Amendments to P.D. No. 1158, the National Internal Revenue Code of 1977

May 20, 2008 DA ITAD BIR RULING NO. 035-08 Arts. 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD 05-06 Punongbayan & Araullo Certified Public Accountants 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated May 7, 2007 requesting confirmation of your opinion on the following: 1) The service fees paid by Teledatacom Philippines, Inc. (TPI-Philippines) to Teledata (Singapore) Ltd. (Teledata-Singapore) are considered income from sources outside the Philippines on the part of Teledata-Singapore and therefore, are not subject to Philippine income tax under Section 23 (F) in relation to Section 42 (A) (3) of the National Internal Revenue Code of 1997 (Tax Code of 1997). 2) Under Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty, Teledata-Singapore will not be deemed to have a permanent establishment in the Philippines to which business profits may be attributed to, considering that the rendition of the services was carried in Singapore. In case Teledata-Singapore personnel were to be sent to the Philippines to perform part of the services, the duration of their stay will not exceed two (2) months at any one time and the aggregate stay of all assigned personnel for the entire duration of this contract shall not exceed 183 days. Accordingly, the service fees derived by Teledata-Singapore under the Management Contract with TPI-Philippines are not subject to Philippine income tax. 3) Services rendered by Teledata-Singapore are not subject to value-added tax (VAT) under Section 108 of the Tax Code of 1997. 4) The payments made by TPI-Philippines and Teledata-Singapore which actually represent reimbursement for all accommodations, advances or loans to TPI-Philippines by Teledata-Singapore as an incident of the performance of its functions as manager should be treated as a reimbursement of cost, therefore, these payments are not subject to income, withholding and value-added taxes. 5) The service fees and reimbursement paid by TPI-Philippines to Teledata-Singapore are deductible from gross income pursuant to Section 34 (A) (1) (a) of the Tax Code of 1997. It is represented that Teledata-Singapore is a corporation duly organized and existing under the laws of Singapore as evidenced by its Memorandum and Articles of Association; that its principal office is located at 151 Lorong Chuan #04-02 New Tech Park (Lobby B) Singapore 556741; that Teledata-Singapore is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission of the Philippines on May 11, 2007; that TPI-Philippines, on the other hand, is a domestic corporation with principal office at Unit 27-B, 27th Floor Wynsum Corporate Plaza, 22 Emerald Avenue, Ortigas Center, Pasig City; that it is primarily engaged in the importation, supply to industrial or commercial users, installation system integration and maintenance of voice data and video communications equipment, software and supplies. It is further represented that on December 1, 2006, Teledata-Singapore and TPI-Philippines entered into a Management Contract (Contract) whereby Teledata-Singapore shall, for a fee, provide to TPI-Philippines the following services to be performed from its offices in Singapore: A. General 1. To assign appropriate executives and staff to review, monitor and advice TPI-Philippines as circumstances may warrant; 2. To review and provide oversight in significant transactions incident to the operation of the business; 3. To advise on the execution of such contracts, agreements, deeds, bonds, mortgages and other obligations that may arise and as are necessary to the business; 4. To provide purchasing services and assistance as circumstances warrant; and 5. Generally, to advise and provide oversight of such other services or duties necessary or appropriate for TPI-Philippines to achieve its business objectives and growth. B. Finance and Investments 1. To advise TPI-Philippines on the investment of funds in worthy securities, money market and loan investments; 2. To advise and oversee in the handling of foreign exchange transactions and/or evaluate currency and interest rate exposure; 3. To review internal processes to ensure that all documents/transactions concerning any form of investment are properly documented and appropriately held for safekeeping; 4. To advise on the planning and management of company funds such that TPI-Philippines will always have sufficient funds to meet all the required disbursements, including arrangement of bank facilities and/or any form of financing; 5. To provide oversight of the company financial reporting process to ensure the integrity and timeliness of TPI-Philippines financial statements and that they are duly audited by such auditor at such intervals/periods as may be necessary, it being understood that the cost of such audit shall be for the account of TPI-Philippines; 6. To render assistance in resolving any and all treasury-related problems, i.e. bills, purchase line, leasing and the like; 7. To provide financial consultation as well as guidance and expertise in the preparation of financial and operational budgets; 8. To review the TPI-Philippines monthly financial statements; 9. To provide oversight and coordination with external auditors on the annual audited accounts; and 10. To review capital expenditure application and review draft audited accounts. C. Internal Audit 1. To review the accounting, custodial and control activities in the different areas of operations of TPI-Philippines in order to determine compliance with management instructions and objectives as well as performance standards within the industry; and 2. To provide, when circumstances warrant, or as requested, the following planning and co-ordination of audit services: a) Financial and operational audit; b) EDP audit (application systems and computer operations); and c) Special audit, such as, but not limited to, fraud investigations, acquisition audit or due diligence audit. D. Management Information Services 1. To advise on the planning and implementation, where necessary, for the installation and maintenance of information systems; 2. To advise and provide assistance in the development and implementation of training programs for TPI-Philippines information technology staff resources for internal and customer needs. E. Tax Legal and Corporate 1. To advise and provide oversight on the maintenance of the full and complete corporate records of TPI-Philippines and corporate secretarial practices are being complied; 2. To provide legal and tax advice and oversight in the areas of handling and/or monitoring of legal and tax cases, documentation, planning, scheduling of payment of appropriate taxes and preparation of related returns as may be required by existing government regulations; 3. To monitor compliance with all regulatory requirements; and 4. When necessary, to advise on the engagement of external counsel to act for and at the expense of TPI-Philippines. F. Human Resources Management and Corporate Relations Services 1. To provide advice or assistance in the adoption of company policies concerning human resources management and industrial relations activities; 2. To provide advice or assistance in planning, organizing and implementing procedures or programmes for recruitment, training, promotion, and determination of salary structures; 3. To assist in the overseeing or selection, training and performance evaluation of employees of TPI-Philippines; 4. To advise and provide oversight, upon request, TPI-Philippines in matters relating to industrial relations or labor cases with counsel and the proper government agencies; 5. To advise on the improvement of processes pertaining to salary administration and benefits planning and administration; 6. To provide advice and oversight in corporate relations services. G. Administrative Services To provide advice and oversight of TPI-Philippines administrative practices, to ensure that best in class practices are being adopted and implemented in the areas of, but not limited to, general procurement and corporate building facilities management. That the Contract will be effective for a period of three (3) years beginning on 01 January 2006 and ending on 31 December 2008, provided, however, that either party may terminate the Contract for whatever reason and at any time by giving ninety (90) days prior written notice to the other party; that TPI-Philippines shall pay Teledata-Singapore a management fee for the above services in an amount equivalent to 3.625% of Budgeted Sales per year; that the above services shall be rendered entirely from Teledata-Singapore offices in Singapore but in case of exigencies of the business of TPI-Philippines, Teledata-Singapore shall assign its own personnel in the service of the former but such personnel shall not be allowed to stay in TPI-Philippines for more than two (2) months at any one time; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed as follows. 1) On service fees to be paid by TPI-Philippines to Teledata-Singapore under the Management Contract. Article 7 of the Philippines-Singapore 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 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." Based on the aforequoted, the profits of a Singapore enterprise shall be taxable only in Singapore unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Singapore enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the management fees received by Teledata-Singapore for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the RP-Singapore tax treaty provides: "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: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and 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. "xxx xxx xxx." Inasmuch as it is represented that the subject Contract shall continue until terminated by either party, the whole of such Agreement, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of 183 days. In other words, the 183-day period shall be counted based on the total number of days the services are rendered in the Philippines upon effectivity of the subject Contract, including all periods resulting from its automatic renewal. Accordingly, for as long as the employees or agents of Teledata-Singapore do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to TPI-Philippines for the "same or connected project", then Teledata-Singapore is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 05-06 dated January 24, 2006) 2) On payments of VAT on the services rendered by Teledata-Singapore to TPI-Philippines in the Philippines. Moreover, while the compensation for services rendered outside the Philippines is not subject to the 12% VAT, the fees paid for that portion of the services of TPI-Philippines which are rendered in the Philippines are, however, subject to 12% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, TPI-Philippines, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 12% final VAT on such fees before making any payment to Teledata-Singapore. In remitting the VAT withheld, TPI-Philippines shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & 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 to be applied against the output tax that may be due from TPI-Philippines if it is a VAT-registered taxpayer. In case TPI-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, TPI-Philippines is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for Teledata-Singapore and the fourth copy for TPI-Philippines as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 3) On the matter of the service fees as reimbursement paid by TPI-Philippines to Teledata-Singapore and deductibility from gross income pursuant to Section 34 (A) (1) (a) of the Tax Code of 1997 Finally, as regards the character of payment made by TPI-Philippines to Teledata-Singapore as being reimbursements and as regards the deductibility of the service fees as an ordinary and necessary business expense on the part of TPI-Philippines, this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer from treating the same as a deductible item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34 (A) (1) (b) of the National Internal Revenue Code. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Moreover, this ruling shall be without prejudice to the determination of whether or not the representatives of Teledata-Singapore have the necessary authority/license to practice law in the Philippines and neither does it confer upon the assigned representatives of Teledata-Singapore, the authority to practice law within the jurisdiction of the Republic of the Philippines. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner