ITAD Ruling No. 154-05

December 12, 2005 ITAD RULING NO. 154-05 Sections 23(F), 42(A)(3) and 108(A) NIRC of 1997 BIR Ruling No. DA-ITAD 90-04 Extramind Consulting, Inc . 7th Floor IBM Plaza Building Eastwood Cyberpark, E. Rodriguez Jr. Avenue Quezon City Attention: Mr. Mario R. Enriquez Managing Director Gentlemen : This refers to your letter dated October 5, 2005 on behalf of your client, KURODA ELECTRIC PHILIPPINES, INC. (KURODA), requesting exemption from Philippine income tax and consequently from withholding tax on the service commission to be paid by Kuroda to SHARP ELECTRONIC COMPONENTS (KOREA) CORPORATION (SECK), pursuant to Article 7 of the Philippines-Korea tax treaty. It is represented that SECK is a nonresident foreign corporation organized and existing under the laws of Korea with office address at Room 501, ILSIN Building, 541 Dohwa-Dong, Mapo-ku, Seoul, Korea; that SECK 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 of Corporation/Partnership issued by the Securities and Exchange Commission on May 3, 2005; that SECK is engaged in sales and manufacturing of electronic and electrical components; that, on the other hand, KURODA is a domestic company organized and existing under the laws of the Philippines with office address located at Lot 4, Block 3 Binary Road, Cabuyao, Laguna; that KURODA is engaged in the making, manufacturing and supplying of electronic parts/components to export oriented enterprises/industries in the Philippines; that SECK has a Client 1 that transferred its manufacturing and procurement functions to a Subcontractor 2 in the Philippines; that KURODA is also selling a PRODUCT 3 to the Philippine Subcontractor; that SECK agreed to help KURODA in the introduction of the PRODUCT to the principal of the Philippine Subcontractor in Korea who is also the Client of SECK; that on January 1, 2005, KURODA and SECK entered into a Service Commission Agreement (Original Agreement) whereby the latter will render some or all of the following services to the Client in Korea in support of sales by KURODA to Subcontractors: EScAID a) setting out marketing plans and initiating contacts with the Client; b) submitting samples of the PRODUCT to the Client; c) carrying out technical negotiations with the Client on subjects such as specification, inspection and warranty; d) providing liaison services to support KURODA's sales to Subcontractors; that in consideration of the above services rendered by SECK, KURODA shall pay SECK, on a tri-monthly basis, a service commission in US dollars at the rate of zero-point-five-percent (0.5%) of the net sales amount of the PRODUCT to the Subcontractors; that in cases where any change of service commission rate becomes necessary, a new service commission rate shall be fixed at any time as may be negotiated upon by the parties. It is further represented that on July 1, 2005, SECK and KURODA made and entered into an Amendment to the Original Agreement dated January 1, 2005, whereby both parties agreed to amend the definition of PRODUCT 4 appearing in Article 1 of the Original Agreement. In reply, please be informed that Section 23(F) of the National Internal Revenue Code of 1997 (NIRC) provides, viz : "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." Based on the above, a foreign corporation like SECK is taxable only on income derived from sources within the Philippines. Relative thereto, income derived from services 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 NIRC, as follows: "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: IcTEaC xxx xxx xxx (3) Services . Compensation for labor or personal services performed in the Philippines; "xxx xxx xxx" Such being the case and since the subject services are represented to be carried out entirely in Korea, this Office is of the opinion and so holds that the service commission to be paid by KURODA to SECK under the Service Commission Agreement, as amended, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax, pursuant to Section 23(F) in relation to Section 42(A)(3) of the NIRC. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) Similarly, the subject service commission is not subject to the ten percent (10%) VAT imposed under Section 108(A) of the NIRC, to wit: "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, ...." The above provision clearly states that the sale or exchange of services subject to VAT includes only those services that are performed in the Philippines. Accordingly, since the subject services will not be performed in the Philippines, service commission in consideration for said services to be paid by KURODA to SECK is, therefore, exempt from VAT. (BIR Ruling No. DA-ITAD 90-04 dated August 24, 2004) This ruling supplements BIR Ruling No. DA-ITAD-105-05 dated August 24, 2005 insofar as the change in the definition of the term PRODUCT as stated in the Amendment to the Service Commission Agreement is concerned, and 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 Footnotes 1. "CLIENT" means TOSHIBA SAMSUNG STORAGE TECHNOLOGY CORPORATION (TSST) whose principal places of business or R&D is in Korea and has related companies or designated subcontractors who have manufacturing and purchasing functions in one or more place(s) in the Philippines. 2. "SUBCONTRACTORS" means SHIN HEUNG ELECTRO-DIGITAL, INC. and/or CALAMBA SHINEI INDUSTRY PHILIPPINES CORPORATION, which are the designated companies which assemble for TSST. 3. "PRODUCT" means HPD-210 (DVD Pick-up unit) per the Original Agreement. 4. "PRODUCT" means HPD-210 and HPD-$$Q (DVD Pick-up Unit) per Amendment to the Original Agreement executed between SECK and KURODA dated July 1, 2005.