ITAD Ruling No. 119-05

October 20, 2005 ITAD RULING NO. 119-05 Sections 23 & 42, NIRC of 1997 BIR Ruling No. DA-ITAD-084-02 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Dela Costa cor. Tordesillas St., Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated November 3, 2004, received by this Office on June 8, 2005, requesting confirmation of your opinion that the service fees paid by your client, Philippine Iris Co., Inc. (IRIS-Phils) to Iris Company, Limited (IRIS-Japan) under a Marketing Support Service Agreement are not subject to Philippine income tax, pursuant to the Philippines-Japan tax treaty. It is represented that IRIS-Japan is a corporation organized and existing under the laws of Japan with head office at 1933 Iizuka-cho, Ota City, Gunma Prefecture, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by a certification dated May 17, 2005 issued by the Securities and Exchange Commission; that IRIS-Phils is a corporation organized and existing under the laws of the Philippines with principal office address at Lot 3, Ampere St.,Cabuyao LISP, SEPZ, Laguna, Philippines; that on May 8, 2000, IRIS-Japan and IRIS-Phils entered into a Marketing Support Service Agreement (Agreement) whereby IRIS-Japan agreed to provide IRIS-Phils the following assistance or services: a) to promote or market the goods of IRIS-Phils to Japan, which includes making regular visit and representation with the relevant corporate officers of such clients, b) to assist IRIS-Phils in developing marketing strategies and specific marketing activities outside the Philippines, and c) to undertake such other incidental marketing activities as may be requested by IRIS-Phils to promote its business in other countries; that all of the marketing services shall be performed totally outside the Philippines, primarily in Japan, and shall not involve any transfer of technology, know-how or other intellectual property rights; that in consideration for the Marketing Services, IRIS-Phils shall pay IRIS-Japan an annual service fee of ten percent (10%) of total annual sales of the Products, payable quarterly on forty-five (45) days after the closing of every three-month period starting 1st day of June 2000; and that the Agreement shall be effective for a period of three (3) years starting from the 1st day of June 2000, renewable for a like period unless sooner terminated pursuant to the provisions of the Agreement. In reply, please be informed that in view of the representation that the services to be rendered by IRIS-Japan in favor of IRIS-Phils shall be performed entirely in Japan, the Philippines-Japan tax treaty finds no application in the instant case since the activity does not result in a case of double taxation for which a tax treaty relief may be sought. As such, the service fees to be paid by IRIS-Phils to IRIS-Japan 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 Tax Code of 1997. Section 23(F) provides: "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 IRIS-Japan 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: HCTaAS "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 IRIS-Phils to IRIS-Japan, 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