DA ITAD BIR Ruling No. 127-07

December 28, 2007 DA ITAD BIR RULING NO. 127-07 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 Mikuni Electronics Corp. Lot 10, Block 6, Phase II Cavite Export Processing Zone Rosario, Cavite Attention: Mr. Shogo Kiga President 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 Mikuni Electronics Corp. (Mikuni-Phils.) to Mikuni Asia Corporation (Mikuni-Japan). It is represented that Mikuni-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at 4-5-30 Chome Sakawa, Odawara City, Kanagawa, Japan; that Mikuni-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 Mikuni-Phils. is a corporation duly organized and existing under the laws of the Philippines with principal address located at Lot 10, Block 6, Phase IV, Cavite Export Processing Zone, Rosario, Cavite; that Mikuni-Phils. is a PEZA-registered enterprise under Certificate of Registration No. 01-068 issued on November 14, 2001 as an Ecozone Export Enterprise at the Cavite Economic Zone; that Mikuni-Phils. is engaged in the manufacture of assembly of large automated deposit system units and other electronics automated equipment; and that in a sworn certification issued by its Corporate Secretary dated June 15, 2007, Mikuni-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 January 31, 2004, Mikuni-Japan and Mikuni-Phils. entered into a Technical Service Contract (Contract) whereby Mikuni-Japan shall provide to Mikuni-Phils. repairs and adjustments of the products sent by Mikuni-Phils. for marketing in Japan which are later found out to be defective: that said products consist of automated deposit systems which are similar to ATM machines in the Philippines; that Mikuni-Japan shall not be under any obligation to send its employees or representatives to the Philippines; that as a consideration for the said services, Mikuni-Phils. will pay Mikuni-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 from the effective date, 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. In reply, please be informed that Section 23 (F) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997) provides: ECTAHc "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 Mikuni-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 therefore by Mikuni-Phils. to Mikuni-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) 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 Mikuni-Phils. to Mikuni-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. TcHCIS 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).