ITAD Ruling No. 166-02

September 23, 2002 ITAD RULING NO. 166-02 Sec. 28 & 42, NIRC DA-ITAD 152-02 R.S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower I, 6815 Ayala Avenue Cor H.V. dela Costa Extension Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your application for relief from double taxation dated June 29, 2000, requesting confirmation of your opinion that the remittances by Shinryo (Philippines) Company, Inc. (SPCI) to Shinryo Corporation (Shinryo) in consideration of the latter's services rendered outside the Philippine shall be exempt from Philippine taxes. It is represented that Shinryo is a corporation organized and existing under the laws of Japan with business address at 2-4, Yotruya, Shinjuku-ku Tokyo, 160, Japan; 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 certification dated October 11, 2000 issued by the Securities and Exchange Commission; that SPCI is a corporation organized and existing under the laws of the Philippines with business address at Room 603, One Corporate Plaza, #845 A. Arnaiz Avenue, Makati City; that SPCI is engaged in contracting mechanical and electrical installation as well as air-conditioning systems in the Philippines; that SPCI and Shinryo entered into a Contract of Procurement Agreement and a Performance Guarantee Agreement dated June 20, 2000, which shall be both effective from October 31, 1999 until September 30, 2004; that under the Contract of Procurement Agreement, Shinryo will provide SPCI the services of a procurement agent in rendering assistance and services in connection with securing Philippine contracts, which shall include: (a) Soliciting Japanese and other foreign clients who have been awarded construction contracts in the Philippines and (b) Procuring on behalf of SPCI such contracts awarded to Japanese and other foreign clients in the Philippines to perform the whole or part of it; that all the foregoing services shall be rendered by Shinryo in Japan or in other countries; that Shinryo or its employees or representatives shall not perform any work in the Philippines; that in consideration of said services, SPCI shall pay Shinryo a commission of one percent (1%) of the gross value of the contracts secured for SPCI; that the commission shall be paid to Shinryo within a year from the date in which the contract procured by Shinryo and awarded to SPCI is signed; that under the Performance Guarantee Agreement, Shinryo guarantees the performance and successful completion of contracts to be undertaken by SPCI in the Philippines; that in case of failure to perform by SPCI, Shinryo undertakes to fulfill the obligation and extend the performance guarantee facility to SPCI; that no services shall be done in the Philippines by Shinryo to ensure the performance guarantee; that in consideration of this guarantee, SPCI shall remit to Shinryo two percent (2%) of the gross value of contracts guaranteed by Shinryo; and that said amount shall be payable within a year from the date in which the contract is awarded. In reply, based on the representation that the services to be rendered by Shinryo shall be performed entirely in Japan, then the RP-Japan 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. ( DA-ITAD 152-02 dated August 29, 2002 ) The fees to be paid by SPCI to Shinryo are considered income derived from sources outside the Philippines, which shall be governed by Section 28(B)(1), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: TDcHCa "SEC. 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(1) In General Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%) effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) "xxx xxx xxx. "SEC. 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" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines so that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefore are taxable in the Philippines. However, since the services to be rendered by Shinryo to SPCI shall be performed entirely in Japan, the fees to be remitted by SCPI are considered income derived from sources outside the Philippines. SacDIE In view of all of the foregoing, the fees to be remitted by SPCI to Shinryo are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to the withholding tax. ( DA ITAD 86-02 dated May 9, 2002 ) This ruling is issued based on 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 parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service