ITAD Ruling No. 080-04

August 5, 2004 ITAD RULING NO. 080-04 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 56-04 BIR Ruling No. DA-ITAD 80-04 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Avenue Makati City Attention: Ms. Mary Assumption Bautista-Villareal Principal, Tax Services Gentlemen : This refers to your letter dated May 7, 2004 requesting confirmation that service fees to be paid by Jardine Lloyd Thompson Insurance Brokers, Inc. (Jardine Philippines) to Jardine Lloyd Thompson Asia Pte., Ltd. (Jardine Singapore) under the Offshore Services Agreement between the parties are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code). It is represented that Jardine Singapore is a foreign company organized and existing under the laws of Singapore with principal office at 78 Shenton Way, Nos. 29-02, Singapore, as confirmed by the Certificate of Residence issued by the Inland Revenue Authority of Singapore on May 11, 2004; that Jardine Singapore 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 issued by the Securities and Exchange Commission on May 17, 2004; that Jardine Philippines, on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at 25th Floor, Philamlife Tower, 8767 Paseo de Roxas Avenue, Makati City, Philippines; that Jardine Philippines and Jardine Singapore are both engaged primarily in the insurance business; that, on January 1, 2004, Jardine Philippines and Jardine Singapore entered into an Offshore Services Agreement where Jardine Singapore agreed to provide Jardine Philippines the following offshore services, as requested by the latter: bespoke accounting and reporting system hosted and maintained on a server or servers outside the Philippines; remote assistance, technical support and advice on Jardine Philippines' IT (information technology) hardware and software, including, in particular, its bespoke broking management system; access to the Group's 1 intranet site for the Asian region and worldwide; assistance and advice on security checks and controls formulated by the Group which allow Jardine Philippines to ensure its compliance with Industry Best Practice; advice within the Asian region to assist Jardine Philippines in meeting its clients' needs for specialist risk covers; advice on Jardine Philippines' marketing and promotional activities and on its business to potential clients; advice on underwriting risks, risk surveys, loss control and claims settlement; advice on product development within the Asian region; advice on general economic trends and conditions, buyer demographics and profiles, and competition from substitute products around the wider Asian region; any other services as may be agreed from time to time between the parties; that all of the foregoing services shall be provided at Jardine Singapore's place of business in Singapore or such other place or places as Jardine Singapore may designate from time to time, except in the territory of the Philippines; and that, in consideration, Jardine Philippines shall pay Jardine Singapore fees for the above services, in Singapore dollars and on a quarterly basis. 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." According to Section 23(F), a foreign corporation like Jardine Singapore is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, it 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; "xxx xxx xxx" Applying the above provisions to the instant case, the subject fees to be paid Jardine Philippines to Jardine Singapore from the provisions of services all entirely outside the Philippines, are therefore exempt from Philippine income tax. ( BIR Ruling No. DA-ITAD 56-04 dated May 31, 2004 ) Similarly, the subject fees are not subject to 10 percent value-added tax (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. . . " Section 108(A) states that sale or exchange of services subject to VAT means "the performance of all kinds of services in the Philippines." In the instant case where the subject services will not be performed in the Philippines, fees to be paid in consideration thereof by Jardine Philippines to Jardine Singapore are therefore exempt from VAT. ( BIR Ruling No. DA-ITAD 56-04 dated May 31, 2004 ) 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 Footnotes 1. Jardine Lloyd Thompson Group plc (a company registered and incorporated in the United Kingdom) and its worldwide subsidiaries.