ITAD Ruling No. 143-04

December 16, 2004 ITAD RULING NO. 143-04 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 90-04 Sycip Gorres Velayo & Co . 6th Floor, Ayala Life FGU Center Mindanao Avenue corner Biliran Road Cebu Business Park, Cebu City 6000 Cebu City Attention: Atty . Rita A . S . Fernandez Tax Services Gentlemen : This refers to your letter dated September 1, 2004 requesting confirmation that the service fees to be paid by Philippine Kenko Corporation (Kenko Philippines) to Kenko Company, Ltd . (Kenko Japan) are exempt from Philippine income tax and value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code). It is represented that Kenko Japan is a foreign company organized and existing under the laws of Japan with principal office at 3-9-19 Nishiochiai, Shinjuku-ku, Tokyo, 161-8570, Japan, as confirmed by its revised Articles of Incorporation dated May 1, 2003; that Kenko Japan 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 issued by the Securities and Exchange Commission on May 19, 2004; that, on the other hand, Kenko Philippines is a domestic company organized and existing under the laws of the Philippines with principal office at Mactan Economic Zone 1, PEZA, Lapu-lapu City 6015, Cebu, Philippines; that Kenko Philippines is registered with the Export Processing Zone Authority, with Certificate of Registration No. 89-50 issued on October 24, 1989; that Kenko Japan is engaged in the manufacture and sale of photographic supplies and optical products, and Kenko Philippines is engaged in the manufacture and sale of binoculars, rifle scopes and spotting scopes; that, on November 1, 2003, Kenko Japan and Kenko Philippines entered into a Business Support Agreement where Kenko Japan agreed to provide Kenko Philippines the following services to be done entirely outside the Philippines: 1. advertising and promotion of sale of Kenko Philippines ' products to customers in Japan and other countries; IDScTE 2. formulation and implementation of a business strategy for customers outside the Philippines; 3. conducting activities relating to sales promotion in foreign countries requested by Kenko Philippines , without transfer of technological know-how and other intellectual property rights; 4. ordering and purchasing of parts of Kenko Philippines' products and making payments to Kenko Philippines ; and 5. assisting in the management and funding of Kenko Philippines ; and that, in consideration for said services, Kenko Philippines agreed to pay on a monthly basis Kenko Japan service fees amounting to 1,866,000 Japanese yen. 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." Section 23(F) states that a foreign corporation like Kenko Japan 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 Accordingly, since the subject services will be carried out entirely outside the Philippines, service fees therefor to be paid by Kenko Philippines to Kenko Japan , being income not derived from sources within the Philippines by a foreign corporation, are therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) Similarly, the subject fees are not subject to 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. 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 . . ." 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 fees therefor to be paid by Kenko Philippines to Kenko Japan are therefore exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) EICSTa 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.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service