ITAD Ruling No. 063-03

April 15, 2003 ITAD RULING NO. 063-03 Secs 28 & 42, NIRC BIR Ruling No. ITAD-166-02 SGV & Co. 6F Ayala Life-FGU Center Mindanao Avenue cor Biliran Road Cebu Business Park, Cebu City Attention: Lauris de la Pea Tax and Business Advisory This refers to your letter dated February 26, 2003 on behalf of your client T & H Furnishing Industries, Inc., (THF) requesting confirmation that the gross amount of sales commission remitted by THF to Tsuneishi Forestry Construction Co., Ltd. (TFC) is not subject to Philippine income tax, pursuant to Section 28(B)(1) of the 1997 Tax Code and Articles 5 and 7 of the Philippines-Japan tax treaty. It is represented that TFC is a corporation organized and existing under the laws of Japan with principal office address at 1471-8 Urasaki-cho, Onomichi-City Hiroshima-Pref, Japan; that TFC is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated October 23, 2002; that THF, on the other hand, is a corporation organized and existing under Philippine laws with principal office at Lot No. 6A- Block 7 Phase 3, Mactan Economic Zone II, SEPZ, Basak, Lapulapu City, Philippines; that on September 2, 2002, a Sales Promotion and Marketing Contract (the Contract) was executed by and between THF and TFC so that TFC may expand the international market of the products manufactured by THF; that upon the request of THF, TFC shall conduct active sales operations directed at consumers of the international market, especially for those of the Japanese market; that in consideration, THF agrees to pay an annual commission for the sales operations of TFC at the rate of five percent (5%) of the total sales attributed to the said operations and sales incentive payment if the sales goals set by THF are achieved; that the Contract shall include the following services: (1) Promotion and marketing of the products of THF exclusively in Japan or other countries other than the Philippines which THF may advise TFC from time to time, (2) Quality assurance and customer service, (3) Collect relevant market information, and (4) Other appropriate business operations upon special request by THF; that the Contract is effective from September 1, 2002 through August 31, 2003 and, unless either party has any doubtful points, shall automatically be extended for one (1) year. In reply, please be informed that inasmuch as it has been represented that the promotion and marketing activities by TFC are to be performed exclusively in Japan and in countries other than the Philippines, then the Philippines-Japan tax treaty does not apply as the herein transaction does not result in a case of double taxation for which a tax treaty relief is sought. ( BIR Ruling No. ITAD-166-02 dated September 23, 2002 ) Instead, the instant case is governed by Section 28(B)(1) in relation to Section 42(A)(3) of the National Internal Revenue Code which provides, viz: "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) and (d): 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) CcAIDa "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" Under the afore-cited 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 TFC to THF under the said Sales Promotion and Marketing Contract are rendered outside the Philippines, the payments by THF to TFC are considered income derived from sources outside the Philippines. In view thereof, this Office is of the opinion as it hereby holds that the payments of THF to TFC are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to withholding tax, pursuant to Section 28(B)(1) of the 1997 Tax Code. ( BIR Ruling No. DA-ITAD-166-02 dated September 23, 2002 ) 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service