ITAD Ruling No. 108-05

September 21, 2005 ITAD RULING NO. 108-05 Sections 23 & 42, NIRC BIR Ruling No. DA-ITAD-084-02 Bureau Veritas Consumer Products Services (Phils.) Inc. 8439 South Super Hi-way West Marcelo Green Village, Paraaque City 1700 Attention: Jarence Minh A. Relloso Accounts & Finance Division Gentlemen : This refers to your letter dated April 6, 2005 requesting confirmation of your opinion that the service fees/business profits payments to Bureau Veritas Consumer Products Services, Inc. (BVCPS-US) by Bureau Veritas Consumer Products Services Philippines (BVCPS-Phils) in consideration of the services performed abroad are not subject to Philippine income tax. It is represented that BVCPS-US is a corporation organized and existing under the laws of United States of America (USA) having its head office at 244 Liberty Street, Brockton, MA, 02301, USA and registered in the State of Massachusetts under Tax ID No. 58-1660400; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated November 2, 2004 issued by the Securities and Exchange Commission; that BVCPS-Phils is a corporation organized and existing under the laws of the Philippines, with its head office address at 8439 South Super Hi-way West, Marcelo Green Village, Paraaque City; that BVCPS-US and BVCPS-Phils entered into a Bureau Veritas Consumer Products Services, Inc. Intercompany Service Agreement (Agreement) dated January 1, 2004; and that under the Agreement, BVCPS-US will perform services, deemed to be necessary to assist BVCPS-Phils in the performance of its business and promotion of products and services, which include but is not limited to the following: 1. Marketing, business development and management services; 2. Customer development assistance to sales personnel; 3. Assistance in client relations, client selection and client care; 4. Assistance in collecting overdue invoices; 5. Dispute resolution assistance; 6. Public relations; 7. Congresses and exhibition assistance; 8. Advertising and promotion of services; 9. Market surveys; 10. Information on trends, markets shares and competitive services 11. Survey on competition; 12. Executive management and analysis; 13. Technical research and consultation; 14. Quality assurance and management activities; 15. Divisional IT development and network activities, -IT department assistance, e-mail and technical support, website maintenance, supplies for keeping the computers updated and maintained; 16. Administrative support and services; 17. Controller's Group and Finance-assistance from the accounting department, support during audit process, tax assistance and planning; 18. Strategic planning assistance; 19. Internal research center services; and 20. Other services as agreed from time to time as being necessary. that the Agreement, which commenced to take effect on January 1, 2004, continued for an initial period of one year to December 31, 2004, and is renewable automatically for successive one year terms until terminated by BVCPS-US with at least six (6) months written notice prior to renewal date; and that all services under the Agreement will be performed entirely in the USA for which BVCPS-Phils will pay BVCPS-US in the months of April, July, October and December via wire transfer for providing the aforesaid services. In reply, please be informed that in view of the representation that the services to be rendered by BVCPS-US in favor of BVCPS-Phils shall be performed entirely in United States, the Philippines-United States tax treaty finds no application in the instant case as the activity does not result in a case of double taxation for which a tax treaty relief is sought. As such, the service fees to be paid by BVCPS-Phils to BVCPS-US are considered income derived from sources outside the Philippines, which shall be governed by Section 23(F) in relation to Section 42(A)(3), both of the 1997 Tax Code. Section 23(F) provides: EHTIcD "SEC. 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 ." Section 23(F) states that a foreign corporation like BVCPS-US is taxable only on income derived from sources within the Philippines. In the case of income from the rendition of services, such income is considered as 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: "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. Accordingly, and since the subject services will be carried out entirely outside the Philippines, the service fees to be paid by BVCPS-Phils to BVCPS-US, being income not derived from sources within the Philippines by a foreign corporation are, therefore, exempt from Philippine income tax. ( BIR Ruling DA-ITAD No. 84-04 dated August 4, 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