ITAD Ruling No. 066-05

June 29, 2005 ITAD RULING NO. 066-05 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD 143-04 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated February 24, 2005 requesting our opinion on the tax treatment of service fee to be paid by Samsung Electronic Philippines Manufacturing Corporation (Samsung Philippines) to Samsung Europe PLC (Samsung UK) . It is represented that Samsung UK is a non-resident foreign corporation, organized and existing under the laws of the United Kingdom of Great Britain and Northern Ireland (United Kingdom), with principal office at Great West House, Great West Road, Brentford, Middlesex, England, United Kingdom; that Samsung UK 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 February 16, 2005 issued by the Securities and Exchange Commission; that, on the other hand, Samsung Philippines is a domestic corporation, organized and existing under the laws of the Philippines, with principal office at Block 6, Calamba Premiere International Park, Barangay Batino, Calamba City, Laguna, Philippines; that Samsung Philippines is engaged in the design, manufacture, and sale of electronic products like optical disk drive products and their components and parts, generally for export; that Samsung Philippines is registered with the Philippine Economic Zone Authority, with Registration Certificate No. 01-011 dated February 9, 2001; that on December 1, 2002, Samsung UK and Samsung Philippines entered into a Netting Services Agreement, whereby Samsung UK , through its Department, Samsung Europe Finance Team, will provide Samsung Philippines the following netting management services: (a) Operate two "netting cycles" per month (i.e., on the 15th and on the 30th of each month) to ensure the timely settlement of Samsung Philippines' intercompany invoices. The term "netting cycles" pertains to the netting schedule of uploading of invoices due for collection from the other Samsung companies (accounts receivable), and deletion request to be sent to the other Samsung companies (accounts payable); (b) Monitor receiving and processing of data provided to the netting centre by Samsung Philippines who upload invoices in the netting centre, in which such data sets out the invoice amounts to be paid by Samsung Philippines and identifies the other Samsung companies by whom Samsung Philippines is expecting to receive payment from, all in accordance with the Netting Cycle; (c) Produce and provide periodic reports setting out, among other things, approximate net currency position in the currency, which Samsung Philippines has designated as the currency in which netting calculations relating to it should be reported; (d) Assist Samsung Philippines on issues arising from requests made by it for invoices to be deleted; (e) Input currency "Offer" (pay) and or Ask (receive) instructions for foreign exchange transactions; (f) Produce and provide a final report setting out the payment positions in the nominated currencies; (g) Instruct Citibank NA, London (the CitiNetting provider where, through its website, Samsung Philippines and other Samsung companies upload their invoices in) to effect payments in accordance with instructions given pursuant to the Netting Cycle; (h) Responsibility for the supervision, management and control of the Netting Cycle and of Samsung Philippines' use of the CitiNetting services; and (i) Maintain with Citibank NA, London all accounts necessary in the opinion of the Bank to enable the Bank to perform the CitiNetting System; that per Certification dated June 1, 2005 and issued by Mr. Jeong Ho Park, Vice President of Samsung Philippines , Samsung UK will perform the netting management services within its premises in the United Kingdom through the Citibank website, and that it will not send any personnel in the Philippines to perform these services; and that in consideration, Samsung Philippines shall pay Samsung UK a service fee (charges) equal to 106% of the appropriate proportion of the costs and expenses borne or incurred by Samsung UK in carrying out the services, where 6% of the costs and expenses represents Samsung UK's mark-up for the services. 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 Samsung UK , 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 Samsung UK will perform for the benefit of Samsung Philippines under the Netting Services Agreement will be done entirely outside the Philippines, particularly, within Samsung UK's premises in the United Kingdom, the service fee to be paid by Samsung Philippines to Samsung UK , 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 by Samsung Philippines to Samsung UK is therefore exempt from VAT. (BIR Ruling No. DA-ITAD 143-04 dated December 16, 2004) IDTSEH 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