BIR Ruling [DA-147-97]

April 7, 1997 BIR RULING [DA-147-97] Joaquin Cunanan & Co. 8th Floor, BA-Lepanto Building 8747 Paseo de Roxas Makati City Attention: Atty . George J . Lavadia Principal Tax and Corporate Services Gentlemen : This refers to your letter dated August 5, 1996 stating that your client, SAP Philippines, Systems Applications and Products in Data Processing (SAP Philippines) is a corporation organized and existing under the laws of the Philippines; that it was registered on May 4, 1995 with the Securities and Exchange Commission; that it is engaged in the business of rendering computer services which include the implementation, use and training of SAP R/3 software; that the company which was then newly organized, was still in the process of training its own people/consultants to be well-versed with the SAP R/3 systems, hence, it was compelled to contract, among others, the services of non-resident foreign corporations, such as SAP Asia, Systems Applications and Products in Data Processing Pte. Ltd. (SAP Asia) for purposes of rendering the necessary services to its Philippine clients; that SAP Asia is a corporation organized and existing under the laws of Singapore primarily engaged in rendering services relative to SAP R/3 software, documentation and any associated products; that pursuant to the agreement between the parties, SAP Asia rendered services to SAP Philippines relative to the San Miguel project for a period which did not exceed six months or 183 days in the aggregate; that in consideration for services performed, SAP Asia was paid based on actual time charges incurred by the latter at a pre-agreed time rate; that SAP Asia rendered services in the Philippines for less than six months in the aggregate for the duration of the project, and has no permanent establishment in the Philippines; and that beginning January 1, 1996, you will subject the payments of SAP Philippines to SAP Asia for services rendered in the Philippines to 10% Value-Added Tax pursuant to the Expanded Value-Added Tax Law. cdt Based on the foregoing, you now request for a confirmation of your opinion that payments by SAP Philippines to SAP Asia for services rendered in the Philippines are not subject to tax pursuant to the Philippine-Singapore Tax Treaty. In reply, please be informed that Article 5(1) and (2) of the RP-Singapore Tax Treaty provide as follows: "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; xxx xxx xxx (j) The furnishing of service, including consultancy services, by a resident of one of the Contracting States (Singapore) through employees or other personnel, provided activities of that nature continue (for the same or connected project) within the other Contracting State (for a period or periods) aggregating more than 183 days. xxx xxx xxx" Moreover, Article 7 of the said treaty provides, viz: "Article 7 " BUSINESS PROFITS "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. xxx xxx xxx" Considering that SAP Asia rendered services in the Philippines for not more than six (6) months in the aggregate for the duration of the project, and has no permanent establishment in the Philippines, payments by SAP Asia for services rendered in the Philippines are not subject to tax pursuant to the aforecited provisions of the Philippine-Singapore Tax Treaty. (BIR Ruling No. 174-92 dated May 29, 1992). However, beginning January 1, 1996, payments of SAP Philippines to SAP Asia for services rendered in the Philippines shall be subject to 10% value-added tax pursuant to R.A. No. 7716 otherwise known as the expanded value-added tax law. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)