ITAD Ruling No. 079-05

August 5, 2005 ITAD RULING NO. 079-05 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 90-04 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Sts. Salcedo Village, Makati City Attention: Jesus Clint O. Aranas Gentlemen : This refers to your letter dated April 18, 2005 on behalf of your client, Andes Sumitronics, Inc. (formerly, Andes Ionics, Inc.) (ASI, for brevity), requesting confirmation that the management consultancy and marketing support service fees to be directly paid by ASI to Andes Electric Co., Ltd. (AECL) for non-technical offshore services are (a) not royalty payments subject to tax on royalties under the Philippines-Japan tax treaty; (b) exempt from income and withholding taxes, pursuant to Section 28(B)(1) in relation to Section 42(A)(3) of the 1997 Tax Code and Article 7 of the Philippines-Japan tax treaty; and (c) not subject to the value-added tax (VAT). It is represented that AECL is a nonresident foreign corporation organized and existing under the laws of Japan with principal office at 2-672 Choshichiyachi, Ichikawa-machi, Hachinohe-city, Aomori, Japan per Certification issued by the Regional Legal Affairs Bureau in Amori on April 12, 2005; that AECL is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 25, 2005; that ASI, on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office located at #3 Mountain Drive, Light Industry Science Park II, Brgy. La Mesa, Calamba City, Laguna; that both AECL and ASI are engaged in the business of manufacturing and selling of electrical parts; that on January 1, 2004, AECL and ASI entered into a Management Consultancy and Marketing Support Service Agreement (Agreement); that under the said Agreement, AECL undertakes to render exclusively (i.e. to be performed entirely outside the Philippines) the following services offshore: a) Review of ASI's monthly financial reports and other management reports to identify the points to be improved; EAaHTI b) Assistance to ASI in developing its organization and creating its annual business plan; c) Provision of such other incidental advise as may be requested by ASI to improve the latter's management in general; d) Promotion or marketing the good(s) of ASI in Japan and other foreign clients of AECL, which includes making regular visits and representations with relevant corporate officers of such clients; e) Assistance to ASI in developing a marketing strategy and specific marketing activities outside the Philippines; and f) Such other incidental marketing activities as may be requested by ASI to promote the latter's business in other countries. that all the above services shall be performed outside the Philippines, primarily in Japan and other South East Asia Countries and shall not involve any transfer of technology, know-how or other intellectual property rights; and that for and in consideration of the undertaking of the abovementioned management consultancy and marketing services, ASI shall pay AECL a fixed annual fee of US$341,788.04. aDcHIS In reply, please be informed that Section 23(F) of the 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." "xxx xxx xxx" According to Section 23(F), a foreign corporation like AECL is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code below: "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; SCIAaT "xxx xxx xxx" Such being the case and since the subject services will be carried out entirely in Japan or in other South East Asia countries, management consultancy and marketing service fees paid therefor by ASI to AECL, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) Similarly, the subject fees are not subject to the ten percent (10%) VAT imposed under Section 108(A) of the Tax Code below: "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 . . ." "xxx xxx xxx" 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 not be performed in the Philippines, the management consultancy and marketing fees in consideration for said services to be paid by ASI to AECL are therefore exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) HcSETI 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