BIR Ruling [DA-105-97]

March 19, 1997 BIR RULING [DA-105-97] San Miguel Corporation No. 10 San Miguel Ave., Ortigas Centre Mandaluyong City Attention: Mr. Jose S. Tayag, Jr. Vice President and Manager Gentlemen : This refers to your letter dated October 30, 1996 requesting for a ruling confirming your opinion that consultancy fees paid by San Miguel Corporation to Strategos are exempt from withholding taxes under the RP-US Tax Treaty. It is represented that San Miguel Corporation (SMC) is a corporation duly registered and existing under the laws of the Republic of the Philippines engaged in the manufacture and wholesale of beer and various food products, that in the course of its operation, it engaged the services of Strategos, a US based management consultancy firm to conduct the Voyage of Discovery (VOD) Seminar within SMC; that the objective of this activity is to define the corporate goals and how these may be achieved by using the tools and methodology developed by Strategos; that this activity will run for approximately 9 months from January to September 1996, that for the duration of this engagement, Strategos will provide assistance in person by its partners and assigned team members with on going support via teleconference, telephone and e-mail for behind the scenes, provided, however that the on-site presence in the Philippines of its partners and team members will be a maximum period of 26 weeks (182 days) for selected key milestone meetings and where personal support and assistance necessary in the course of the work; that the total fees for the services to be rendered by Strategos for this purpose is US$2,500,000.00 plus expenses which is estimated at about US$625,000.00; that upon completion of the assignment, Strategos will provide SMC with a reconciliation of actual expenses such that they will refund any overpayment or invoice SMC for any underpayment; and that payments will be remitted to Strategos head office in the State of California, U.S.A according to the following schedules. PHASE END OF MONTH FEES (IN US$) EXPENSES (IN US$) Diagnosis January '96 0 30,000.00 Diagnosis February '96 200,000,00 30,000.00 Design March '96 200,000.00 69,450.00 Discovery Part 1 April '96 0 69,450.00 Discovery Part 1 May '96 0 69,450.00 Discovery Part 1 June '96 750,000.00 69,450.00 Discovery Part 2 July '96 0 69,450.00 Discovery Part 2/3 August '96 250,000.00 69,450.00 Discovery Part 3 September '96 1,100,000.00 69,450.00 $2,500,000.00 $625,000.00 =========== ========= In reply, please be informed that your opinion that the consultancy fees being paid by your company to Strategos is exempt from withholding taxes pursuant to Article 8 (1) in relation to Article 5 of the RP-US Tax Treaty is hereby confirmed. Article 8 (1) of the RP-US Tax Treaty provides as follows. "Article 8 BUSINESS PROFITS (1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. xxx xxx xxx" In this connection, Article 5 of the same Tax Treaty defines a permanent establishment, as follows: "Article 5 PERMANENT ESTABLISHMENT (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the contracting States engages in a trade or business; (2) The term "fixed place of business" includes 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; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building or construction or assembly project or supervisory activities in connection therewith, provided that such site, project or activity continues for a period of 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." Such being the case, and since no consultant of Strategos will be assigned to the Philippines for a period of more than 183 days, the consultancy fees you are paying to Strategos for their services are not subject to Philippine income tax and are therefore exempt from final withholding taxes prior to remittance to the United States. Moreover, considering that the expenses charge to your account by Strategos are subject to reconciliation of actual expenses such that they will refund any overpayment or invoice SMC for any underpayment, this amount will not form part of the income of Strategos. However, the said consultancy fees are subject to the 10% VAT under the provisions of Republic Act No. 7718, otherwise known as the Expanded VAT Law. The VAT is applicable only to the consultancy fees considering that the amount remitted for the services rendered by Strategos for this project is not part of the income of Strategos. This ruling is being issued on the basis of the foregoing facts as represented. However, if, upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. Very truly yours, ALICIA L. CLEMENO Assistant Commissioner (Legal Service) By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Exec. Assistant (Legal Service)