BIR Ruling [DA-261-98]

June 21, 1998 BIR RULING [DA-261-98] Saulog and De Leon Law Offices Unit 406, Cityland Condominium 10 Tower I 6815 Ayala Avenue Makati City Attention: Atty . Robert Alexander R . Malig Gentlemen : This refers to your letter dated August 4, 1997 stating that your client, Permanent Homes, Inc. (PHI), is a corporation organized and existing under Philippine laws, with principal office address at Room 2207/2208 The Peak, 107 Alfaro Street, Salcedo Village, Makati City; that it is engaged in the business of real estate development; that on September 6, 1996, PHI entered into a Design Consultancy Agreement (Agreement) with Inarc Design (Singapore) Pte. Ltd., (Inarc Design), a corporation organized and existing under the laws of Singapore, with principal office at 111 North Bridge Road, 1801 Peninsula Plaza, Singapore, for the development of a mixed use building at No. 932 United Nations Avenue, Ermita, Manila (Project); that under the Agreement, the development of the Project shall consist of six (6) stages, the first three (3) of which shall be undertaken by Inarc Design; that these three stages are as follows: LexLib Stage I. Briefing/Concept Design: Collate requirements from PHI to determine the scope of works for the Project. Prepare concept drawings and information with the local architect and consultants for the agreed scope of works and gain approval from PHI before proceeding to Stage II. Stage II. Design Development: Develop the approved concept drawings through preparation of design development drawings into a three dimensional solution by means of a creative ethos that is focused on the objectives of PHI. Resolve all materials, color selections, design details, reflective ceiling plans and equipment locations. Review the budget and programme for the scope of works and gain approval from PHI before proceeding to Stage III. Stage III. Contract Documentation: Develop the design development drawings with the local architect and consultants into a comprehensive set of construction documents, including plans, sections, elevations, details, finishes, schedules and specifications: Coordinate the building service engineer's design to ensure compatibility with the architectural solution. Review the budget and programme for the scope of works and gain approval from PHI before proceeding to Stage IV. that in addition to the foregoing, Inarc Design shall also undertake the following services, if requested by PHI, provided the same shall be subject to additional fees, to wit: Architectural modes, major signage allocation, (i.e., other than reception/company name signage) artwork selection, and/or planting selection and any other services not included in the agreed contract works. that in consideration of Inarc Design's services, PHI shall pay an amount equivalent to 1.5% of the construction contract sum, i.e., P7,680,000.00, for an initial estimated construction budget of P504,000,000.00; that it is agreed upon that this fee shall be a fixed lump sum of US$295,300 for Stages I-III, with a provision for re-calculation only if the construction budget increases by more than 10% after calculation by the appointed Project-Manager for each of Stages I-III; that PHI shall reimburse to Inarc Design the following expenses: 1) Fees duly paid to statutory authorities having jurisdiction over the works; 2) The provision of copies of drawings or contract documents, and the cost of any courier service associated with the transport of such documents when required by PHI. However, reimbursement for these expenses is subject to a maximum amount of P78,000.00 (i.e., $3,000); 3) The cost of travelling, accommodation and meals of personnel to and from PHI office and the works during the course of the stages of service. A total of 14 round trips from Hong Kong, each to be accompanied by up to two personnel is mutually agreed upon for the service. It is also mutually agreed that these disbursement costs will be deducted from a ceiling sum of US$12,320 and Inarc Design reserves the opportunity to discuss with PHI if these disbursement costs should be exceeded due to an increase either in frequency and/or duration. that Inarc Design does not have a permanent establishment in the Philippines; and that its personnel shall not be present in the Philippines for more than 183 days in any calendar year. Based on the foregoing representations, you now request confirmation of your option that "1) The lump sum fee and additional fees for additional services, if any, payable by PHI to Inarc Design are: a. In the nature of "business profits" within the meaning of Article 7 of the Tax Treaty; and b. Not subject to any Philippine income tax, pursuant to said Tax Treaty. "2) The salaries and other remuneration of Inarc Design's personnel who may be assigned in the Philippines during the term of the Agreement is not subject to Philippine income tax; "3) PHI is exempt from withholding tax on the lump sum fee and additional fees, if any, and salaries and other remuneration payable to Inarc Design and its personnel, respectively." In reply, please be informed that your opinion is hereby confirmed, as follows: 1) Under Article 7, paragraph 1 of the RP-Singapore Tax Treaty, pertinent portion of which provides, viz.: "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." Moreover, Article 5(1) and (2) of the said treaty provides, viz.: "ARTICLE 5 "Permanent Establishment "1. For the purpose of this Convention, the term "permanent establishment" means 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 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, it is the opinion of this Office that the remittance by PHI to Inarc Design of the fees paid for consultancy services rendered by the latter under the Design Consultancy Agreement is in the nature of business profits within the meaning of Article 7 of the RP-Singapore Tax Treaty. Accordingly, since Inarc Design does not have a permanent establishment in the Philippines, the fees to be derived by Inarc Design are not subject to Philippine income tax and consequently to the withholding tax prescribed under Section 28(B)(1) of the Tax Code of 1997. The said fees are taxable only in Singapore pursuant to Article 7 of the RP-Singapore Tax Treaty. (BIR Ruling Nos. 566-88 dated November 29, 1988; 88-86 dated June 24, 1986) cdpr 2) Considering that Inarc Design does not have a permanent establishment in the Philippines nor does it perform consultancy services in this country for a period exceeding an aggregate of 183 days at any calendar year, the salaries and other remuneration of its personnel shall be taxable only in Singapore. (BIR Ruling No. 566-88 dated November 29, 1988) 3) The remittance by PHI to Inarc Design of the lump sum fee and additional fees, if any, and the salaries and other remuneration payable to the latter and its personnel under the Design Consultancy Agreement shall be exempt from withholding tax prescribed under Section 28(B)(1), in relation to Section 57(B), both of the Tax Code of 1997. 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 considered null and void. prcd Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)