ITAD Ruling No. 097-05

September 2, 2005 ITAD RULING NO. 097-05 Sec. 23 (F) in relation to Sec. 42 (A) (3) of the Tax Code of 1997 BIR Ruling No. DA-ITAD 90-04 C.L. Manabat & Co . Certified Public Accountants And Management Consultants 6th Flr. Salamin Building 197 Salcedo St., Legaspi Village Makati City Attention: Atty. Domingo A. Lagundi, Jr. Manager, Tax and Corporate Gentlemen : This refers to your letter dated February 7, 2005, on behalf of your client, Forever Living.com, L.L. C. (FLC) requesting confirmation of your opinion that the payments by Forever Living Products Philippines, Inc. (FLPPI) to FLC for services rendered are in the nature of business profits and therefore exempt from Philippine income tax pursuant to Article 8 of the Philippines-United States of America tax treaty, Section 28(B) in relation to Section 42(C)(3) and Section 57(A) of the National Internal Revenue Code of 1997 (Tax Code), BIR Ruling No. DA-145-97 and the Court of Tax Appeals Case No. 2872, and final withholding of value-added tax pursuant to Section 3 of the Revenue Regulations No. 8-02. It is represented that FLC is a nonresident foreign corporation duly organized and existing under the laws of the State of Arizona, United States of America with principal office address at 7501 East McCormick Parkway, Scottsdale, Arizona 85258, that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission on December 8, 2004; that FLPPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at 4th Floor Greentop Condominium, Ortigas Avenue, San Juan, Metro Manila; that prior to September of 2004, FLC authorized FLPPI to have access to its AS400, a computer program capable of computing commissions earned by distributors of FLC and its affiliates; that in a letter dated 5 January, 2005, an alleged agreement is confirmed to exist between FLC, represented by its President Rex Maughan, and FLPPI, represented by its Managing Director Natalia Golez, which states that FLC has provided and shall continue to provide for the use of its AS400 in the US by FLPPI for the purpose of processing and computing the commission earned by distributors of FLPPI under the following terms: 1. The use of such corresponding software by FLPPI in the Philippines shall be limited to the ordinary encoding of data without any monetary considerations. 2. Hosting fees shall be based on the number of users and the amount of disk space that FLPPI's application programming and data require, which allows five (5) users and 100 megabytes of disk space for a minimum of $10.00 each. Each additional megabyte shall be billed at 25 cents each. The number of users and storage requirements shall be calculated by FLPPI at the end of each month and FLPPI will be billed accordingly. that on April 8, 2005, a Certification was issued by Natalia Golez in her capacity as Managing Director of FLPPI which certifies that FLPPI agreed with FLC verbally on the use of the AS400 system and that the January 5, 2005 letter serves as their formal agreement (Agreement); that pursuant to that Agreement, the encoded data shall be processed, and the resulting amounts of commissions shall be computed using AS400 in the US; that only encoding of required data into AS400 is done in the Philippines; that these data are transmitted to the US via the internet; that although users employed by the FLPPI in the Philippines shall encode the data, only FLC employees could enter commands into AS400 necessary to compute for the commissions; and that the processing and computing is done in the US by FLC using AS400. 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 FLC 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" Such being the case and since the subject services will be carried out entirely in the United States, service fees paid therefor by FLC to FLPPI, being income derived from sources outside 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. AaITCS 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 hosting fees in consideration for said services to be paid by FLPPI to FLC are, therefore, exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service