ITAD Ruling No. 086-02

May 9, 2002 ITAD RULING NO. 086-02 RP-Singapore Tax Treaty Art. 7 Tax Code of 1997 Section 28 (B) (1) and Section 42 (A) (4) BIR Ruling No. 036-90 Sycip, Salazar, Hernandez & Gatmaitan Sycip Law-All Asia Capital Centre 105 Paseo de Roxas 1226 Makati City Attention: Atty. Ma. Elizabeth P. Loriega and Atty. Catherine Ria B. Salabit Gentlemen : This refers to your letter dated August 3, 2000, requesting confirmation of your opinion that the fees to be paid by your client, Group Asia Face to Face, Inc. (Group Asia Phils.), to Group Asia Face to Face Experiential Marketing (Pte) Ltd. (Group Asia Singapore) for offshore design and support services shall not be subject to Philippine income tax. It is represented that Group Asia Phils., a domestic advertising company, is a corporation organized and existing under the laws of the Philippines with office address at 5th Floor, ALSCO Building, 116 Herrera St. Makati City; that Group Asia Singapore is a corporation organized and existing under the laws of Singapore with offices at 113 New Bridge Road, No. 16-09 Chinatown Point, Singapore; that it is not engaged in business in the Philippines; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as per certification dated March 16, 2001 issued by the Securities and Exchange Commission; that a Service Agreement dated October 4, 2000 was entered into by and between Group Asia Phils. and Group Asia Singapore, whereby Group Asia Singapore shall render design and support services to Group Asia Philippines; that under the said Agreement, Group Asia Singapore will render the following design and support services, to wit: a) the design of equipment to be utilized by Group Asia Phils. in promotional campaigns (e.g. vehicles, stages, sound and light system,); b) design of promotional services; c) design of audit and other administrative or control structures of Group Asia Phils.; d) management accounting support services (e.g. services costing, profit and loss projections, cash flow estimates, etc.) e) consumer modeling services, including psychographic modeling and spiral dynamics; and f) regional coordination services, including provision of liaison services between Group Asia Phils. and its regional affiliates; that all the foregoing services shall be performed by Group Asia Singapore in Singapore using facilities located in Singapore; and that Group Asia Phils. shall pay Group Asia Singapore an amount equal to 50% of the former's revenues (i.e., gross amount of the invoices to clients less direct costs) for the first twelve months of commercial operations and 25% of the same revenue thereafter; and that Group Asia Phils. shall also reimburse Group Asia Singapore for all out-of-pocket expenses incurred by the latter in connection with the contracted services. IDESTH In reply, inasmuch as it has been the representation that the services to be rendered by Group Asia Singapore shall be performed entirely in Singapore, then the fees to be paid to it by Group Asia Phils. are considered income derived from sources outside the Philippines and, therefore, shall be governed by Section 28(B), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(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%) (Emphasis supplied) "xxx xxx xxx. "SEC. 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" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines. Accordingly, if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor are taxable in the Philippines. Since the design and support services to be rendered by Group Asia Singapore to Group Asia Phils. shall be performed entirely in Singapore, the fees to be remitted by Group Asia Phils. are considered income derived from sources outside the Philippines. In view of all of the foregoing, the fees to be remitted by Group Asia Phils. to Group Asia Singapore are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to the withholding tax. (BIR Ruling No. 036-90) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. STEacI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service