ITAD Ruling No. 063-05

June 27, 2005 ITAD RULING NO. 063-05 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD 143-04 Aranas Consunji Barleta Unit 106, Ground Floor, Le Metropole Building 326 Tordesillas corner De La Costa Streets Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated April 18, 2005 requesting our opinion on the tax treatment of service fee to be paid by Andes Sumitronics, Inc. (formerly, Andes Ionics, Inc.) to Sumitronics Asia Pte., Ltd. (formerly, Sumitronics Asia Holding Pte., Ltd.) . It is represented that Sumitronics Asia Pte. Ltd. (Sumitronics Asia) is a non-resident foreign corporation, organized and existing under the laws of Singapore, with principal office at 31 International Business Park #05-08/10, Creative Resource Building, Singapore 609921, as confirmed by its Memorandum and Articles of Association dated December 15, 1995; that Sumitronics Asia is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated April 25, 2005 issued by the Securities and Exchange Commission; that Sumitronics Asia is engaged in business as an investment company and for this purpose, it acquires and holds either for itself or for any company or for any government, sovereign ruler, commissioners, public body or authority, nominee shares, stocks, debenture, debenture stock, bonds, notes, obligations, and securities issued or guaranteed by that company, and debenture, debenture stock, bonds, notes, obligations, and securities issued or guaranteed by that government, sovereign ruler, commissioners, public body or authority; that, on the other hand, Andes Sumitronics, Inc. (Andes Sumitronics) is a domestic corporation, organized and existing under the laws of the Philippines, with principal office at #3 Mountain Drive, Light Industry Science Park II, Barangay La Mesa, Calamba City, Laguna, Philippines; that Andes Sumitronics is engaged in the manufacture, assembly, trade, distribution, and sale on a wholesale basis, electronic parts and related products; that on January 1, 2004, Sumitronics Asia (then, Sumitronics Asia Holding Pte., Ltd.) and Andes Sumitronics entered into a Marketing Support Service Agreement, whereby Sumitronics Asia will provide Andes Sumitronics the following services: 1. promotion or marketing of Andes Sumitronics' Products in Singapore and in other countries where Sumitronics Asia have clients, which includes making regular visits and representations with the relevant corporate officers of these clients; 2. assisting Andes Sumitronics in developing a marketing strategy and specific marketing activities outside the Philippines; and 3. undertaking other incidental marketing activities as may be requested by Andes Sumitronics to promote its business in other countries; that the above services will be performed totally outside the Philippines, particularly, in Singapore and in other Southeast Asian countries, and will not involve any transfer by Sumitronics Asia to Andes Sumitronics of technology, know-how, or other intellectual property rights; that the Andes Sumitronics' Products include but are not limited to (1) Epson Products (hard disk drives, etc.), (2) Hitachi Products (motherboards, etc.), (3) Toshiba Products (motherboards, etc.), and (4) Panasonic Products (flex cables, etc.); that in consideration, Andes Sumitronics will pay Sumitronics Asia a service fee amounting to US$65,454.54 for the initial period of one (1) year of the Agreement, payable on December 31, 2004; and that the Agreement will be renewed automatically for successive periods of one (1) year, and the service fees payable thereon will be agreed upon by the parties. In reply, please be informed that Section 23(F) of the National Internal Revenue Code of 1997 (Tax Code) provides: "Section 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." Section 23(F) states that a foreign corporation like Sumitronics Asia , whether engaged in trade or business in the Philippines or not, is taxable only on income derived from sources within the Philippines. In the case of income from furnishing services, such income is considered derived from sources within the Philippines , and therefore taxable, only if the services are performed in the Philippines, under Section 42(A)(3) of the Tax Code: "Section 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" Accordingly, since the services which Sumitronics Asia will perform for the benefit of Andes Sumitronics under the Marketing Support Service Agreement will be done entirely outside the Philippines, the service fee to be paid therefor by Andes Sumitronics to Sumitronics Asia , being income not derived from sources within the Philippines, is therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 143-04 dated December 16, 2004) Similarly, the service fee is not subject to ten percent (10%) value-added tax (VAT) imposed under Section 108(A) of the Tax Code: "Section 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 . . . " Section 108(A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will be done entirely outside the Philippines, the service fee to be paid therefor by Andes Sumitronics to Sumitronics Asia is therefore exempt from VAT. (BIR Ruling No. DA-ITAD 143-04 dated December 16, 2004) AIECSD 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.) JAMES H. ROLDAN Assistant Commissioner, Legal Service