ITAD BIR Ruling No. 008-17

February 14, 2017 ITAD BIR RULING NO. 008-17 Sections 23 (F), 28 (B) (1), 42 (C) (3) and (108) (A); National Internal Revenue Code of 1997, as amended R. G. Manabat & Co. 9th Floor, The KPMG Center 6787 Ayala Avenue, Makati City Attention: AAA _______________ RE : Request for Confirmation Gentlemen : This refers to your letter dated 21 October 2016, requesting confirmation that income received by MJF Interiors International Ltd. ("MJF Interiors") from CWC International Corporation ("CWC International") are exempt from income tax and from value-added tax ("VAT") pursuant to Sections 23 (F), and 42 (C) (3) and 108 (A) of the National Internal Revenue Code of 1997 as amended ("Tax Code"). The facts, as represented, are as follows: MJF Interiors is a foreign corporation organized and existing under the laws of Ireland based on its Articles of Association, Memorandum of Association, and Certificate of Incorporation issued by the Registrar of Companies of Ireland. MJF is neither registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company, issued by the Securities and Exchange Commission. CWC International, on the other hand, is a domestic corporation organized and existing under the laws of the Philippines. TCAScE In November 2015, MJF Interiors and CWC International entered into a Master Services Agreement where MJF Interiors agreed to provide interior design consultancy services to CWC International for the fit-out of office areas starting from Level 9 to Level 24 of Citi Plaza, 34th Street, Fort Bonifacio, Taguig City, Philippines. The project consists of sixteen (16) office floors with an area of 420,935 square feet. The Agreement shall be in force for a period of one (1) year from 27 August 2014 to 27 August 2015. Thereafter, the Agreement shall be automatically renewed for another one (1) year term with a limit of two (2) automatic consecutive renewals. Pursuant to the Agreement, the parties entered into a Statement of Work where MJF Interiors agreed to prepare a business plan, which will be discussed with a customer project manager. Under said Plan, MJF Interiors shall allocate works and assignment to its personnel, who shall perform their assignments under the direction and supervision of the project manager. The services will be performed in Dublin, Ireland. The services which will be provided are as follows: 1. Review Citi Global and Regional Workplace Standards Documents; 2. Analyze and qualify the suggested workplace settings and suggested products; 3. Review all space planning exercises and compare with client density, goals and CWC International's goals; 4. Review concept designs prior to the general release to CWC International; 5. Ensure the foregoing are achievable within CWC International's model; 6. Review and agree procurement strategy and interior packages for tender; 7. Review potential list of vendors for suitability; 8. Support tender activities to award; 9. Preparation of all technical drawings relating to interior products to ensure compliance; 10. Preparation of all final construction drawings in relation to bespoke joinery pieces; and 11. Review and qualify all fabrics and materials proposed by the design team. In consideration for the above-mentioned services, CWC International will pay a service fee of ____________________ US Dollars (USD__________) to MJF Interiors, exclusive of all taxes. The Statement of Work shall come into force from 27 August 2015 to September 2016. cTDaEH In reply, please be informed that under Sections 23 (F) and 28 (B) (1) of the Tax Code, a foreign corporation is subject to income tax only with respect to income derived from sources the Philippines, to wit: " 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. " " Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Non-Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d) above: n Provided, that effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" With respect to income from services under Section 42 (C) (3) of the Tax Code, the same is considered not derived in the Philippines if the services are performed outside the Philippines, thus: "Section 42. Income from Sources within the Philippines. (C) Gross Income from Sources without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx (3) Compensation for labor or personal services performed without the Philippines; xxx xxx xxx" As represented, the interior design consultancy services subject of the Master Service Agreement and Statement of Work will be performed in Dublin, Ireland. Hence, the service fees paid to MJF Interiors by CWC International are considered derived without the Philippines under Section 42 (C) (3) of the Tax Code. The fees are therefore exempt from income tax based on Section 23 (F) in relation to Section 28 (B) (1) of the Tax Code. Furthermore, since the services are rendered outside of the Philippines, the service fees are exempt from VAT, which is imposed under Section 108 (A) of the Tax Code: cSaATC "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 the recommendation of the Secretary of Finance, shall effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%). 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." Under this Section, the sale or exchange of services subject to VAT cover only those services performed in the Philippines. 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, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document.