BIR Ruling [DA-577-99]

October 6, 1999 BIR RULING [DA-577-99] SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr . Joel L . Tan-Torres Gentlemen : This refers to your letter dated July 16, 1999 requesting for a confirmatory ruling that your client, Sun Life Assurance Company of Canada ("SLAC"), which is engaged in the life insurance business, is not subject to income tax, withholding tax and value-added tax ("VAT") on the compensation received for services to be rendered to a new domestic life insurance corporation under an Administrative Services Agreement ("Agreement"). LexLib It is represented that SLAC is a mutual life insurance company organized and existing under the laws of Canada; that since 1895, it carried on a life insurance business through a Philippine branch ("Branch"); that under a Transfer Agreement and an Indemnity Insurance Agreement, the Branch's life insurance business will be transferred to a new corporation ("NEWCO") which is a domestic corporation; that under the Administrative Services Agreement, NEWCO will contract with SLAC's Head Office ("Head Office") to provide the former with certain administrative services from time to time including Information Technology Services, Actuarial Services, Accounting Services, Legal Services, Human Resource Services, Marketing and Research Services and General Management and Other Services, among others; that these administrative services will be performed by Head Office personnel in Canada using facilities and resources located in Canada and will be charged at cost; that NEWCO is not precluded from obtaining the same services from other providers if it proves beneficial to the company. In connection therewith, you now request confirmation of the following: 1. The compensation paid by NEWCO to SLAC for administrative services under the Agreement is considered as compensation for services performed outside the Philippines and is not subject to income tax under Section 28 of the Tax Code and the provisions of the RP-Canada Tax Treaty; 2. The fees paid by NEWCO to SLAC are not royalties and, thus, not subject to withholding tax; 3. The compensation paid by NEWCO to SLAC is an ordinary and necessary business expense of NEWCO, allowed as a deduction from its gross income; 4. The administrative services rendered by SLAC to NEWCO under the Agreement is not subject to 10% VAT. In reply, please be informed that under Section 28 of the 1997 Tax Code, resident foreign corporations like SLAC are taxable only on income derived from Philippine sources. Since the administrative services will be rendered by the SLAC Head Office to NEWCO in Canada, then the services are performed outside the Philippines. Consequently, the compensation paid in relation thereto is income derived from the sources without the Philippines pursuant to Section 42(C)(3) of the same Tax Code. prcd Moreover, Section 42(A)(4) of the 1997 Tax Code provides: "(4) Rentals and Royalties . Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for: (a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; (c) The supply of scientific, technical, industrial, or commercial knowledge or information; (d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and (g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting." Also, Article XII(3) of the RP-Canada Tax Treaty provides: "3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial, or scientific experience, and includes payments of any kind in respect of motion picture films and works on films and videotapes for use in connection with television." To be considered royalties, there must be transferred into the Philippines technology, equipment, or other property, where the payee has proprietary interest (BIR Ruling No. 093-89, dated May 2, 1989; BIR Ruling No. 026-94, dated January 21, 1994). Under the Agreement between NEWCO and SLAC Head Office, there is no transfer of technology or know-how, nor of technology, property or equipment where SLAC Head Office has proprietary skills to NEWCO. SLAC's personnel will be performing work using only customary skills. In which case, the payments for administrative services to be rendered by SLAC to NEWCO in Canada are not royalties within the meaning of the Tax Code and the RP-Canada Tax Treaty but are considered compensation derived from sources outside the Philippines and, therefore, not subject to income tax and the withholding tax. Furthermore, the Agreement is entered into between SLAC Head Office and NEWCO only. Thus, while SLAC has a branch in the Philippines, the payments made by NEWCO to SLAC are not attributable to the Philippine branch since the branch will have no participation or intervention, whether directly or indirectly, with the performance of the administrative services under the Agreement (Marubeni Corporation vs. Commissioner of Internal Revenue, 177 SCRA 500, September 14, 1989). In this connection, Article VII of the RP-Canada Tax Treaty provides as follows: "Article VII "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: (a) that permanent establishment; or . . ." (Emphasis ours) A "permanent establishment" under Article V(1) of the Treaty includes a branch. Specifically, Article V(5) provides that an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other State if it collects premiums or insures risks situated therein through an employee, or a representative who is not an agent of independent status. In view of this, since the compensation paid to SLAC Head Office by NEWCO will not be attributable to SLAC's Philippines branch, the same are considered business profits not subject to Philippine income tax and the withholding tax. The fees paid to SLAC Head Office being proper and appropriate to NEWCO's life insurance business, the same are allowable deductions from NEWCO's gross income pursuant to Section 34(A)(1) of the Tax Code. Finally, a 10% VAT is imposed on the "sale or exchange of services" in the Philippines for a fee, remuneration or consideration. Since SLAC Head Office will perform the administrative services in Canada, the same is not subject to the 10% VAT. 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 will be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)