ITAD Ruling No. 022-03

January 30, 2003 ITAD RULING NO. 022-03 RP-Germany, Article 5 & 7 BIR Ruling No. ITAD 134-00; DA-ITAD 38-02 Bernaldo Mirador Law Offices U-1810-11 Cityland Condominium 10 Tower 1, 6815 Ayala Avenue North Makati City Attention: Ms. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your application for relief from double taxation dated June 27, 2001 on behalf of your client, C. Melchers Gmbh & Co.-Philippine Branch (C. Melchers), requesting confirmation that the service fees paid by C. Melchers to its foreign affiliates in consideration for services performed outside the Philippines are considered as income sourced outside of the Philippines and therefore shall not be subject to Philippine income tax, expanded withholding tax and value-added tax, and that C. Melchers be allowed to claim such service fees as deduction for income tax purposes, pursuant to the RP-Germany tax treaty. It is represented that C. Melchers is a branch of C. Melchers Gmbh, a foreign corporation licensed by the Securities and Exchange Commission to transact business in the Philippines under License No. A199903723, with business address at Unit 19-C, 19th Floor, Rufino Pacific Tower, 6784 Ayala Avenue cor. Herrera Street, Makati City; that it is engaged in the business of buying, selling, distributing, marketing at wholesale all kinds of goods, commodities, wares and merchandise of any kind in the Philippines or abroad; that Finesse Marketing-und Vertiebs Gmbh (Finesse) is a non-resident foreign corporation duly organized and existing under the laws of Germany with official address at Flughafendamm 9, 28199 Bremen, Germany; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated July 17, 2001 issued by the Securities and Exchange Commission; that on the 17th day of April 2001, C. Melchers and Finesse entered into a Service Agreement in order to support its business in the Philippines for a period of one (1) year, wherein Finesse will provide consultancy services to C. Melchers, such as but not limited to, canvassing of prospective buyers, promotion of the business and interest of C. Melchers, provision of advertising services, and the like in Germany, and for which Finesse will receive compensation in the form of "Service Fee" in the amount of Fifty Five Thousand US Dollars (US$55,000.00) per annum which shall cover the actual and direct costs and expenses incurred by Finesse in providing the services to C. Melchers; and that all of the foregoing services shall be performed in its home office in Germany. In reply, based on the representation that the services to be rendered by Finesse shall be performed entirely in Germany, then the RP-Germany 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 ) The fees to be paid by C. Melchers to Finesse are considered income derived from sources outside the Philippines, which shall be governed by Section 28(B)(1), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: "SEC 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(B) Tax on Non-resident 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 (33%); and effective January 1, 2002 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied). "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" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines so that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefore are taxable in the Philippines. However, since the services to be rendered by Finesse to C. Melchers shall be performed entirely in Germany, the fees to be remitted by C. Melchers are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to the withholding tax. ( DA ITAD 86-02 dated May 9, 2002 ) As regards your opinion that the service fees to be paid by C. Melchers to Finesse qualify as deductible expense under Section 34(a)(1) of the Tax Code of 1997, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. ( DA-ITAD Ruling No . 38-02 dated March 14, 2002 ) HAaECD This ruling is issued based on 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