VAT Ruling No. 019-02

March 26, 2002 VAT RULING NO. 019-02 40 (A) 023-95; 074-94; 059-89 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, 1226 Makati City March 26, 2002 Attention: Mr. George J. Lavadia Principal Tax Services Gentlemen : This refers to your letter dated May 31, 2000 requesting on behalf of your clients, Dalisay Shipping Corporation (Dalisay) and Towa Enterprise Co., Ltd. (TOWA) for a ruling that the service fee arising from their agreement is not subject to Philippine income tax, withholding and value-added tax. It is represented that Dalisay is a corporation organized under the laws of the Philippines; that it is primarily engaged in the business of contracting seamen for overseas work and acting as agent in the supply of manpower to shipping companies; that on the other hand, Towa is a non-resident foreign corporation organized under the laws of Japan; that under their agreement, Dalisay designated Towa as its sole agent in Japan; that as agent, Towa will, on behalf of Dalisay, "attend to the registration and accreditation of ships in the seafarer's union, to make payment to such union, and other relevant matters."; that by its very nature, these services shall be performed in Japan; and that in consideration for its services as agent, Towa shall receive from Dalisay a service fee of US$350.00 per month per ship. In support of your request, you submitted a Certification issued by the Securities and Exchange Commission (SEC) to the effect that Towa Enterprise Co., Ltd. (TOWA) has not been registered either as a corporation or as a partnership and that it has not been licensed to do business in the Philippines. In reply, please be informed that Section 23 of the Tax Code of 1997 provides that a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-two percent (32%) of the gross income received during each taxable year from all sources within the Philippines . (Emphasis Ours) For the source of income to be considered as coming from within the Philippines, it is sufficient that the income is derived from an activity conducted within the Philippines pursuant to Section 42 (A) of the Tax Code of 1997. Since the services rendered by Towa as the sole agent of Dalisay in Japan, which are therefore, performed outside the territorial jurisdiction of the Philippines, the service fees derived therefrom are considered as income from sources without the Philippines. Accordingly, inasmuch as a non-resident foreign corporation is subject to tax only on income from sources within the Philippines, service fees paid by Dalisay to Towa, shall not be subject to income and withholding taxes. (BIR Ruling No. 074-94 dated March 9, 1994) Likewise, it shall not be subject to the value-added tax on its sale of services since the services are performed outside the Philippines (Section 103, Tax Code of 1997). Conversely, services performed in the Philippines are subject to the value-added tax. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group