Foster Corporation (FC) is a Singapore-based foreign corporation engaged in construction and installation projects. In 2010, Global Oil Corporation (GOC), a domestic corpoartion engaged in the refinery of petroleum products, awarded an anti-pollution project to Foster Corporation, whereby FC shall design, supply machinery and equipment, and install an anti-pollution device for GOC’s refinery in the Philippines, provided that the installation part of the project may be sub-contracted to a local construction company. Pursuant to the contract, the design and supply contracts were done in Singapore by FC, while the installation works were sub-contracted by the FC with the Philippine Construction Corporation (PCC), a domestic corporation. The project with a total cost of P100 Million was completed in 2011 at the following cost components: (design – P20Million; machinery and equipment – P50 Million; and installation –P30 Million). Assume that the project was 40% complete in 2010 and 100% complete in 2011, based on the certificates issued by the certificates issued by the architects and engineers working on the project. GOC paid FC as follows: P60 Million in 2010 and P40 Million in 2011, and FC paid PCC ion foreign currency through a Philippine bank as follows: P10 Million in 2010 and P20 Million in 2011.
a) Is FC liable to Philippines income tax, and if so, how much revenue shall be reported by it in 2010 and in 2011? Explain your answer. (5%)
b) Is PCC, which adopted the percentage of completion method of reporting income and expenses, liable to value added tax in 2010 and in 2011. Explain your answer. (5%)
Suggested answer only. Not an official answer and not legal advice.
a) No, FC is not liable for Philippine income tax and reports P0 revenue. b) Yes, PCC is subject to VAT, but its services to FC qualify for 0% VAT.
Under Sec. 42, NIRC and the PH-Singapore Tax Treaty, an NRFC is taxed only on local income, and business profits are exempt without a permanent establishment (CIR v. Marubeni). Under Sec. 108(B)(2), services to an NRFC doing business abroad, paid in remitted foreign currency, are 0% VAT zero-rated.
FC's design and supply were performed in Singapore, while installation was subcontracted to PCC. Lacking a local permanent establishment, FC owes no Philippine tax. PCC's installation services for FC, paid in foreign currency via a local bank, qualify for 0% VAT in 2010 and 2011.
Thus, FC owes zero income tax, and PCC's revenues are subject to 0% VAT.
This is not an official scoring system and carries no weight with the Supreme Court or any bar review provider. It measures how much of the suggested answer's wording your response covers, not whether your reasoning is correct. For practice only.
Quick check
How is a non-resident foreign corporation taxed on its income under Section 42 of the NIRC?
A non-resident foreign corporation is subject to Philippine corporate income tax exclusively on Philippine-source income.
What is the VAT rate on local installation services rendered to a non-resident foreign corporation and paid in inwardly remitted foreign currency?
Services rendered to a non-resident foreign corporation paid in acceptable foreign currency inwardly remitted through the banking system qualify for zero percent VAT.
Where is the income source located for engineering design contracts performed entirely outside the Philippines by a foreign entity?
Income from service contracts is sourced where the actual service or work is performed.
Under tax treaties, what condition must exist for a foreign corporation's business profits to be taxable in the Philippines?
Under double taxation treaties, business profits are taxable locally only if attributable to a domestic permanent establishment.
How is a domestic subcontractor taxed on payments received in foreign currency for local construction work from a foreign prime contractor?
Subcontracted local services paid in inwardly remitted foreign currency qualify for zero-rated VAT while remaining subject to income tax on net income.
Learn more about these topics
1. NRFC Income Taxability
Under Section 42 of the National Internal Revenue Code and international tax treaties, a non-resident foreign corporation is subject to Philippine income tax only on income derived from sources within the Philippines. Business profits earned by a foreign entity without a permanent establishment in the Philippines are exempt from domestic corporate income taxation. When design work and machinery manufacturing occur entirely offshore abroad, the resulting revenues constitute foreign-source income beyond the territorial jurisdiction of Philippine tax authorities.
2. Zero-Rated Subcontracted Services
Under Section 108(B)(2) of the Tax Code, services rendered by a domestic contractor to a non-resident foreign corporation doing business outside the Philippines qualify for zero percent Value-Added Tax. To qualify for zero-rating, the consideration for services performed within the Philippines must be paid in acceptable foreign currency inwardly remitted through the domestic banking system. Subcontracted construction and installation services rendered locally satisfy statutory zero-rating requirements when settled via qualifying foreign exchange remittances.
3. Permanent Establishment Rule
Under double taxation agreements, such as the Philippines-Singapore Tax Treaty, business profits of a foreign enterprise are taxable in the host country only if attributable to a local permanent establishment. Where a foreign prime contractor subcontracts all physical installation and construction activities within the host country to an independent domestic corporation, the foreign entity does not create a permanent establishment. Consequently, the foreign prime contractor remains completely immune from host-country income tax liability.