Amendments to Act No. 2339, the Internal Revenue Law of 1914

November 15, 2005 ITAD RULING NO. 137-05 Articles 5 & 7 of the Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD-59-04 Diaz Murillo Dalupan and Company 5th Floor, Don Jacinto Bldg., Dela Rosa corner Salcedo Street Legaspi Village, Makati City Attention: Atty. Millard M. Manseguiao Director, Tax & Corporate Services Gentlemen : This refers to your letter dated December 6, 2004, requesting confirmation that the fees and charges paid by Edeleanu Sdn Bhd-Philippine Branch (Edeleanu-Phil) to Uhde Edeleanu S.E. Asia Pte., Ltd. (Edeleanu-Singapore), formerly Tessag Edeleanu Asia Pte. Ltd. under a Memorandum of Agreement are not subject to Philippine income tax and value-added tax (VAT). It is represented that Edeleanu-Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore with principal address at 25th International Business Park, Singapore with registration number 1982 02129R as certified by the Assistant Registrar of Companies and Business of Singapore on July 23, 2002; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated October 12, 2005; that Edeleanu-Phil is a Philippine branch of a foreign corporation organized in Malaysia; that on July 15, 2004, Edeleanu-Singapore and Edeleanu-Phil entered into a Memorandum of Agreement (Agreement); that under the said Agreement it was stated that Edeleanu-Phil entered into a Contract Agreement with Petron Corporation-Refining Division, for engineering, procurement and construction services for "Offsites Automation Project" at Limay, Bataan, including supervision, engineering, procurement, consultations, constructions, labor, and related services; that under the Agreement, Edeleanu-Phil engaged Edeleanu-Singapore to prepare in Singapore the following technical documents: Plans and drawings in-process design, civil and structural, piping, electrical, instrumentation engineering, and related services Updates of P & IDD's. Updated Line List Hydraulic Calculations Foundation/footing drawings Structural drawings aCIHcD Piping Arrangement drawings Isometric drawings Piping Supports Bulk piping MTO Cable tray/conduit routing drawings Power Cable layout drawings Electrical Cable schedule Termination drawings Layout of field instrumentation cables/tray route Summary of Instrument Cables Cabinets termination details that Edeleanu-Singapore shall send to the project in the Philippines experts/consultants for site inspections, to oversee the implementation of technical plans for a period not exceeding 183 days in one (1) year; that in consideration of the sum of Three Hundred Sixty US Dollar (US$360,000.00), the parties have agreed as follows: 1) Uhde Edelanu S.E. Asia Ltd. shall prepare in Singapore the aforementioned technical documents to be used at the offsites automation projects; and (2) that the monthly billings/payment of Edeleanu-Phil to Edeleanu-Singapore shall be subject to actual receipt of payment by Edeleanu-Phil from Petron Corporation; and that Edeleanu-Singapore employees, namely Mr. Hew Chong Yoon and Mr. Ng Lng Min, stayed in the Philippines for less than 183 days to render services under the Agreement, per certification issued by Ms. Lee Ken Moe of Edeleanu-Singapore dated August 17, 2005. In reply, please be informed that Article 7 and 5 of the Philippines-Singapore tax treaty provide: "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 or has carried 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 establishment. xxx xxx xxx" "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes specially but is not limited to: xxx xxx xxx" j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. HaTDAE xxx xxx xxx" Based on the foregoing, a corporation which is a resident of Singapore and which does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services, through its employees or other personnel continue for the same or a connected project within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as it is represented that the services rendered by Edeleanu-Singapore for Edeleanu-Phil did not exceed a period or periods aggregating more than 183 days, then the furnishing of said services by Edeleanu-Singapore through its employees or other personnel shall not constitute carrying of business through a permanent establishment in the Philippines. Such being the case, income derived by Edeleanu-Singapore under the Agreement is not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5 of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-59-04 dated June 3, 2004) However, the aliquot part of the service fees to be paid by Edeleanu-Phil to Edeleanu-Singapore for services actually performed in the Philippines is subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Edeleanu-Phil, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% VAT on such service fees before remitting any payment to Edeleanu-Singapore. In remitting the VAT withheld, Edeleanu-Phil shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Edeleanu-Phil upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case Edeleanu-Phil is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an "expense" or as an "asset" whichever is applicable. In addition, Edeleanu-Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Edeleanu-Singapore upon its request and the fourth copy to be retained by Edeleanu-Phil as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued on the basis of the foregoing facts as represented. However, if upon it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Legal Commissioner Legal Service