ITAD Ruling No. 141-03

September 18, 2003 ITAD RULING NO. 141-03 Sec. 28 (B) & Sec. 42 (A) of the NIRC BIR Ruling No. ITAD-152-02 P. Imes Cavite Economic Zone Rosario, Cavite Attention: Florante T. Garcia Asst. Senior Manager-Finance Gentlemen : This refers to your application for relief from double taxation requesting confirmation that the consultation fees to be paid by P. IMES Corporation (P. IMES) to IMES Co. Ltd. (IMES) are exempt from withholding taxes pursuant to the RP-Japan tax treaty. It is represented that P. IMES is a PEZA-registered corporation organized and existing under the laws of the Philippines; that IMES is a corporation duly organized and existing under the laws of Japan; that IMES is not registered as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 19, 2002; that the nature of the business of P. IMES, which is manufacturing of computer, peripherals, needs constant consultation with regard to management, engineering and manufacturing expertise to be able to cope with the fast changing world of information technology; that on December 1, 2002, P. IMES and IMES entered into a Management and Engineering Consulting Agreement whereby the latter shall provide the former with consultancy services, which include the following: (1) Recommendations and advice on the improvement of management systems and organization structures, (2) Advice and assistance in the development of the planning system and its measurement for management, (3) Recommendations and advice in the development of financial system, (4) Advice and assistance in the development of the ingenious production control system, (5) Advice on the on-going management, (6) Recommendations regarding the development, preparation and conduct of manufacturing planning and operation system, (7) Review and comment on the engineering plans for adoption, (8) Advice on the preparation of the quality control system for the materials and equipment used in the manufacturing and operation of the business, and (9) Procurement of materials and equipment from time to time as requested by P. IMES that are suitable for the operation of the business which are not available in the Philippines; and that in consideration for the said services, P. IMES shall pay IMES the service fee amounting to 1,760,840 monthly which shall be based on the staff level of IMES and the estimated time spent by the staff of the latter in providing the services; and that the consultancy services will be done at the consultant's office in Japan so that there is no need for the consultant to visit the Philippines: In reply, based on the representation that the services to be rendered by IMES shall be performed entirely in Japan, then the fees to be paid by P. IMES to IMES are considered income derived from sources outside the Philippines, which shall be governed by Section 28(B)(1), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: "SEC. 28. Rates of Income Tax on 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 of income tax 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: aIcSED "xxx xxx xxx. "(3) Services Compensation for labor or personal services performed in the Philippines; "xxx xxx xxx" It is clear from the aforequoted provisions that a non-resident 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 non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor are taxable in the Philippines. In the instant case, based on your representation that the services to be rendered by IMES to P. IMES shall be performed entirely in Japan, the consultancy fees to be remitted by P. IMES are considered income derived from sources outside the Philippines and are, therefore, not therefore, not subject to Philippine income tax and consequently to the withholding tax. ( DA ITAD 86-02 dated May 9, 2002 ) It is noteworthy that, since the income is derived entirely from sources abroad then the RP-Japan 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 152-02 dated August 29, 2002 ). This ruling is issued on the basis of the facts as represented. However, if upon investigation, it will 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service