ITAD Ruling No. 043-04

May 3, 2004 ITAD RULING NO. 043-04 Section 23 (F), 28 (B) (1), 42 (C) (3) & 108 (A) of the Tax Code of 1997 BIR Ruling Nos. DA-ITAD 38-02, 136-03 & 185-03 Bernaldo Mirador Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue corner H.V. Dela Costa Street, Makati City 1200 Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated September 10, 2003, on behalf of Center for Training and Development, Inc. (CTDI), requesting for confirmation of your opinion that the service fees paid by CTDI to The Point of Contact Communications (Services) Ltd., (TPOC) in consideration for the services performed outside the Philippines are considered as income sourced outside of the Philippines, and therefore, not subject to Philippine income tax, expanded withholding tax, and value-added tax (VAT), and that CTDI shall be allowed to claim such service fees as deduction for income tax purposes. It is represented that CTDI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at Unit 1809 Cityland Condominium 10-Tower 1, 6815 Ayala Avenue corner Dela Costa Street, Makati City; that it is registered with the Securities and Exchange Commission (SEC) under Reg. No. AS094-006299; that it is engaged in providing, rendering, conducting, and furnishing training and development and management education, corporate communications and research, research and development studies, business and management advisory services, and such other related activities to various clients, whether corporations, partnerships, organizations, institutions, public and private, domestic or foreign, and/or individuals; that TPOC is a foreign corporation duly organized and existing under the laws of Cyprus, with principal address at 51 Eleftheriou Venizelou, Kyriakou court, Suite 202-204, 8021 Paphos, Cyprus; that it is an international company engaged in the business of manpower recruitment for various clients worldwide; that the recruitment process takes place outside the Philippines; that it has no permanent establishment in the Philippines; that it is not registered as a corporation or as a partnership licensed to do business in the Philippines per SEC Certification dated September 9, 2003; and that in August 2003, CTDI and TPOC entered into a Memorandum of Agreement wherein TPOC shall provide the following services abroad. a) Soliciting skilled personnel outside the Philippines with expertise in telecommunications specifically in the field of information and communications technology b) Conducting interviews and pre-screening to shortlist the candidates with adequate know-how, competence, skill and expertise in telecommunications c) Negotiating the terms and conditions of the employment of the expatriate, and d) Sending the ones pre-selected to the Philippines for CTDI's projects with clients. In reply, please be informed of the following provisions of the Tax Code of 1997: "SEC. 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 "SEC. 28. Rates of Income Tax on Foreign Corporations. 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%). xxx xxx xxx "SEC. 42. Income from Sources Within the Philippines . xxx xxx xxx "(C) Gross Income From Sources Without the Philippines . The following items of gross income shall be treated as income from sources without the Philippines : xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines; xxx xxx xxx" Under the aforecited provisions, a nonresident foreign corporation is taxable only on income derived from sources within the Philippines so that if a nonresident foreign corporation furnishes and performs services in the Philippines, the service fees therefrom are taxable in the Philippines. Considering that the services of TPOC to CTDI under Memorandum of Agreement are rendered outside the Philippines, the payments by CTDI to TPOC are considered income derived from sources outside the Philippines. ( BIR Ruling No. DA-ITAD 185-03 dated November 28, 2003 ) In view thereof, this Office is of the opinion as it hereby holds that payments of CTDI to TPOC pursuant to the Memorandum of Agreement are considered income derived from sources outside the Philippines pursuant to Section 23(F) in relation to Section 42(C)(3) of the Tax Code of 1997 and are, therefore, not subject to Philippine income tax under Section 28(B)(1) of the said Code. Moreover, Section 108(A) of the Tax Code of 1997 states: "SEC. 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, . . . . (Emphasis supplied)" Inasmuch as the services are performed outside of the Philippines, the service fees are not subject to the 10% value added tax ( BIR Ruling No. DA-ITAD 136-03 dated August 29, 2003 ) DaCEIc As regards your opinion that the service fees paid by CTDI to TPOC 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. ( BIR Ruling No. DA-ITAD 38-02 dated March 14, 2002 ) This ruling is issued based on the facts as represented. However, if upon investigation is 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