ITAD Ruling No. 026-03

January 30, 2003 ITAD RULING NO. 026-03 Sec. 28 & 42, NIRC BIR Ruling No. DA-ITAD 152-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: M.F.A. Balili Tax Division Gentlemen : This refers to your application for relief from double taxation dated November 25, 2002, on behalf of your client Dentsu Young & Rubicam Pte. Ltd. (DYR-Singapore), requesting confirmation of your opinion that the service fees/business profits payments to DYR-Singapore by Colgate Palmolive Philippines, Inc. (CP-Phils) in consideration of the services performed abroad are not subject to Philippine income tax. It is represented that DYR-Singapore is a corporation organized and existing under the laws of Singapore with business address at 300 Beach Road #36-05/06 The Concourse, Singapore; 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 December 2, 2002 issued by the Securities and Exchange Commission; that CP-Phils is a corporation organized and existing under the laws of the Philippines with business address at 1049 J.P. Rizal St., Makati City; that DYR-Singapore and CP-Phils entered into an Advertising Agency Services Agreement dated January 1, 2002, that under the agreement DYR-Singapore will perform, basically, the following services: 1. account management; 2. advertising and promotional services; 3. coordinating and production of all finished advertising materials; 4. coordinating work on professional advertising assignments 5. providing event marketing resources; and 6. monitoring and post evaluation of media performance; that all services under the agreement will be performed entirely in Singapore for which CP-Phils will pay DYR-Singapore an annual fee for providing the aforesaid services In reply, in view of the representation that the services to be rendered by DYR-Singapore in favor of CP-Phils shall be performed entirely in Singapore, then the RP-Singapore tax treaty will find no application as the activity 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 ). As such, the fees to be paid by CP-Phils to DYR-Singapore 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 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) "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. However, since the services to be rendered by DYR-Singapore to CP-Phils shall be performed entirely in Singapore, the fees to be remitted by CP-Phils are considered income by a non-resident foreign corporation derived from sources outside the Philippines. As such, the fees to be remitted by CP-Phils to DYR-Singapore are not subject to Philippine income tax and consequently to withholding tax. ( DA ITAD 86-02 dated May 9, 2002, DA ITAD 166-02 dated September 23, 2002 ) 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 ScTIAH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service