ITAD Ruling No. 152-02

August 29, 2002 ITAD RULING NO. 152-02 Art. 5 & 7, RP-Malaysia Sections 28 & 42, Tax Code BIR Ruling No. DA-ITAD-86-02 Punongbayan & Araullo 20th Flr., Tower I The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Romeo H. Duran Tax Director Gentlemen : This refers to your letter dated June 18, 2002, requesting confirmation of your opinion that the service fees to be paid by your client, DFI Consulting Philippines Inc. (DFI-Phils.), to DFI Consulting Malaysia (DFI-Malaysia) by virtue of their Non-Technical Support Services Agreement are not subject to Philippine income tax pursuant to the provisions of Article 7 in relation to Article 5 of the RP-Malaysia tax treaty. It is represented that DFI-Malaysia is a non-resident foreign corporation duly organized and existing under the laws of Malaysia with principal address located at Suite 8-15-2, Level 15 Menara Olympia, Jalan Raja Chulan 50200 Kuala Lumpur, Malaysia; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-Registration of Corporation/Partnership dated May 23, 2002 issued by the Securities and Exchange Commission; that DFI-Phils. is a domestic corporation duly organized and existing under the laws of the Philippines with principal address located at 37th Floor, Philamlife Tower, Salcedo Village, Makati City; that on January 3, 2000, DFI-Phils. and DFI-Malaysia entered into a Non-Technical Support Services Agreement (Agreement),whereby DFI-Malaysia shall provide consultancy services in the following areas of operation of DFI-Phils.: a. Advertising, publicity and promotional campaigns; b. Financial Reporting Coordination; c. Coordination and Implementation of Company's Policies and Procedures; d. Provisions of the Management Committee and Directors; e. Offsite Training & Assistance to Local Consultants; f. Network Usage; g. Trouble Shooting of Network System; h. Shared notebooks/resources; i. Website Development; j. Crises Management; and k. Database Maintenance that DFI-Malaysia shall render the abovementioned services in Kuala Lumpur, Malaysia; that DFI-Phils. agreed to send to DFI-Malaysia all information necessary to indispensably perform the agreed services; that DFI-Malaysia may send personnel to the Philippines to perform the services, if deemed necessary, for short duration not exceeding 183 days; that as consideration for the consultancy and administrative services provided, DFI-Phils. agreed to pay DFI-Malaysia for the actual time spent for the services rendered and also agreed to reimburse DFI-Malaysia for the actual cost incurred in rendering the service. In reply, please find hereunder the answers to your queries: I. Whether the service fees to be paid by DFI-Phils. to DFI-Malaysia for services performed outside the Philippines shall not be subject to Philippine income tax in the absence of a permanent establishment pursuant to Article 7 in relation to Article 5 of RP-Malaysia tax treaty. It will be noted that the existing tax treaty between the Philippines and Malaysia is for the avoidance of double taxation. Inasmuch as it has been represented that all the services to be performed by DFI-Malaysia in favor of DFI-Phils. will be done outside the Philippines, then the RP-Malaysia 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. Under the Tax Code of 1997, non-resident foreign corporations are taxable only for income derived in the Philippines. Income derived for services rendered outside the Philippines is income derived from sources outside the Philippines. II. Whether the service fees to be paid by DFI-Phils. to DFI-Malaysia in the event services are performed by its personnel in the Philippines for short duration not exceeding 183 days shall not be subject to Philippine income tax. Pursuant to Article 7 in relation to Article 5 of the RP-Malaysia tax treaty, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if it has a permanent establishment situated in the Philippines and only so much of such profit that is attributable to that permanent establishment. It has been represented that DFI-Malaysia may send its personnel to the Philippines to perform the abovementioned services for short duration not exceeding 183 days. Inasmuch as DFI-Malaysia cannot be deemed to have a permanent establishment in the Philippines as such, the service fees to be paid by DFI-Phils. to DFI-Malaysia for the services performed in the Philippines are taxable only in Malaysia. However, the fees paid by DFI-Phils. for the portion of said services rendered in the Philippines are subject to 10% value-added tax pursuant to Section 108 of the Tax Code of 1997. Accordingly, DFI-Phils. being the payor in control of payment shall be responsible for the withholding of value-added tax on such fees on behalf of DFI-Malaysia using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from DFI-Phils. if it is a VAT-registered taxpayer. In case DFI-Phils. is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, DFI-Phils. is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon request of DFI-Malaysia, the first three copies thereof be given to DFI-Malaysia and the fourth copy to be retained by DFI-Phils. as its file. ( Sections 4 & 6, Revenue Regulations No. 4-2002 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered without force and effect insofar as the herein parties are concerned. IaHAcT Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service