ITAD Ruling No. 084-04

August 4, 2004 ITAD RULING NO. 084-04 Article 5 & 8, Philippines-United States tax treaty Sec. 28 (B) (1), Tax Code of 1997 BIR Ruling No. ITAD-59-98 Atty. Nestor P. Nuez & Associates 8/F, CIF Towers, J. Luna Ave., cor R. Humabon Ave. North Reclamation Area, Cebu City Attention: Atty. Nestor P. Nuez Gentlemen : This refers to your application for relief from double taxation dated May 14, 2004, on behalf of your client CP Kelco Philippines Inc. (CP Kelco-Phils), requesting confirmation that the payment of service fees to CP Kelco US, Inc. (CP Kelco-US), a US-based company, is not subject to income tax, withholding tax and value-added tax (VAT), pursuant to the Philippines-United States tax treaty. It is represented that CP Kelco-US is a nonresident foreign corporation organized and existing under the laws of the State of Delaware, USA with principal office at 311 S. Wacker Drive, Suite 3700, Chicago, Illinois 60606, USA; that it is not registered either as a corporation or as a partnership licensed to engage in trade or business in the Philippines per certification issued by the Securities and Exchange Commission dated December 17, 2003; that CP Kelco-Phil is a corporation duly organized and existing under the laws of the Philippines with principal office at Barangay Abugon, Sibonga, Cebu; that on January 1, 2004, both CP Kelco-Phil and CP Kelco-US entered and executed an Administrative Support Services Agreement (Agreement), whereby the former will provide administrative and operational advisory support services to the latter in connection with the manufacturing, marketing, and sale of biogum and food gum related products, including but not limited to the areas of operations, information systems, finance, treasury, legal, human resources, insurance and risk management, general and strategic management and administration and other services; that all of the said services are to be performed entirely in the United States, per certification issued by CP Kelco-Phil dated May 14, 2004; that for the said services rendered by CP Kelco-US, CP Kelco-Phil will pay them the amount of basic fee payable annually and shall be based upon a pro-rata share of the cost of providing the services plus 5% (which shall include direct and indirect overhead costs in rendering services); and that the Agreement will take effect on January 1, 2004 and shall be automatically renewed annually and may be terminated at any time upon the mutual agreement of both parties. In reply, please be informed that pursuant Section 28(B)(1) of the Tax Code of 1997, which reads: "(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): 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%). Based on the above-cited, to be subject to Philippine income tax, such income of a nonresident foreign corporation not engaged in trade or business in the Philippines must have been derived from sources within the Philippines. If the services are performed within the Philippines, such income is subject to a final tax of 32%, based on the gross income of the said nonresident foreign corporation, in accordance with the above-cited provision of the Tax Code. Thus, for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from an activity within the Philippines. ( Commissioner vs. BOAC & CTA , GR Nos. 65773-74, April 30, 1987) Since the subject services rendered by CP Kelco-US are done entirely outside the territorial jurisdiction of the Philippines, the payment of service fees paid by CP Kelco-Phil to CP Kelco-US are considered as income from without the Philippines pursuant to Section 23(F) of the Tax Code of 1997. Furthermore, Article 8 in relation to Article 5 of the existing treaty between the Philippines and the United States provides, viz : "Article 8 Business Profits "1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in the other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. "xxx xxx xxx" "Article 5 Permanent Establishment "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting State engages in a trade or business. "2. The term "fixed place of business" includes but is not limited to: "xxx xxx xxx" "(j) The furnishing of services, including consultancy services, by a resident of one of the Contracting State through employees or other personnel, provided activities of that nature continue (for the same or connected project) within the other Contracting State for a period or periods aggregating more than 183 days. DcAEIS "xxx xxx xxx" In view thereof, this Office is of the opinion and so holds that since the services covered by the subject Administrative Support Services Agreement are to be rendered by CP Kelco-US outside the Philippines, and are considered income from sources without the Philippines, the payments made by CP Kelco-Phil to CP Kelco-US for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the tax Code of 1997. ( BIR Ruling No. ITAD-59-98 dated May 21, 1998 ) Finally, the administrative support services provided by CP Kelco-US to CP Kelco-Phil under the Agreement which are rendered outside the Philippines are not subject to the 10% VAT imposed under Section 108 of the Tax Code of 1997. 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