ITAD Ruling No. 131-04

November 12, 2004 ITAD RULING NO. 131-04 Sections 28 (B) (1) & 42 of the Tax Code of 1997 BIR Ruling No. DA-ITAD-08-04 Kumon Philippines, Inc . 19th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Doris Purina-Barican Finance/Admin Manager Gentlemen : This refers to your letter dated July 8, 2004, requesting exemption from Philippine tax on your management fees to Kumon Asia and Oceania PTE Ltd. (Kumon-Singapore), pursuant to the Philippines-Singapore tax treaty. It is represented that Kumon-Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore with office address at 9 Raffles Place, #18-20/21, Republic Plaza II, Singapore 048619; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 27, 2004; that Kumon Philippines, Inc. (Kumon-Philippines) is a corporation organized and existing under the laws of the Philippines with office address at 19th Floor, Philamlife Tower, 8767 Paseo de Roxas Ave., Makati City; that on April 1, 2001, Kumon-Philippines and Kumon-Singapore entered into a Management Agreement wherein it was agreed that Kumon-Singapore shall provide the following services to Kumon-Philippines: (1) provision of necessary and useful group regulations and group guidelines to Kumon-Singapore and its subsidiaries, (2) provision of the coordinated decision-making, exchange of information and training opportunities to the top management of Kumon-Singapore, (3) provision of administrative assistance to Kumon-Singapore and its subsidiaries, such as establishment of internal controls, conducting the internal audit, international tax planning and its execution, coordination in international distributions, etc., (4) development, assistance in installation and maintenance, and training of staff of Kumon-Singapore and its subsidiaries for certain unified computer software, and (5) conducting certain researches on behalf of Kumon-Singapore; that the initial term of the Management Agreement shall be for a period of twelve months commencing on April 1, 2001 and continuing until March 31, 2002; that the term of the Management Agreement shall automatically be extended for additional period of twelve months each unless either party gives to the other party, at least 30 days prior to the expiration of the then existing term, a written notice of the termination, with or without cause, of the end of the existing term; that in consideration for Kumon-Singapore's performance of services, Kumon-Philippines agrees to pay a management fee equivalent to the direct and indirect expenses of Kumon-Singapore properly allocable to the services, plus mark-up of five percent (5%); and that the management services as provided in the Management Agreement were performed in Singapore per certification issued by Kumon-Singapore dated July 1, 2004. In reply, please be informed that based on the representation that the management services rendered by Kumon-Singapore are performed entirely in Singapore, then the management fees paid by Kumon-Philippines to Kumon-Singapore are considered income derived from sources outside the Philippines, and shall be governed by Section 28(B)(1), in relation to Section 42, both of the 1997 Tax Code, to wit: "SEC. 28. Rates of Income Tax Foreign Corporation . "xxx xxx xxx" "(B) Tax on Nonresident Foreign Corporation "(1) In General Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) "xxx xxx xxx." "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" "(C) Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines : "xxx xxx xxx" "(3) Compensation for labor or personal services performed without the Philippines ; "xxx xxx xxx" It is clear from the aforequoted provisions that a nonresident foreign corporation is taxable only on income derived from sources within the Philippines. The source of the income derived from services is the place where the services are rendered so that if the nonresident foreign corporation furnishes and performs services in the Philippines, the compensation therefore are taxable in the Philippines. In the instant case, based on your representation that the services rendered by Kumon-Singapore to Kumon-Philippines are performed entirely in Singapore, the service fees remitted by Kumon-Philippines to Kumon-Singapore are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to withholding tax. (DA-ITAD-08-04 dated February 9, 2004) It is noteworthy that, since the income is derived entirely from sources abroad, then the Philippines-Singapore tax treaty will find no application as the transaction does not result in a case of double taxation for which a tax treaty relief is sought. (DA-ITAD-08-04 dated February 9, 2004) This ruling is issued based on 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. DHETIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service