BIR Ruling [DA-145-97]

April 7, 1997 BIR RULING [DA-145-97] Joaquin Cunanan & Co. 14 Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Tomasa H . Lipana Tax Managing Partner Gentlemen : This refers to your letter dated December 18, 1996 requesting confirmation of your opinion to the effect that payments made by Dart Philippines, Inc. (TUPPERWARE PHILS.") to Premier Products, Inc. ("PPI") for services rendered pursuant to the Revised Service Agreement between the aforesaid parties are not taxable in the Philippines. cdtech It represented that PPI is a non-resident foreign corporation organized and existing under the laws of the United States of America; that it has been organized for several purposes, including that of providing, on a centralized basis, a variety of management, human resources, management information systems, accounting and financial services, for itself and for other affiliated companies; that it is not engaged in trade or business in the Philippines; that, on the other hand, TUPPERWARE PHILS., an affiliated company of PPI, is a corporation organized and existing under the laws of the Philippines and engaged in the manufacture and sale of plastic houseware products, toys and other related classes of items; that in 1993, the above-stated companies entered into a Service Agreement whereby PPI shall provide services to TUPPERWARE PHILS., such as, management services, human resources, management information systems, accounting and financial services, among others; that all the said services are to be executed outside of the Philippines; that in consideration of the said services, TUPPERWARE PHILS., shall pay PPI the actual cost incurred in accordance with the provision of the aforementioned Agreement; that the BIR, through its unnumbered Ruling No. 007-95 dated January 4, 1995, confirmed the tax exemption and deductibility of the payments/reimbursements by TUPPERWARE PHILS. to PPI under the Service Agreement; that on January 1, 1996, the same parties revised the aforesaid Agreement reiterating basically the same contractual provisions, except for the expansion of services such as providing assistance to TUPPERWARE PHIL.'s business services units in quality management, in sales force expansion, in establishing other development opportunities, in treasury, finance and other matters; and that based on the foregoing facts, it is your opinion that since the payments made by TUPPERWARE PHILS. to PPI are mere reimbursements of actual costs and expenses incurred by PPI, with no markup or profit element, and inasmuch as PPI does not have a permanent establishment in the Philippines, the services being rendered entirely outside the Philippines, the same shall be considered as business profits and therefore, not taxable in the Philippines, and that the reimbursements are deductible from TUPPERWARE PHIL.'s gross income since they qualify as ordinary and necessary expenses incurred in the conduct of the latter's trade or business in the Philippines. In reply, please be informed that the payments made by TUPPERWARE PHILS. to PPI for services rendered as set forth in their Service Agreement are exempt from Philippine income tax considering that the said services are rendered by PPI entirely outside of the Philippines. Under Article 8 of RP-US Tax Treaty, the taxability of business profits earned by a U.S. resident shall depend on the existence of a permanent establishment (PE) in the Philippines. A PE, as defined under Article 5 of the same Tax Treaty includes, among others, "the rendering of technical services in the Philippines for a period of more than 183 days." This means that if the technical or consultancy services are rendered outside the Philippines, or even if these are rendered within the Philippines but the rendition of which is less than 183 days during a given taxable year, the same shall not constitute a PE. As such, the payments for such services shall be exempt from withholding tax. In view thereof, this Office is of the opinion, and so holds, that since the services covered by the subject Service Agreement will be rendered by PPI outside the Philippines and considering further that PPI has no PE in the Philippines, the payments made by TUPPERWARE PHILS. for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 25 (b)(1) in relation to Section 50(a), both of the Tax Code, as amended. The said payments of TUPPERWARE PHILS. to PPI, however, being an expense considered appropriate and helpful in the development of the taxpayer's business and likewise normal in relation to the business of TUPPERWARE PHILS., can be deducted as ordinary and necessary business expense when paid or incurred during the taxable year, hence, deductible from TUPPERWARE PHIL.'s gross income pursuant to Section 29(a)(1) of the Tax Code, as amended. Furthermore, said payments are also exempt from Philippine income tax since they are mere reimbursements for actual incurred without any mark-up or profit element. (BIR Ruling No. 001-90 dated January 4, 1990). This ruling is being issued on the basis of the foregoing facts as represented. However, if it will be disclosed that the facts are different upon investigation, and/or any of the conditions imposed in this letter is not complied with, then this ruling shall be considered null and void. Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)