Adoption of Rule 138-A of Revised Rules of Court to Permit Limited Law Student Practice

August 1, 2003 ITAD RULING NO. 115-03 Article 6 and 8, RP-US Tax Treaty Secs. 28 and 42, NIRC BIR Ruling No. DA-ITAD-31-03 Murata Electronics Philippines Inc. 124 GRM Building East Science Avenue Laguna Technopark, Bian, Laguna Attention: Kohei Miyao President Gentlemen : This refers to your letter dated June 9, 2003, requesting for an exemption from Philippine income tax on the service fees paid by your company Murata Electronics Phils, Inc. (Murata-Phils) to Murata Electronics North America, Inc. (Murata-US). It is represented that Murata-US is a non-resident foreign corporation duly organized and existing under the laws of the State of Texas, with business address at 2200 Lake Park Drive, Smyrna, Georgia 30080-7604, 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 June 2, 2003; that Murata-Phils is a domestic corporation with principal office at 124 GRM Building East Science Avenue, Laguna Technopark, Bian, Laguna; that on April 1, 2002, Murata-Phils entered into an Engineering Commission Agreement with Murata-US, whereby Murata-US will provide service in connection with the marketing and sales promotion of Murata-Phils' products for prospective customers in the United States; that the employee's services are rendered solely in the United States; and that Murata-Phils shall pay Murata-US a commission at the rate stipulated in the contract. In reply, please be informed that based on the representation that the services by Murata-US shall be rendered solely in the United States, then the fees to be paid by Murata-US to Murata-Phils 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) of the National Internal Revenue Code of 1997 (NIRC) 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 the trade or business in the Philippines shall pay a tax equal to thirty-five (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or causal 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.) "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 income from sources within the Philippines: DcIHSa xxx xxx xxx "3) Services Compensation for labor or personal services performed in the Philippines;" 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 therefore are taxable in the Philippines. Considering that the services of Murata-US to Murata-Phils under the said Agreement are rendered outside the Philippines, the service fees to be paid by Murata-Phils to Murata-US are considered income derived from sources outside the Philippines. In view thereof, the service fees to be paid by Murata-Phils to Murata-US, being income derived from sources outside the Philippines, are therefore, not subject to Philippine income tax and consequently to withholding tax. ( BIR Ruling No. DA-ITAD-31-03 dated February 13, 2003 ) It will be noted that the RP-US tax treaty will find no application pertaining to the subject service fees as the transaction does not result in double taxation being performed solely abroad as discussed above. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service