 23 (F) in relation to Section 42 (A) (3) of the Tax Code of 1997, as amended; BIR Ruling No. DA-ITAD 097-05 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated October 2, 2006, requesting confirmation of your opinion that: (1) the fees paid by Taisei Corporation-Tokyo Head Office (TC-Japan) to Mitsubishi Corporation-Tokyo Head Office (MC-Japan) for the use of or access to the ASP Service under the ASP Hosting Services Agreement are not subject to Philippine income tax pursuant to Philippine tax situs as well as Article 7 in relation to Article 5 of the Philippines-Japan tax treaty; and (2) the said fees are also not subject to value-added tax since the ASP Services are deemed rendered outside the Philippines. It is represented that MC-Japan is a foreign corporation organized and existing under the laws of Japan with principal address at 6-3, Marunouchi 2-Chome, Chiyoda-ku, Tokyo, Japan; that MC-Japan is licensed to do business in the Philippines through its branch office, Mitsubishi Corporation-Manila Branch (MC-Philippines); that MC-Japan is engaged in the business of, among others, providing a web-based application service, so-called the ASP, to the leading general construction companies; that TC-Japan is a foreign corporation organized and existing under the laws of Japan with principal address at 3-25-1, Hyakunin-cho, Shinjuku-ku, Tokyo, Japan; that TC-Japan is licensed to do business in the Philippines through its branch, Taisei Corporation-Philippine Branch (TC-Philippines); that TC-Japan is primarily engaged in the business of construction and civil engineering works. It is further represented that on August 10, 2005, MC-Japan and TC-Japan executed an ASP Hosting Services Agreement (Agreement) whereby MC-Japan allows TC-Japan the use of or access to the ASP Services; that the Agreement was entered into directly by MC-Japan and TC-Japan in Japan without the participation of MC-Philippines and TC-Philippines; that the payments for the use of or access to the ASP Services will be made directly by TC-Japan to MC-Japan; that pursuant to the Agreement and the User Terms and Conditions, the use of or access to the ASP Construction Software is granted not only to TC-Japan but also to its authorized joint-venture partners, subcontractors, suppliers and vendors (herein referred to as TC-Vendors) in connection with its various construction projects located mainly in Japan. HSCAIT Moreover, it is represented that the ASP is a business software application rental service that provides customers (or users) access, via internet, to "project collaboration software service" and "project information managing software service'' (collectively referred to herein as the "ASP Service"), which allow them to have a clear view of the status of their ongoing construction work and serves as a tool for sharing and management of construction-related information at the construction project site; that the ASP Service covers the construction project located only in Japan, however, as a web-based application service, the access to and use of the ASP Service can be done anytime and anywhere in the world by simply connecting to MC-Japan's ASP Server (located in MC-Japan's premises in Japan) through the internet or via World Wide Web, and requires an authorized and pre-determined user (herein referred to as "Users") to log-in into said server; that TC-Japan will be able to access or use the ASP Service in the Philippines through the following: 1) Access to or use of MC-Japan's ASP Service by TC-Japan employees sent to the Philippines on business to work on various TC-Japan projects; 2) Access to or use of MC-Japan's ASP Service by TC-Japan employees transferred to an entity in the Philippines. That such employees will access MC-Japan's server located in Japan via the internet using ID/password given to permitted users. In reply, please be informed that the existing tax treaty between the Philippines and Japan is for the avoidance of double taxation. inasmuch as it has been represented that all the services performed by MC-Japan in favor of TC-Japan were done outside the Philippines, then the Philippines-Japan tax treaty finds no application at this instance, as the transaction does not result in a case of double taxation. 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 TC-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 fees to be paid therefore by TC-Japan to MC-Japan, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 097-05 dated September 2, 2005) EAISDH Similarly, fees are not subject to the twelve percent (12%) VAT imposed under Section 108 (A) of the Tax Code of 1997, as amended: "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%) 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 includes only those services that are performed in the Philippines. Accordingly, since the said services will not be performed in the Philippines, the fees to be paid by TC-Japan to MC-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. 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).