Services rendered abroad not subject to Philippine tax

Service fees derived by a non-resident foreign corporation for services rendered outside the Philippines are exempt from Philippine income tax and VAT.

Under Section 23(F) of the Tax Code, a foreign corporation, whether or not engaged in trade or business in the Philippines, is subject to tax only with respect to income derived from sources in the Philippines. In case the income is for sale of services, Section 42(A)(3) of the Tax Code provides that such income shall be considered derived from the Philippines only if the services are actually performed in the Philippines.

In the instant case, the services rendered by the non-resident foreign corporation, i.e., coating of pipes, were rendered abroad. Hence, considering that the services were performed entirely outside the Philippines, the service fees paid by the domestic corporation to the non-resident foreign corporation are exempt from Philippine income tax.

With respect to VAT, payments for the sale or exchange of services are subject to VAT only if the services are performed in the Philippines pursuant to Section 108(A) of the Tax Code. Accordingly, since the services are performed by the non-resident foreign corporation outside the Philippines, the service fees are likewise not subject to VAT.

BIR Ruling No. 458-2012, July 10, 2012

Tax Brief – August 2012

Punongbayan and Araullo