ITAD Ruling No. 090-04

August 24, 2004 ITAD RULING NO. 090-04 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 56-04 Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22 Floor Philamlife Tower 8767 Paseo de Roxas Street Makati City Attention: Atty. Francisco G. Tagao Principal Mr. Ronald L. Carreon Director Tax and Corporate Services Gentlemen : This refers to your letter dated July 9, 2004 requesting confirmation that the service fees to be paid by Inter-National Starch & Chemical Co.,Inc. (NSC Philippines) to National Starch & Chemical (Singapore) Pte.,Ltd. (NSC Singapore) 1 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 NSC Singapore is a foreign company organized and existing under the laws of Singapore with principal office at 10 Science Park Road, Nos. 04-21 The Alpha, Singapore Science Park II, Singapore 117684, as confirmed by the Certificate of Incorporation of Private Company issued by the Register of Companies on November 1, 1982; that NSC 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 June 23, 2004; that NSC Philippines ,on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at 2 Perfecto Drive, Sta. Maria Industrial Estate, Bagumbayan, Taguig, Metro Manila, Philippines; that NSC Philippines and NSC Singapore are both in the business of production and sales of adhesives, resins, starch, and other similar products; that, on April 26, 1999, NSC Philippines and NSC Singapore entered into a Service Level Agreement (Agreement) whereby NSC Singapore agreed to provide NSC Philippines the following services, all done entirely in Singapore: 1. Human Resources Support advice relating to payroll, recruitment, contracts of employment, labor laws, trade union relations, unfair dismissal (or similar) claims, employment of expatriates, and other associated matters; 2. Engineering Expertise and Project Management assistance in implementing good manufacturing practices and in planning and outsourcing plant equipment resources; 3. Finance and Administration Support advice and assistance on cost and investment accounting, financial and management reporting, and business analysis; 4. Purchasing Support advice and assistance on the negotiations of contracts for the purchase of key materials; 5. Marketing Support market intelligence, newsletters, and advice on new product launches; and 6. Other Services other ancillary services like advice relating to public affairs and public relations; that the provision of the subject services will not involve the provision or licensing by NSC Singapore of any know-how to NSC Philippines ;that the Agreement, which retroactively took effect on January 1, 1998, shall continue from year to year unless terminated by either party; that, in consideration for said services, NSC Philippines shall pay NSC Singapore ,in US dollars and on a quarterly basis, service fees calculated based on the data sheet or spreadsheet prepared by NSC Singapore as of December 1 of a particular year, reflecting therein the projected charges of each person who provides such services and the basis of allocation for such charges; that for 1998, the service fees due and payable to NSC Singapore was US$ 254,000; and that on May 11, 2004, NSC Philippines and NSC Singapore have agreed that the Agreement shall expire on December 31, 2004, but shall be subject to renewal for another three years if the parties will agree. 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 NSC Singapore 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; "xxx xxx xxx Accordingly, since the subject services will be carried out entirely in Singapore, service fees therefor, including those for 1998 amounting to US$ 254,000, to be paid by NSC Philippines to NSC Singapore ,being income not derived from sources within the Philippines by a foreign corporation, 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 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 ..." 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, service fees therefor, including those for 1998 amounting to US$254,000, to be paid by NSC Philippines to NSC 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. TaDCEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service Footnotes 1. Formerly, National Starch & Chemical (Asia) Pte.,Ltd .,and, originally, Staybond Adhesives (Pte.) Ltd .