ITAD Ruling No. 008-04

February 9, 2004 ITAD RULING NO. 008-04 Tax Code of 1997 Sections 28 (B) (1) & 42 BIR Ruling No. DA-ITAD-152-02 BIR Ruling No. DA-ITAD-148-03 C.L. Manabat & Co. Certified Public Accountants and Management Consultants 3rd to 6th Floor, Salamin Bldg., 197 Salcedo St., Legaspi Village 1229 Makati City Attention: Atty. Domingo Lagundi, Jr. Corporate and Tax Services Gentlemen : This refers to your application for relief from double taxation dated October 2, 2003, on behalf of your client, Datacraft Asia Ltd. (Datacraft Asia), requesting confirmation of your opinion that the payments of service fees by Datacraft Communications System Inc. (Datacraft Phils.) to Datacraft Asia is not subject to income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty. It is represented that Datacraft Asia is a nonresident foreign corporation organized and existing under the laws of Singapore with business address at 6 Shenton Way #24-01 DBS Bldg. Tower II, Singapore 068809; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated September 2, 2003; that Datacraft Asia is not engaged in trade or business in the Philippines; that Datacraft Asia is an affiliate of Datacraft Phils., a domestic corporation duly organized and existing under the laws of the Philippine, with principal office at 4th Floor, Gammon Center, Philamlife Building, 126 Alfaro Street, Salcedo Village, Makati City; that Datacraft Asia entered into an "Agreement for Provision of Management, General Support and Administrative Services" (Agreement) with Datacraft Phils., wherein Datacraft Asia shall provide Datacraft Phils. with services as detailed in Schedule 1 which is made as integral part and parcel of the Agreement for a fee; that under the Agreement, the said services shall be provided by Datacraft Asia in Singapore through teleconferencing, internet, email, and other similar forms of communication; that no employee or any authorized representative of Datacraft Asia shall come to the Philippines for more than one hundred eighty (180) days to render services as provided for in the Agreement and per Certification issued by Datacraft Phils. dated November 18, 2003; and that Datacraft Phils. shall pay Datacraft Asia a fee calculated based on 110% of all direct and indirect costs incurred by the latter in rendering the said services. In reply, based on the representation that the services rendered by Datacraft Asia shall be performed entirely in Singapore, then the fees to be paid by Datacraft Phils. to Datacraft Asia are considered income derived from sources outside the Philippines, which shall be governed by Section 28(B)(1), in relation to Section 42, both of the 1997 Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporation . . . . "xxx xxx xxx' "(B) Tax on Nonresident Foreign Corporation. . . . "(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): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) SITCEA "xxx xxx xxx. "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; "xxx xxx xxx" "(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" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines. The source of the income derived from services is the place where the services are rendered so that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor are taxable in the Philippines. In the instant case, based on your representation that the services rendered by Datacraft Asia to Datacraft Phils. shall be performed entirely in Singapore, the service fees to be remitted by Datacraft Phils. are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to withholding tax. (DA-ITAD-148-03 dated October 2, 2003) It is noteworthy that, since that income is derived entirely from sources abroad, then the Philippines-Singapore tax treaty will find no application as the transaction does not result in a case of double taxation for which a tax treaty relief is sought. (DA-ITAD 152-02 dated August 29, 2002) . 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service