DA ITAD BIR Ruling No. 151-06

December 8, 2006 DA ITAD BIR RULING NO. 151-06 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code; BIR Ruling No. DA-ITAD 105-05 Fernandez Aguja Law Firm CPA-Lawyers Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated October 31, 2006 on behalf of your client, Taiyo Yuden (Philippines), Inc. (PTY) (Taiyo-Philippines), requesting confirmation of your opinion that the commission payments it makes to Wako Denki Co., Ltd. (Wako-Japan) under the Sales Promotion Agreement for the latter's sales promotion activities rendered entirely outside the territorial jurisdiction of the Philippines are subject to the 0% preferential withholding tax rate under Article 7 in relation to Article 5 of the Philippines-Japan Tax Treaty and that said commission payments are not subject to the Value-Added Tax under Section 109(K) of the 1997 Tax Code, as amended. It is represented that Wako-Japan is a nonresident foreign corporation organized and existing under the laws of Japan, with principal office at 5-1-2 Sotokanda Chiyodaku, Tokyo, Japan; that it is engaged in the business of manufacture and distribution of IC, LSI, and electronic components, wireless communication equipment, boat equipment; that Wako-Japan is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Securities and Exchange Commission's Certificate of Non-Registration of Corporation/Partnership dated October 3, 2006; that Taiyo-Philippines is a domestic corporation with principal office at Mactan Economic Zone I, Lapulapu City. It is a duly registered Philippine Economic Zone Authority (PEZA) export enterprise under Certificate of Registration No. 89-04. It is further represented that on August 1, 2005, Taiyo-Philippines and Wako-Japan executed a Sales Promotion Agreement and a Supplemental Agreement dated October 26, 2006 under which Wako-Japan agreed to render Sales Promotion services, which shall include the following among others: a) To conduct research and studies on the current and future market conditions include the demand, price and supply of Products; b) To conduct research and studies on the Target Customer's needs and/or demands for the Products and other related matters; c) To provide the guidance and advise to Taiyo-Philippines how to sell the Products at its best; d) To support the business relation between Taiyo-Philippines and/or Taiyo Yuden Co., Ltd. (JTY) and Target Customer; and e) To do and perform other sales promotions specifically requested by Taiyo-Philippines and/or JTY. ITDHSE That Wako-Japan shall perform the foregoing Sales Promotion activities and services completely outside the territorial jurisdiction of the Philippines; that the said services shall be rendered only in Japan or in any other foreign country outside Philippine jurisdiction; that the rendition of the sales promotions services shall in no way involve a grant of license for the use of Wako-Japan's proprietary rights nor will it involve any transfer of technological know how and other intellectual property rights; that in consideration for the above services, Taiyo-Philippines shall pay Commissions in the amount of 3% of the amount of gross sales to PENTAX Cebu; 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 or a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that 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 Wako-JAPAN 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 Japan and other countries, the commission payments to be paid by Taiyo-Philippines to Wako-Japan, 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 Japan and other countries, the commission payments by Taiyo-Philippines to Wako-Japan 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: cDAISC (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 term 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 commission payments in consideration for the said services to be paid by Taiyo-Philippines to Wako-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.) JAMES H. ROLDAN Assistant Commissioner Legal Service