February 19, 2007

BIR RULING [DA-108-07]

23 (F); 42 (C) (3); 108; 109 (K);

VAT Ruling 100-99; DA-ITAD Ruling 70-04

Samsung Electronics Philippines

Manufacturing Corporation
Block 6, Calamba Premiere International Park,
Barangay Batino, Calamba City,
Laguna

Attention: Mr. Sang Ho Park

Chief Financial Officer

Gentlemen :

This refers to your letter dated February 6, 2007 requesting confirmation of

your opinion that the payments to be made by Samsung Electronics Philippines
Manufacturing Corporation (SEPHIL) pursuant to the contracts entered into with the
following entities, namely: Samsung Institute of Calibration and Technology Co. Ltd.
(SICT), I.T. Construction Co., Inc. (Korea) (ITC), Hansan Enterprise Co., Ltd.
(Korea) (HECL), and Samsung Corporation (Korea) (Samsung-Korea) are not
subject to value added tax (VAT), and to Philippine income and withholding taxes.

It is represented that SEPHIL [formerly Philippines Samsung Electronics

Corporation (PSEC)] is a corporation duly organized and existing under Philippine
laws with office address at the Calamba Premiere International Park-Special
Economic Zone. It is registered with the Philippine Economic Zone Authority
(PEZA) as an Ecozone Export Enterprise under Registration Certificate No. 01-011
dated February 9, 2001 and is entitled to a 5% special tax on gross income in lieu of
payment of all national and local taxes.

SEPHIL entered into separate agreements with the following resident

corporations of Korea: SICT, ITC, HECL and Samsung-Korea. A brief description of

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 the contracting corporation and the agreement is provided below: CASaEc

Calibration Service Agreement with SICT

SICT is a corporation duly organized and existing under the laws of Korea
with principal address at 83-2 Yeongcheon-ri, Dongtan-myeon, Hwaseong-si,
Gyeonggi-do, Korea. It does not maintain any office or fixed base in the Philippines
as evidenced by a certification issued by the Securities and Exchange Commission
(SEC). SICT is engaged in the business of calibrations for various equipment.

On October 19, 2006, SICT and SEPHIL entered into a Calibration Service
Agreement. Under the contract, SEPHIL shall pay SICT service fees for the
calibration of SEPHIL's equipment. SEPHIL shall also reimburse actual cost incurred
for the transportation of standard equipment, and the accommodation and travel of
SICT engineers. The services to be performed by SICT engineers shall last for a short
duration of time. Historically, SICT personnel render their services for SEPHIL for a
period not exceeding one week per year.

Service Contract with ITC

ITC is a corporation duly organized and existing under the laws of Korea with
principal address at 137 sarihyun dong, Ilsandonggu, Goyang City, Kyonggi-Do,
Korea. It does not have a representative office in the Philippines as evidenced by a
certification issued by SEC.

On October 26, 2006, ITC entered into a contract with SEPHIL for the supply
of construction materials and installation of roof and wall insulation panel for a
consideration of US$1,170,000.00. The scope of work shall be for a period not
exceeding 180 days.

Service Contract with HECL

HECL is a corporation duly organized and existing under the laws of Korea
with principal address at 137 sarihyun dong, Ilsandonggu, Goyang City, Kyonggi-Do,
Korea. It is not doing business and has no permanent establishment in the Philippines
as evidenced by a certification issued by SEC.

On October 26, 2006, HECL, entered into contract with SEPHIL for the
installation of aluminum frame and glass works in SEPHIL factory for a
consideration of US$133,000.00. The scope of work under the contract shall be
completed within a period not exceeding 180 days.
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 Engineering and Management Contract with Samsung-Korea

Samsung-Korea is a corporation duly organized and existing under the laws of

Korea with principal address at Samsung Plaza Bldg. 263, Seohyon Dong, Budang
Gu, Sungnam Si, Kyunggi Do, Korea. It has a branch office in the Philippines but the
same has not conducted nor engaged in any operations since the time of its
establishment.

On November 10, 2006, Samsung-Korea entered into contract with SEPHIL

for Engineering and Construction Management Services for the Rehabilitation of
SEPHIL factory, specifically, for the supervision of the construction to be performed
by ICT and HECL. In consideration of its services, Samsung-Korea shall be paid
service fees by SEPHIL in the amount of US$214,000.00. The scope of work shall be
completed within a period not exceeding 180 days. THcaDA

Based on the foregoing, you now request for confirmation of your opinion that
the service fees to be paid by SEPHIL to the aforementioned non-resident foreign
companies are not subject to VAT and to Philippine income taxes since the said
payment constitutes income from sources without the Philippines.

In reply, please be informed that as a general rule, sale of services to be

rendered in the Philippines is subject to twelve percent (12%) VAT. Section 108 (A)
of 1997 Tax Code, as amended by RA 9337, provides:

"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%) [now 12%] 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 a fee, remuneration or consideration . . ."
(emphasis added)

However, Section 109 (K) of the same Tax Code exempts from VAT
transactions which are exempt under international agreements or under special laws,
to wit:

"SEC. 109. Exempt Transactions. The following shall be exempt from the

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 value-added tax:

xxx xxx xxx

(K) Transactions which are exempt under international agreements to which

the Philippines is a signatory or under special laws, except those under
Presidential Decree No. 529;

xxx xxx xxx"

Concerning special laws relevant to SEPHIL and other PEZA-registered

enterprises, Section 24 of Republic Act No. 7916 (An Act Providing for the Legal
Framework and Mechanism for the Creation, Operation, Administration, and
Coordination of Special Economic Zones in the Philippines, Creating for this
Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes)
and Section 1, Rule XIV (incentives to ECOZONE Developers/Operators) of the
Rules and Regulations to Implement this Act are worth mentioning, thus:

"Section 24. Exemption from Taxes under the National Internal Revenue
Code. Any provision of existing laws, rules and regulations to the contrary,
notwithstanding, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu of paying taxes, five
percent of the gross income earned by all business and enterprises within the
ECOZONE shall be remitted to the national government . . ."

"Section 1. ECOZONE Developers/Operators. ECOZONE

Developers/Operators shall be entitled to the following incentives:

A. Exemption from National and Local Taxes and Licenses. An

ECOZONE Developer/Operator shall to the extent of its construction and
operation, be exempt from payment of all national internal revenue taxes and
local government impost, fees, licenses or taxes, including but not limited to
the following: AEScHa

1. Internal revenue taxes such as gross receipts tax, value-added tax, ad

valorem and excise taxes;

2. Franchise, common carrier or value added taxes and other percentage

taxes on public and service utilities and enterprises.

xxx xxx xxx"

It is clear from the aforequoted provisions of law that SEPHIL is exempt from

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 payment of all national internal revenue taxes including VAT. As an exempt entity,
SEPHIL, therefore, cannot be directly charged for VAT on its sales nor can it be
indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchases. Since SEPHIL may not be passed on with nor claim input VAT on its
purchases, services rendered to it by the foreign companies are effectively subject to
VAT at zero percent rate. Section 108 (B) (3) of the Tax Code provides thus:

"Section 108. Value-added Tax on Sale of Services and Use or Lease of

Properties.

(B) Transactions Subject to Zero Percent (0%) Rate. The following

services performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:

(3) Services rendered to persons or entities whose exemption under special

laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;" aECSHI

However, since effective zero-rating is not available to non-resident suppliers,

the sale of services by such suppliers is considered exempt and the provisions of
Section 109 (K) apply accordingly. Such being the case, the payment of service fees
by SEPHIL to the non-resident foreign companies under their respective agreements
should be exempt from VAT. This position finds support in VAT Ruling No. 100-99
dated September 16, 1999, as reiterated in BIR Ruling Nos. DA-ITAD 62-05 dated
June 27, 2005 and DA-ITAD 112-05 dated September 30, 2005, where the BIR held
that the payment of royalties by a PEZA -registered export enterprise to a
non-resident owner is exempt from VAT. Similarly, in BIR Ruling No. ITAD 130-05
dated November 14, 2005, the BIR ruled that inspection service fees paid by a
PEZA-registered export enterprise to a non-resident foreign corporation is exempt
from VAT.

With respect to the income tax implications of the subject payment to resident
corporations of Korea, Article 7 (1) of the RP-Korea tax treaty provides:

"Article 7
Business Profits

1. The profits of an enterprise of a Contracting State shall be taxable only

in that State unless the enterprise carries on business in the other Contracting
State through a permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the enterprise may be taxed in
the other State but only so much of them as is attributable to that permanent
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 establishment.''

The term "permanent establishment" is defined under Article 5 of the same tax
treaty which states that:

"Article 5
PERMANENT ESTABLISHMENT

(1) For the purposes of this Convention, the term "permanent establishment"
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on.

(2) The term "permanent establishment" includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a factory;

e) a workshop;

f) a mine, an oil or gas well, a quarry or any other place of extraction of

natural resources; aSDHCT

g) premises used as a sales outlet; and

h) a warehouse, in relation to a person providing storage facilities for

others;

(3)(a) a building site or construction, installation or assembly project or

supervisory activities in connection therewith, constitute a permanent
establishment only if such site, project or activity constitutes for a period of
more than six months;

(b) the furnishing of services including consultancy services by an

enterprise through an employee or other personnel constitutes a permanent
establishment only if activities of that nature continue within a Contracting
State for a period or periods not exceeding in the aggregate 183 days within
any 12-month period;

(c) ...

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 (4) ...

It is clear from the aforequoted provisions that if a corporation which is a

resident of Korea does not carry on business in the Philippines through a permanent
establishment situated therein, the profits of such corporation shall not be subject to
Philippine income tax. For this purpose, a corporation which is a resident of Korea
may be deemed to have a permanent establishment in the Philippines if, among
others, the furnishing of services through its employees continues (for the same or a
connected project) within the Philippines for a period or periods aggregating more
than 183 days in a year or if the installation project or supervisory activities in
connection therewith constitutes a period of more than six months. HAEDIS

Considering that the services to be performed in the Philippines by the

personnel of all four companies will not exceed 183 days in any twelve-month period,
nor will the installation project and supervisory activities in connection therewith last
more than six months, the said companies, accordingly, cannot be deemed to have a
permanent establishment in the Philippines to which the business profits may be
attributed.

Moreover, notwithstanding the treaty provision that a permanent establishment

includes a branch and the concomitant rule that a foreign corporation is the same
juridical entity as its branch office in the Philippines, it is the opinion of this Office
that, for tax purposes, the Philippine branch of Samsung-Korea cannot be deemed a
permanent establishment to which the business profits of Samsung-Korea may be
attributed. The BIR, quoting the Supreme Court in the case of Marubeni vs. CIR
(G.R. No. 76573 dated September 14, 1989), aptly explained in BIR ITAD Ruling
No. 70-04 dated July 13, 2004 that:

". . . such rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the
principal-agent relationship theory. It is understood that the branch becomes
its agent here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set
aside. The transaction becomes one of the foreign corporation, not of the
branch. Consequently, the taxpayer is the foreign corporation, not the branch
or the resident foreign corporation."

In the instant case, while Samsung-Korea maintains a Philippine branch, the

said branch does not have any participation whatsoever in the Management
Contract with SEPHIL, nor is it privy to the transaction between Samsung-Korea and

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 SEPHIL. Inasmuch as there is no principal-agency relationship to speak of, the
agreement with SEPHIL becomes one of Samsung-Korea alone. Consequently, the
business profits arising from the Contract shall be considered exclusively as income
of Samsung-Korea and not of its Philippine branch.

Such being the case, the payments to be made to SICT, ITC, HECL and
Samsung-Korea are considered compensation for labor or services performed outside
the Philippines and are therefore considered income derived from sources outside the
Philippines.

In this regard, Section 23 (F), in relation to 42 (C) (3) of the Tax Code,
provides:

"Sec. 23. General Principles of Income Taxation in the Philippines

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." EaHcDS

"Sec. 42. Gross Income from Sources Without the Philippines.

xxx xxx xxx

(3) Compensation for labor or personal services performed without the

Philippines."

Since the service fees are considered income derived from sources outside the
Philippines, your opinion, that the payments to be made by SEPHIL to SICT, ITC,
HECL and Samsung-Korea pursuant to their respective agreements are not subject to
Philippine income tax and consequently to withholding tax, is hereby confirmed.

This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be disclosed that the facts are different, then
this ruling shall be considered null and void.

Very truly yours,

(SGD.) JAMES H. ROLDAN

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 Assistant Commissioner
Legal Service
Bureau of Internal Revenue

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