ITAD Ruling No. 161-05

December 16, 2005 ITAD RULING NO. 161-05 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997 BIR Ruling Nos. DA-ITAD 66-05 Isla Lipana & Co . (Formerly, Joaquin Cunanan & Co.) 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Tammy H. Lipana Managing Partner, Tax Services Gentlemen : This refers to your letter dated July 18, 2005 requesting confirmation that the management fee to be paid by Manila Mandarin Hotel, Inc. (Mandarin Philippines) to Mandarin Oriental Management B.V. (Mandarin Management Netherlands) , under an Offshore Management Agreement is exempt from income tax pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code). It is represented that Mandarin Management Netherlands is a foreign corporation, organized and existing under the laws of the Netherlands, with registered office at Diepenbrockstraat 19, 1077 VX Amsterdam, the Netherlands, as confirmed by the relevant Certificate dated March 9, 2005 issued by the Netherlands Tax Office at Rijnmond Rotterdam; that Mandarin Management Netherlands 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 February 21, 2005 issued by the Securities and Exchange Commission; that, on the other hand, Mandarin Philippines is a corporation, organized and existing under the laws of the Philippines, with registered office at Makati Avenue, Makati City 1226, Metro Manila, Philippines; that on May 9, 2005, Mandarin Philippines and Mandarin Management Netherlands entered into an Offshore Management Agreement whereby Mandarin Management Netherlands , as Offshore Manager, agreed to be responsible for the management and operation of, and the provision of certain services in connection with, Mandarin Philippines ' hotel in the Philippines, in each case to be performed outside the Philippines; that in consideration, Mandarin Philippines shall pay Mandarin Management Netherlands a management fee, in respect of each fiscal year, of an amount equal to one percent (1%) of Mandarin Philippines ' gross revenue in respect of the fiscal year (or part thereof) in question; and that the Agreement shall be effective from February 15, 2005 up to February 14, 2010, and may be renewed for four additional terms each of five years but such renewal not to be made beyond August 31, 2026. 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 Mandarin Management Netherlands , whether engaged in trade or business in the Philippines or not, is taxable only on income derived from sources within the Philippines. In the case of income from furnishing services, such income is considered derived from sources within the Philippines , and therefore taxable, only if the services are performed in the Philippines, under Section 42(A)(3) 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, since the services which Mandarin Management Netherlands will perform for the benefit of Mandarin Philippines under the Offshore Management Agreement will be done entirely outside the Philippines, the management fee to be paid by Mandarin Philippines to Mandarin Management Netherlands for such services, being income not derived from sources within the Philippines, is therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 66-05 dated June 29, 2005) DaTICc Similarly, the management fee is not subject to ten percent (10%) value-added tax (VAT) imposed 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 This is because the sale or exchange of services subject to VAT include only services that are performed in the Philippines; in the case of services that Mandarin Management Netherlands will perform for Mandarin Philippines where they will be done entirely outside the Philippines, the management fee to be paid therefor is therefore exempt from VAT. (BIR Ruling No. DA-ITAD 66-05 dated June 29, 2005) 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.) 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, modifies Section 108 (A) to read as: "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 . . ."