ITAD Ruling No. 214-02

December 4, 2002 ITAD RULING NO. 214-02 Secs. 28 & 42, NIRC BIR Ruling No. DA-ITAD-166-02 C.L. Manabat & Co. 5th Floor Salamin Bldg. 197 Salcedo St., Legaspi Village Makati City Attention: Raniel L. Dimayuga Assistant Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated August 27, 2002, on behalf of your client, Subic Bay Satellite System, Inc. (SBSSI), requesting confirmation that the income payments of SBSSI to Loral Skynet (Loral) by virtue of a Skynet Space Segment Service Agreement are not subject to Philippine income tax pursuant to Article 8 of the RP-US tax treaty. IDEScC It is represented that Loral is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office address at 500 Hills Drive, Bedminster, New Jersey, USA; 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 issued by the Securities and Exchange Commission dated August 22, 2002; that Loral is in the business of, inter alia , providing space segment capacity service to its customers via satellites; that SBSSI is a Subic Special Economic and Freeport Zone (SSEFZ)-registered corporation duly organized and existing under Philippine laws with principal business address at Building 8172, Subic Bay Freeport Zone, Upper Cubi, Upper Zambales Highway, Subic Bay, Philippines; that on October 27, 2000, SBSSI, in order to provide better services to its clients, entered into a Skynet Space Segment Service Agreement with Loral whereby the latter agreed to provide a non-preemptible space segment service to the former through a Telstar 10 satellite consisting of a 0.52 MHz of total bandwidth allocation located at 76.5 E.L along with Tracking, Telemetry and Control, and to maintain the satellite used to provide the space segment capacity; that under the said Agreement, no equipment was installed in the Philippines and the services rendered by Loral were coursed through satellites; and that in consideration for said services, SBSSI pays monthly fees to Loral; that SBSSI withholds 7.5 tax on its payments to Loral based on Section 2.57-1(l)(4) of Revenue Regulations (RR) No. 2-98 as amended by RR No. 6-01. In reply, based on the representation that the furnishing of services by Loral will be rendered entirely outside the Philippines and will be coursed through satellites, then the RP-US tax treaty finds no application inasmuch as the herein transaction does not result in a case of double taxation for which a tax treaty relief is sought. ( BIR Ruling No. ITAD-166-02 dated September 23, 2002 ) Hence, the instance case is clearly governed by Section 28(B)(1) in relation to Section 42(A)(3) of the National Internal Revenue Code which provides, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . 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) and (d): 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 (33%) percent; and, effective January 1, 2000 and thereafter, the rate shall be thirty-two (32%).(Emphasis supplied) "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 Based on the afore-cited provisions, a nonresident foreign corporation is taxable only on income derived from sources within the Philippines so that if a nonresident foreign corporation furnishes and performs services in the Philippines, the service fees therefrom is taxable in the Philippines. Considering that the services of Loral to SBSSI under the said Service Agreement is rendered entirely outside the Philippines, the services fees to be paid by SBSSI to Loral are considered income derived from sources outside the Philippines. In view thereof, this Office is of the opinion and so holds that the services fees of SBSSI to Loral are considered income derived from sources outside the Philippines and are therefore not subject to Philippine income tax and consequently to withholding tax. ( BIR Ruling No. DA-ITAD-166-02 dated September 23, 2002 ) 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. AEITDH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service