ITAD Ruling No. 014-05

February 16, 2005 ITAD RULING NO. 014-05 Sections 23 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 90-04 United Pulp and Paper Co.,Inc. Level 5, PHINMA Plaza, 39 Plaza Drive Rockwell Center, Makati City Attention: Aurasa Jinawath VP Finance and Treasurer Gentlemen : This refers to your letter dated August 12, 2004 requesting confirmation that the service fees to be paid by United Pulp and Paper Co., Inc. (UPPC) to Foster Wheeler Energia Oy (Foster Wheeler) 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 Foster Wheeler is a nonresident foreign company organized and existing under the laws of Finland with principal office at Nuijamiestentie 3, P.O. Box 45, 00401 Helsinki, Finland; that Foster Wheeler 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 July 27, 2004; that UPPC, on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at Level 5, PHINMA Plaza, 39 Plaza Drive, Rockwell Center, Makati City; that on April 30, 2004, UPPC and Foster Wheeler entered into an Engineering Service Contract for a Coal-Fired Boiler Plant whereby Foster Wheeler agreed to provide UPPC the following services for the installation, commissioning, start-up, performance test and successful operation of the Plant, all of which are to be performed outside the Philippines: 1) Provision of the documentation, drawings and other necessary data of the plant engineering, material list, machinery design and drawing services, in the form of Technical Documents, so as to enable UPPC to construct, operate and maintain the Plant successfully. 2) Supply of six (6) copies of the Technical Documents and one (1) CDROM as stated in Article 3.1 within the delivery schedule specified in Annex 1. 3) Rendering all reasonable assistance and support in respect of information, data, drawings and specifications in support of the implementation of the Plant. that all services aforecited are to be performed outside the Philippines; that in consideration of the services rendered by Foster Wheeler, UPPC agrees to pay an amount of One Million Two Hundred Thousand Euro only (1,200,000EUR);and that said contract shall be terminated as stipulated in Article 24 of the same 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 Foster Wheeler 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 Finland, the service fees to be paid by UPPC to Foster Wheeler, being considered as 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 the 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. cTADCH 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 services will not be performed in the Philippines, service fees to be paid by UPPC to Foster Wheeler are therefore exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) 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