ITAD BIR Ruling No. 019-09

August 10, 2009 ITAD BIR RULING NO. 019-09 Sections 23 (B), 42 (A) (3), 232, 233, 235 and 236 (A) and (B); National Internal Revenue Code of 1997, as amended GoForIt Migration Consultancy Services 1120 Apacible Street Paco, Manila Attention: Ms. Irma Largoza-Campomanes Country Office Manager Gentlemen : This refers to your letter dated August 21, 2007, requesting confirmation that the Philippine office of GoForIt Migration Consultancy Services (GoForIt) is exempt from reporting its income and expenses. Basic Facts It is represented that GoForIt is the registered trading name granted by the relevant government body in Australia to Atty. Maria Dulce Manlapaz, a dual citizen of Australia and the Philippines, in order for the latter to formally practice her migration profession in Australia; that Atty. Manlapaz opened up an office in the Philippines to handle secretarial and administrative functions in accepting clients who want to migrate to Australia and who want to engage the services of Atty. Manlapaz; that the said office is situated at 1120 Apacible Street, Paco, Manila, Philippines; and that in order for renovation works in the office to proceed, the relevant permits must be secured from the City Government of Manila, which consequently required the registration of GoForIt. aDcTHE It is also represented that Atty. Manlapaz will exercise her profession in Australia and that the Philippine office of GoForIt, through its Country Office Manager, will merely facilitate the signing of professional service contracts between the prospective clients and Atty. Manlapaz; that payments for Atty. Manlapaz will be in Australian dollars and will be remitted directly to an Australian bank account designated for this purpose; that although no 'income' will in effect be directly received in the Philippines, expenses, on the other hand, will be incurred by the Philippine office in its operations and that in some occasions, the office will be reimbursed of such expenses like those for photocopying, mailing and telephone. It is further represented that Atty. Manlapaz, being a resident of Australia, will report to the Australian tax authorities her income from the exercise of migration profession in Australia, where such income will be subject to income tax in Australia; that, as you understand it, the Philippine office of GoForIt will report to the Bureau of Internal Revenue all income generated from professional service contracts signed at that office and all expenses incurred by the office for such undertaking, and that the Philippine office will then pay the corresponding income tax on its taxable income; and that, thereafter, Atty. Manlapaz will report the same income and expenses of the Philippine office in her Australian income tax return, recognize any tax credit for income taxes paid in the Philippines (pursuant to the existing Agreement between the Government of the Republic of the Philippines and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ), 1 and then pay any residual income tax due on her income derived in Australia, the Philippines, and in other countries. It is finally represented that you request that the Philippine Office of GoForIt be exempt from reporting its income and expenses based on the following grounds: 1. That the Philippine office will conduct only secretarial and administrative tasks in connection with the practice of migration profession of Atty. Manlapaz. 2. That while the contract for professional migration service will be signed by a prospective client in the Philippines, the service itself will be performed by Atty. Manlapaz in Australia. 3. That the purpose of the Philippine office is largely to provide facility and ease to the clients in the submission and clerical processing of the required documentation for migration purposes. 4. That the existence of the Philippine office is closely connected to and dependent on the qualifications of Atty. Manlapaz as a registered migration agent in Australia. 5. That Atty. Manlapaz, being a resident of Australia, will not directly manage the Philippine Office, which will be actually managed by the Country Office Manager who is a resident citizen of the Philippines. Nonetheless, Atty. Manlapaz will ensure that the operating expenses of the Philippine Office will be fully covered regardless of the level of income generated from such clients in the Philippines. Ruling In reply, please be informed that a nonresident citizen of the Philippines like Atty. Manlapaz is taxable only on income derived from sources in the Philippines. Section 23 (B) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: DIECTc "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (B) A nonresident citizen is taxable only on income derived from sources within the Philippines;" For income generated from professional service contracts signed at the Philippine Office of GoForIt , which call for Atty. Manlapaz to render professional migration services to prospective clients in the Philippines who want to migrate to Australia, such income will be subject to income tax in the Philippines if the same is considered derived from sources in the Philippines. In this connection, Section 42 (A) (3) of the Tax Code of 1997, as amended, provides: "SEC. 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;" The question of when income from the performance of services is considered derived from sources in the Philippines is expounded by the Supreme Court in Commissioner of Internal Revenue vs. British Overseas Airways Corporation and Court of Tax Appeals (G.R. No. L-65773-74, April 30, 1987). In summary, British Overseas Airways Corporation (BOAC), a foreign corporation organized and existing under the laws of the United Kingdom and a wholly-owned corporation of the Government of the United Kingdom, had a general sales agent in the Philippines ( Warner Barnes and Company, Ltd., and later, Qantas Airways ) which sold plane tickets on behalf of BOAC . During the taxable years in question, the general sales agent sold tickets on behalf of BOAC for the transport of passengers and cargoes in between territories which are outside the Philippines. BOAC, during those years, had no landing rights to transport passengers and cargoes to and from the Philippines. On whether such plane tickets sold by the general sales agent for BOAC considered derived from sources in the Philippines even if the transport of passengers and cargoes covered by the tickets was not in any instance in the Philippines, the Court ruled: ETHCDS "The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In British Overseas Airways Corporation's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government . . . The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. Admittedly, British Overseas Airways Corporation was an off-line international airline at the time pertinent to this case. The test of taxability is the 'source'; and the source of an income is that activity . . . which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And even if the British Overseas Airways Corporation tickets sold covered the 'transport of passengers and cargo to and from foreign cities', it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word 'source' conveys one essential idea, that of origin, and the origin of the income herein is the Philippines." (emphasis ours) Applying the above jurisprudence, the fact that the professional service contracts in question will be signed in the Philippines (that is, at the Philippine Office of GoForIt ), that payments for such contracts will come from individuals who are resident of the Philippines, and that such payments will be derived from a business activity which will be regularly pursued in the Philippines, is sufficient to deem such income as derived from sources in the Philippines, even if Atty. Manlapaz will not actually perform her contractual obligations to her clients in the Philippines but in Australia. In view of the foregoing, your request that the Philippine office of GoForIt be exempt from reporting its income and expenses is hereby DENIED for lack of legal basis. Finally, as a regular taxpayer, the Philippine Office of GoForIt must register with the appropriate Revenue District Office of the Bureau of Internal Revenue and the Philippine Office will be supplied its own Taxpayer Identification Number, pursuant to Section 236 (A) and (J) of the Tax Code of 1997, as amended, which provide: "SEC. 236. Registration Requirements. (A) Requirements. Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer: (1) Within ten (10) days from date of employment, or (2) On or before the commencement of business, or (3) Before payment of any tax due, or (4) Upon filing of a return, statement or declaration as required in this Code. The registration shall contain the taxpayer's name, style, place of residence, business, and such other information as may be required by the Commissioner in the form prescribed therefor. A person maintaining a head office, branch or facility shall register with the Revenue District Officer having jurisdiction over the head office, branch or facility. For purposes of this Section, the term 'facility' may include but not be limited to sales outlets, places of production, warehouses or storage places." xxx xxx xxx (J) Supply of Taxpayer Identification Number (TIN). Any person required under the authority of this Code to make, render or file a return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes, and which he shall indicate in certain documents . . ." Also, the Philippine Office of GoForIt must pay the annual registration fee of P500.00, must keep its own book of accounts and subsidiary books, and must preserve these documents for a certain period of time as necessary, pursuant to Sections 236 (B), 232, 233 and 235 of the Tax Code of 1997, as amended, thus: cTIESa "SEC. 236. Registration Requirements. xxx xxx xxx (B) Annual Registration Fee. An annual registration fee in the amount of five hundred pesos (P500) for every separate or distinct establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year thereafter on or before the last day of January . . ." "SEC. 232. Keeping of Books Accounts. (A) Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts. All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep a journal and a ledger or their equivalents . . ." "SEC. 233. Subsidiary Books. All corporations, companies, partnerships or persons keeping the books of accounts mentioned in the preceding Section may, at their option, keep subsidiary books as the needs of their business may require: Provided, That where such subsidiaries are kept, they shall form part of the accounting system of the taxpayer and shall be subject to the same rules and regulations as to their keeping, translation, production and inspection as are applicable to the journal and the ledger." "SEC. 235. Preservation of Books of Accounts and Other Accounting Records. All the books of accounts and other accounting records of corporations, companies, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers . . ." Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Signed on May 11, 1979, and effective January 1, 1980.