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October 6, 2006

BIR RULING [DA-596-06]

34; DA-053-2004; DA-384-1998; DA-037-2004

Sycip Gorres Velayo & Co.


6760 Ayala Avenue
1226 Makati City
Attention: Atty. E.C. Alcantara
Tax Division

Gentlemen :

This refers to your letter dated May 2, 2006 requesting for a ruling on the tax
consequences of the Service Agreement entered into by and between Marubeni
Corporation (MC) and Marubeni Philippines Corporation (MPC).
It is represented that MC is a corporation duly organized and existing under the
laws of Japan with principal business address at 4-2 Ohtemachi 1-Chome, Chiyoda-ku,
Tokyo, Japan; that MC is licensed to do business in the Philippines through its
Philippine branch, Marubeni Corporation Manila Branch (MC-Manila) duly registered
with the Securities and Exchange Commission (SEC); that MPC is a corporation duly
organized and existing under and by virtue of the laws of the Philippines with registered
o ce and principal place of business at 8th and 9th Floors, L.V. Locsin Bldg. Ayala
Avenue corner Makati Avenue, Makati City; that MPC is a 100% subsidiary of MC; that
pursuant to the intra-group services (IGS) charge policy between MC and its domestic
and foreign subsidiaries, MC and MPC entered into a Service Agreement dated April 1,
2005 whereby MC's Corporate Staff Division shall perform services in favor of MPC,
consisting in:
1. Information and advice with respect to general administration, human
resources, media relations & advertisement, accounting, finance, risk
management and information with respect to legal matters and
economic & industrial research;
2. Services with respect to payroll and welfare for Japanese expatriates;
3. Advice and assistance with regard to certain information peculiar to each
country by Regional Strategy & Coordination Department of MC.
It is further represented that for all the abovementioned services which will be
performed by MC outside the Philippines, MPC shall pay MC compensation for services
to be semi-annually agreed in writing by the parties based on agreed allocation ratios
without additional mark-up or pro t; that such compensation for services determined
to be on arm's-length basis, represents allocation or reimbursement of actual costs by
MC to MPC based on actual costs and expenses incurred by staff of MC in providing
the service to MPC; and that MC-Manila Branch has no participation in the Service
Agreement between MC and MPC. DcTAIH

In this regard, you are requesting confirmation of your opinion, as follows:


1. The compensation to be derived by MC from MPC for services rendered
pursuant to the Service Agreement is not subject to income/withholding
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tax since the same is mere reimbursement of costs without mark-up or
profit; and
2. The said compensation to be paid by MPC to MC under the Service Agreement
is deductible from MPC's gross income as a valid expense.
In reply, please be informed as follows:
1. The compensation for services being mere reimbursement of costs without
mark-up or pro t and rendered outside the Philippines shall be exempt from Philippine
income tax.
Inasmuch as it has been represented that the MPC shall pay MC compensation
for services based on agreed allocation ratios without additional mark-up or pro t, the
service fees, pursuant to the Service Agreement, are not subject to Philippine income
tax. Payments covering actual and direct costs and expenses without mark-up or pro t
are mere reimbursement of costs and therefore, do not constitute taxable income. (BIR
Ruling No. DA-053-04 dated February 6, 2004) By its very nature, reimbursement of
costs is not income for being mere returns of capital (BIR Ruling No. DA-384-98 dated
August 24, 1998). Accordingly, the service fees to be paid by MPC to MC are not
considered as taxable income subject to Philippine income tax and consequently to
withholding tax.
Further, since the services are to be rendered by MC outside the Philippines, the
service fees pursuant to the Service Agreement are not subject to Philippine income tax
pursuant to Section 28(B)(1) of the Tax Code of 1997, as amended.
2. The compensation for services is deductible from MPC's gross income as a
valid expense.
The compensation for services to be paid by MPC to MC is deductible from the
gross income of MPC. The services to be performed by MC to MPC pursuant to an IGS
charge policy between MC and its domestic and foreign subsidiaries like MPC, which
services include information and advice with respect to general administration, human
resources, media relations & advertisement, accounting, nance, risk management and
information with respect to legal matters and economic & industrial research among
others are ordinary and necessary expenses deductible on the part of MPC. The said
expenses being directly connected with and appropriate in the conduct of the business
of MPC, the same may thus be considered as ordinary and necessary expenses
pursuant to Section 34(A)(1) of the Tax Code of 1997, as amended, which provides that
such ordinary and necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise of profession are allowed
as deduction from gross income. (BIR Ruling No. DA-037-04 dated February 2, 2004 )
Moreover, for the expenses to be deductible on the part of MPC, it is understood
that the parties have exerted reasonable efforts to ensure that the method of allocation
and charges is consistent with the arm's length principle as may be determined through
adequate documentation. Finally, in the event that transfer pricing regulations
implementing Section 50 of the Tax Code of 1997, as amended, are issued by the BIR,
the parties shall comply with the requirements thereof.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed or discovered that the facts are
different, then this ruling shall be considered as null and void. HaEcAC

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Very truly yours,
Commissioner of Internal Revenue
By:
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service

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