ITAD Ruling No. 156-05

December 12, 2005 ITAD RULING NO. 156-05 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling No. DA-ITAD 143-04 Rohm Apollo Semiconductor Philippines, Inc . People's Technology Complex Special Economic Zone Maduya, Carmona, Cavite Attention: Ms. Merlita M. Macaspac Deputy Department Manager Gentlemen : This refers to your letter dated September 24, 2004 requesting our opinion on the tax treatment of service fee to be paid by Rohm Apollo Semiconductor Philippines, Inc. (Rohm Apollo Philippines) to Rohm Company, Ltd. (Rohm Japan) pursuant to a Business Support Services Agreement. It is represented that Rohm Japan is a foreign corporation organized and existing under the laws of Japan, with head office at 21 Saiin Mizosaki-cho, Ukyo-ku, Kyoto-city, Japan, as confirmed by its Complete Company Profile dated August 25, 2004 issued by the Kyoto Regional Legal Affairs Bureau; that Rohm Japan's business activities are manufacturing and sale of (1) electrical and electronic products, equipment and materials, (2) precision, office and medical equipment/machines and their components, and (3) automotive parts, among others; that Rohm Japan is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated August 23, 2004 issued by the Securities and Exchange Commission; that, on the other hand, Rohm Apollo Philippines is a corporation organized and existing under the laws of the Philippines, with office address at People's Technology Complex Special Economic Zone, Maduya, Carmona, Cavite, Philippines, as confirmed by its Registration Agreement with the Philippine Economic Zone Authority (PEZA) dated September 18, 2000, who issued Rohm Apollo Philippines its Certificate of Registration No. 00-077 dated September 18, 2000; that Rohm Apollo Philippines' business activity as an Ecozone Export Enterprise is the manufacturer of semiconductor products, particularly microchip transistors and tantalium capacitors; that on July 1, 2004, Rohm Japan and Rohm Apollo Philippines entered into a Business Support Services Agreement (Agreement) whereby Rohm Japan agreed to provide Rohm Apollo Philippines the following services and supports for the latter's purchase of materials, namely, (1) selecting appropriate suppliers, (2) negotiating with suppliers or its affiliates over the price of materials for a reasonable amount, and (3) dealing with the quality problems of materials by negotiating with suppliers or its affiliates, or by other appropriate means; that in consideration, Rohm Apollo Philippines shall pay Rohm Japan a service fee equivalent to 0.3% of the total prices (calculated on a monthly basis) of materials actually bought by Rohm Apollo Philippines from suppliers selected by Rohm Japan ;that the above services will be performed entirely in Japan, and according to the duly notarized relevant Certification dated September 8, 2005 issued by Rohm Apollo Philippines ,no employees of Rohm Japan were sent yet to the Philippines from July 1, 2004 up to September 8, 2005 to accomplish such purpose and that the Agreement is effective from July 1, 2004, with an initial term of one (1) year and when may be renewed for successive one (1) year periods. In reply, please be informed that concerning income tax, a foreign corporation like Rohm Japan , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines, under Section 23(F) of the National Internal Revenue Code of 1997 (Tax Code): DIESaC "SEC. 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." In relation, income from furnishing of services which a foreign corporation carries on outside the Philippines is not deemed derived from sources within the Philippines and as such is not taxable in the Philippines, based on Section 42 of the Tax Code: "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, by reason that the above services will be performed by Rohm Japan outside the Philippines (that is, in Japan),the service fee to be paid by Rohm Apollo Philippines to Rohm Japan in consideration for the services furnished by the latter is not subject to income tax. (BIR Ruling No. DA-ITAD 143-04 dated December 16, 2004) Concerning value-added tax (VAT), only services performed in the Philippines are subject to ten percent (10%) VAT, under Section 108(A) of the Tax Code: "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. .." 1 Accordingly, since it is represented that the above services will not be performed in the Philippines, the service fee to be paid by Rohm Apollo Philippines to Rohm Japan in consideration for the services is not subject to VAT (BIR Ruling No. DA-ITAD 143-04 dated December 16, 2004) 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. SEHTAC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service Footnotes 1. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005, amends Section 108 (A), thus: "SEC. 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: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%);or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 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 ..."