ITAD Ruling No. 031-03

February 13, 2003 ITAD RULING NO. 031-03 Sec. 28 & 42, NIRC BIR Ruling No. DA-ITAD 166-02 Sycip Gorres Velayo & Co. 6th Floor Ayala Life-FGU cor. Biliran Road Cebu Business Park, Cebu City Attention: Atty. Lauris Dela Pea Tax and Business Advisory Gentlemen : This refers to your tax treaty application dated December 2, 2002, on behalf of your client, Taiyo Yuden (Philippines), Inc. (TYPI), requesting confirmation that the gross amount of commission remittances made by TYPI to Sun Electronics Co., Ltd. (SECL) are not subject to the Philippine income tax, pursuant to Section 28(B)(1) of the Tax Code of 1997 and Articles 5 & 7 of the RP-Japan tax treaty. aSTAcH It is represented that SECL is a corporation duly organized and existing under the laws of Japan with office address at NSN Bldg., 4-20, 1-Chome, Nishiki-cho, Tachikawa City, Tokyo, Japan; 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 August 19, 2002 issued by the Securities and Exchange Commission; that TYPI is a corporation duly organized and existing under the laws of the Philippines, with office address at Mactan Economic Zone, Lapu-Lapu City, Cebu; that SECL and TYPI entered into a Sales Promotion Agreement dated April 1, 2002, whereby TYPI agrees to pay SECL commission at the rate of one percent (1%) of the sales amount obtained by the promotion of the latter, in consideration for the promotional activities to be conducted by SECL exclusively in Japan, which shall include the following services: (1) Follow-up design specifications; (2) Responsive measures in case of occurrence of quality problems; (3) Approval of new products, sales promotion and activities; (4) Gathering market information; and (5) Sales cooperation and activities to accommodate other individual requests of TYPI. In reply, based on the representation that the services to be rendered by SECL shall be performed entirely in Japan, then the RP-Japan 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 TYPI to SECL 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 such that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor are taxable in the Philippines. However, since the services to be rendered by SECL to TYPI shall be performed entirely in Japan, the fees to be rendered by TYPI are considered income derived from sources outside the Philippines. In view of all of the foregoing, the fees to be remitted by TYPI to SECL 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) 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