BIR Ruling [DA-225-98]

June 9, 1998 BIR RULING [DA-225-98] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr . 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 (SEC); 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 Duyser & Friends International Consulting (DUYSER) for purposes of rendering the necessary services to its Philippine clients; that Duyser is a corporation organized and existing under the laws of Malaysia primarily engaged in the process, implementation and use of computer software, in particular, SAP R/3 software; that pursuant to the agreement between the parties, Duyser rendered services to SAP Philippines to assist in the implementation, use and training of SAP R/3 software for a period which did not exceed six months or 183 days in the aggregate; that in consideration for services performed, Duyser was paid based on actual time charges incurred by the latter at a pre-agreed time rate; that Duyser rendered services in the Philippines for a period which did not exceed six months and has no permanent establishment in the Philippines; and that beginning January 1, 1996, you will subject the payments of SAP Philippines to Duyser for services rendered in the Philippines to 10% Value-Added Tax pursuant to the Expanded Value-Added Tax Law. cdll Based on the foregoing, you now request for a confirmation of your opinion that payments by SAP Philippines to Duyser for services rendered in the Philippines are not subject to income tax pursuant to the Philippine-Malaysia Tax Treaty. In reply, please be informed that Article 5(1) and (2) of the RP-Malaysia 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 place of management; (b) a branch; (c) an office; 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 Duyser did not render services in the Philippines for more than six (6) months in the aggregate for the duration of the project and has no permanent establishment in the Philippines, payments made by SAP Philippines to Duyser are not subject to income tax pursuant to the aforecited provisions of the Philippine-Malaysia Tax Treaty. (BIR Ruling No. 174-92 dated May 29, 1992) However, beginning January 1, 1996, payments, of SAP Philippines to Duyser 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, as amended by R.A. No. 8241, and as last amended by R.A. No. 8424. This ruling is being issued in 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 considered null and void. aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group