ITAD Ruling No. 013-05

February 16, 2005 ITAD RULING NO. 013-05 Sections 23 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 90-04 ROHM LSI Design Philippines, Inc. 24/F Tower 1 The Enterprise Center 6766 Ayala Avenue Cor. Paseo de Roxas 1200 Makati City Attention: Yoshihiko Yamauchi Managing Director Gentlemen : This refers to your letter dated October 13, 2004 requesting confirmation that the service fees to be paid by ROHM LSI Design Philippines, Inc. (ROHM-Phils.) to Silvaco Japan, Inc. (Silvaco-Japan) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code). It is represented that Silvaco-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office at 4F Miyake Bldg., 549-2 Shinano-Cho Totsuka-ku, Yokohama Japan; that Silvaco-Japan is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on November 9, 2004; that Silvaco-Japan is a wholly owned subsidiary of Silvaco International Inc. (SILVACO) of California, USA, and is given software license for sales and service rights; that ROHM-Phils., on the other hand, is a domestic company organized and existing the laws of the Philippines with principal office at 24/F Tower I, The Enterprise Center, 6766 Ayala Avenue, Makati City; that it is registered with the Board of Investments (BOI) per Certificate of Registration No. 92-467 dated January 27, 1993; that ROHM-Phils. purchased CAD software from Silvaco-Japan; that in relation to the purchased software, ROHM-Phils. and Silvaco-Japan entered into a Software Maintenance Contract as supplemented by an Individual Software Maintenance Contract; that under the Individual Software Contract, Silvaco-Japan agreed to provide ROHM-Phils. the following maintenance services, which are performed in Japan and transmitted electronically by recorded media (per notarized Certification issued by ROHM-Phils. dated January 10, 2005), during the term of the contracts: 1. Provide updated versions; 2. Technical consultation via telephone, fax, e-mail, etc. 3. Technical training; 4. Platform charges (once a year). that ROHM-Phils. shall pay Silvaco-Japan for the maintenance charges as specified in the Individual Software Maintenance Contract. In reply, please be informed that Section 23(F) of the Tax Code 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 Silvaco-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 below: "Section 42. 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" Accordingly, since the subject services will be carried out entirely in Japan, service fees therefor to be paid by ROHM-Phils. to Silvaco-Japan, being income not derived from sources within the Philippines by a foreign corporation, are therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) Similarly, the subject fees are not subject to ten percent (10%) Value-Added Tax (VAT) imposed under Section 108(A) of the Tax Code below: "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. 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, service fees therefor to be paid by ROHM-Phils. to Silvaco-Japan are therefore exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) aCcEHS 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group