BIR Ruling [DA-285-06]

April 27, 2006 BIR RULING [DA-285-06] 57; 105; 044-99 Lopez and Company LAC Center 2518 Leiva Street Sta. Ana, Manila Attention: Mr. Restituto T. Lopez Senior Partner Gentlemen : This refers to your letter dated February 6, 2006 requesting for a ruling, on behalf of your clients Euro P2P Direct, Inc. (Euro P2P) and Euro Forbes International Pte., Ltd. (Euroforbes), relative to the tax consequences of the exclusive distributorship agreement entered into by the parties. It is represented that Euro P2P, with office address at 5th floor, RFM Corporate Center, corner Sheridan and Pioneer Streets, Mandaluyong City, was incorporated and registered with the Securities and Exchange Commission on January 28, 2005 under SEC Certificate of Registration No. CS200501296 to engage in, conduct, and carry on the business of buying, importing, selling, distributing, marketing at wholesale or retail as may be permitted by law, all kinds of home care and related products; that it is a 100% Filipino-owned company with an authorized capital stock of Five Million Pesos divided into Fifty thousand shares with a par value of P100.00 each; that Euroforbes is a corporation duly organized and existing under and by virtue of the laws of Singapore with office address at 35 Selegie Road, #04-07 Singapore 188307; that Euroforbes is in the business of selling and marketing various goods, such as the Forbes household products and kitchenware; that on January 1, 2005, Euroforbes granted exclusive distributorship rights to Euro P2P who agreed to be the distributor in the Philippines with respect to Forbes products; that the salient features of the Exclusive Distributorship Agreement are as follows: "Euro P2P shall appoint associates and maintain facilities for the sale of Forbes Products, and maintain a business and sales organization adequate to work and develop the Territory to Euroforbes satisfaction; Euroforbes shall furnish to Distributor sales promotional aids, such as handbooks, sales plans, circulars, advertising suggestions, cuts, printed commercial and technical information, and other publications which Euroforbes may have available for distribution. Euroforbes shall charge Distributor for such materials upon delivery. Media advertising in the Philippines, whether in print, television, or radio and advertising and promotional materials to be done in the Philippines shall be for the account of Euroforbes. Euro P2P agrees to provide sales incentives to its staff, at its expense, to promote increased sales and distribution of Forbes Products. All costs and expenses in connection with the performance by Euroforbes of its obligations under the Maintenance and Technical Services section of the agreement shall be to the account of Distributor." and that based on the foregoing, you request that the fees to be received by Euroforbes for the maintenance and technical service fees and the sales promotional materials be exempt from Philippine income tax and withholding tax; and that the billings of Euro P2P to Euroforbes for the reimbursable costs, as these expenditures were advanced and paid for and in behalf of Euroforbes be considered as non-revenue accounts, non-vatable transactions and should not be subject to income tax and value-added tax. aITECD In reply, please be informed that under Article 7 of the RP-Singapore tax treaty, "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 of the same Tax Treaty provides that 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 of supervisory activities in connection therewith, provided such site, project or activity continues for a period 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." Inasmuch as Euroforbes does not have a permanent establishment in the Philippines, the same will not be subject to any withholding tax under Section 57 of the Tax Code of 1997, including the 1% creditable tax to be withheld on income payments made by any of the top 10,000 corporations to their local supplier of goods. Thus, the income payments to Euroforbes through Euro P2P as an exclusive distributor under the exclusive distributorship agreement are not subject to income tax in the Philippines and, consequently, are not subject to any withholding tax, including the 1% creditable tax to be withheld on income payments made by any of the top 10,000 corporations. (BIR Ruling No. 007-2006 dated January 13, 2006) Likewise, the maintenance and technical services to be rendered by a resident of Singapore, through employees or other personnel, which visits shall in no case exceed 183 days during the distributorship agreement, shall not constitute carrying of business through a permanent establishment in the Philippines. Such being the case, income derived therefrom is not subject to Philippine income tax pursuant to Article 7 of the RP-Singapore Tax Treaty. cIETHa In addition, please be informed that under Section 105 of the Tax Code of 1997, which provides for the coverage of the value-added tax, only a ''person who in the course of trade or business sells, barters, exchanges, leases goods or properties or renders services and any person who imports goods shall be subject to value-added tax." Considering that Euroforbes will merely support the operations of Euro P2P, through a non-technical day to day administration services which shall thereafter be charged to the latter on a reimbursement-of-cost basis, the provision of Section 105 shall not apply. Thus, even if the billing which shall be forwarded by Euroforbes to Euro P2P will not reflect the expenses on a reimbursement basis, the same is not subject to income tax, withholding tax and VAT since the same refers to services imputable to Euroforbes rendered abroad. (BIR Ruling No. 044-99 dated March 30, 1999). Likewise, the billings of Euro P2P to Euroforbes for the reimbursable costs, as these expenditures were advanced and paid for and in behalf of Euroforbes, are considered as non-revenue accounts, non-vatable transactions and therefore are not subject to income tax and value-added tax. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service