Nihon Houzai Laguna Corp.

December 18, 2006 DA ITAD BIR RULING NO. 163-06 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 105-05 Nihon Houzai Laguna Corp . Rm. 202 M, 124 East Science Avenue Laguna Technopark, Bian, Laguna Attention: Mr. Teruo Nishimura Vice President Gentlemen : This refers to your tax treaty relief application dated February 21, 2006, received by this Office on August 12, 2006, for the service fees paid by Nihon Houzai Laguna Corp. (Nihon-Philippines) to Nihon Hosai Co. Ltd. (Nihon-Japan). It is represented that Nihon-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at No. 2-4-2 Hatanodai Shinagawa Tokyo, Japan; that Nihon 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 14, 2006; that Nihon-Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address located at GRM Bldg. Rm. 202 M, 124 East Science Avenue, Laguna Technopark Bian, Laguna; that Nihon-Philippines is a PEZA-registered enterprise as shown in its Certificate of Registration No. 04-09-F dated June 14, 2004. acCDSH It is further represented that on January 3, 2005, Nihon-Japan and Nihon-Philippines entered into a Contract whereby Nihon-Japan commits the following services to Nihon-Philippines: 1. Facilitation of the purchases being made by Nihon-Philippines from various suppliers outside the territorial jurisdiction of the Philippines; 2. Recommendation of the appropriate measures to be undertaken by Nihon-Philippines to improve/sustain the level and quantity of its production; and Provision of other services such as competitive sourcing of new products, project management, technical development, testing and evaluation of quality assurance and transportation and commercialization of new/existing products. That Nihon-Japan shall not be under any obligation to send its employees or representative to the Philippines; that as a consideration for the said services, Nihon-Philippines will pay Nihon-Japan the amount of Twenty Thousand US Dollars ($20,000.00) per month; that the Contract shall be valid and binding for a period of one (1) year from the effective date, 3 January 2005, 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 period of one (1) year; 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 of a tax credit certificate, collection proceedings, or a judicial appeal. 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 derived from sources within the Philippines. xxx xxx xxx" According to Section 23(F), a foreign corporation like Nihon-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; TIDcEH 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 Nihon-Philippines to Nihon-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) 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: "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 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 Nihon-Philippines to Nihon-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 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 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).