ITAD Ruling No. 105-05

August 24, 2005 ITAD RULING NO. 105-05 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 90-04 Extramind Consulting, Inc. 7th Floor IBM Plaza Building Eastwood Cyberpark, E. Rodriguez Jr. Avenue Quezon City Attention: Mr. Mario R. Enriquez Managing Director Gentlemen : This refers to your letter dated July 1, 2005 on behalf of your client, Kuroda Electric Philippines, Inc. (Kuroda, for brevity), requesting exemption from Philippine income tax and consequently from withholding tax the service commission to be paid by Kuroda to Sharp Electronic Components (Korea) Corporation (SECK), pursuant to Article 7 of the Philippines-Korea tax treaty. It is represented that SECK is a nonresident foreign corporation organized and existing under the laws of Korea with principal office at Room 501, ILSIN Building, 541 Dohwa-Dong, Mapo-ku, Seoul Korea; that SECK 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 of Corporation/Partnership issued by the Securities and Exchange Commission on May 3, 2005; that SECK is engaged in the sales and manufacturing of electronic and electrical components; that Kuroda is a domestic company organized and existing under the laws of the Philippines with principal office located at Lot 4, Block 3 Binary Road, Cabuyao, Laguna; that Kuroda is engaged in the making, manufacturing, supplying, and/or providing electronic parts and/or components to export oriented enterprises/industries in the Philippines; that SECK has a CLIENT 1 that transferred its manufacturing and procurement functions to a SUBCONTRACTOR in the Philippines; that Kuroda is also selling a PRODUCT (HPD-210 or DVD pick-up unit) to the Philippine SUBCONTRACTOR; that SECK agreed to help Kuroda in the introduction of the product to the principal of the Philippine SUBCONTRACTOR in Korea who is also the CLIENT of SECK; that on January 1, 2005, Kuroda and SECK entered into a Service Commission Agreement (Agreement) whereby the latter will render some or all of the following services to the CLIENT in Korea in support of sales by Kuroda to SUBCONTRACTORS: a) setting out marketing plans and initiating contacts with the CLIENT; b) submitting samples of the PRODUCT 2 to the CLIENT; ISTDAH c) carrying out technical negotiations with the CLIENT on subjects such specification, inspection and warranty; d) providing liaison services to support Kuroda's sales to SUBCONTRACTORS. 3 and that in consideration of the above services rendered by SECK, Kuroda shall pay SECK a service commission regarding the business transaction between Kuroda and the Subcontractors of zero-point-five-percent (0.5%) of the net sale amount of the product to the subcontractors on a tri-monthly 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." "xxx xxx xxx" According to Section 23(F),a foreign corporation like SECK 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 Korea, the service commission to be paid therefor by Kuroda to SECK, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) Similarly, the subject service commission is 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. HEITAD 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, service commission in consideration for said services to be paid by Kuroda to SECK is 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 Footnotes 1. "CLIENT" means TOSHIBA SAMSUNG STORAGE TECHNOLOGY CORPORATION (TSST) whose principal places of business or R&D in Korea and have any related companies or designated subcontractors who have manufacturing and purchasing functions in one or more place(s) in the Philippines. 2. "PRODUCT" means HPD-210 (DVD Pick-up unit). 3. "SUBCONTRACTORS" means SHIN HEUNG ELECTRO-DIGITAL, INC. and/or CALAMBA SHINEI INDUSTRY PHILIPPINES CORPORATION, which are the designated company which assemble(s) for TSST.