Supply of Technology as well as Communications Equipment to a GOCC Subject to VAT

March 18, 1997 BIR RULING NO. 024-97 102 (a) (3) (4) (5) (6); 25 (a) 000-00 024-97 Javlon International (Phils.), Inc. 4th Floor, Pacific Star Bldg. Makati Avenue cor. Sen. Gil Puyat Makati City Attention: Ms . Corazon J . Panganiban Director, Business Development Gentlemen : This has reference to BIR Ruling No. 08-97 dated January 22, 1997 whereby this Office ruled that the supply of technology as well as communications equipment to a government-owned and controlled corporation is subject to value-added tax pursuant to Section 102 (a) (3) (4) (5) and (6) of the Tax Code, as amended and that pursuant to Section 12 (2) of the RP-France Tax Treaty, the income payment made to the contractor is subject to the preferential rate of 25%. cdta It is represented that your principal, a French Government Corporation, is a Limited company organized and existing under the laws of France; that it has a local representative in the Philippines (Javlon International Phils. Inc.); that it is in the final stages of negotiating a contract with a Philippine government owned and controlled corporation; that such Agreement will require the French corporation to set up and organize a Branch Office in the Philippines; that such contract provides for the sale of various equipment and information systems to the Philippine government-owned and controlled corporation which will become the exclusive owner of such equipment and information systems; that the equipment will be acquired in the Philippines and most of the information systems will be developed/acquired locally; that it will provide its client, a government-owned and controlled corporation, the technology for the installation of the appropriate computer system, control systems and communications equipment including hardware, software, and various technical services stated in the agreement; that the government-owned and controlled corporation binds itself to the contractor the contract price in French for the works, equipment and software which is undertaken by the contractor directly from France; that the contract price in Pesos shall be made in payment for the works, equipment and software to be undertaken by the contractor in the Philippines; that an advance payment of 15% of the French Prance component of the total contract price, shall be paid to a contractor's French Franc bank account in the Philippines; and that 15% of the Philippine Peso component of the total contract price, payable to a contractor's Peso bank account in the Philippines. The portion of BIR Ruling No. 08-97 which provides that the supply of technology as well as communications equipment to a government-owned and controlled corporation is retained. Thus, the supply of technology as well as communications equipment to a government-owned or controlled corporation is subject to value-added tax (VAT) pursuant to Section 102 (a) (3) (4) (5) & (6) of the Tax Code, as amended by Republic Act No 7716, otherwise known as the Expanded Value-Added Tax Law. The collection of the VAT shall be effected by way of withholding by the income payor who shall then remit the same to the BIR using the VAT Withholding Remittance Form. Moreover, the following is added to the foregoing: "In the case of software to be developed/delivered, it appears from the agreement that the same becomes the sole property of the Philippine corporation and therefore, no royalties are required." However, the portion which treats the income payment as royalties and is therefore subjected to 25% preferential rate, is hereby modified. Article 5 of the RP-French Republic Tax Treaty defines a permanent establishment as: "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" shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period more than six months; i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period." In connection therewith, Article 7 of the RP-French Republic Tax Treaty, stating: "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. "2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contacting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. "3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred whether in the State in which the permanent establishment is situated or elsewhere. cdti "4. Notwithstanding the provisions of paragraph 3, no deductions shall be allowed in respect of amounts paid or charged (other than reimbursement of actual expenses) by the permanent establishment to the head office of an enterprise or any of its other offices, by way of: a) royalties, fees, or other similar payments in return for the use of patents or other rights; b) commission for specific services performed or for management; and c) interest on money lent to the permanent establishment, except in the case of a banking institution. "5. No profits shall be attributed to permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. "6. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. "7. Where profits include items of income which are dealt with separately in other Articles, of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article." Such being the case, and since as represented, your principal will set-up a Branch Office in the Philippines, which falls within the purview of the definition of a permanent establishment under Section 2 of Article 5 of the RP-French Republic Tax Treaty. Accordingly, a tax at the rate of 25% shall be imposed on the taxable income derived from all sources within the Philippines by the said permanent establishment, Branch Office of your principal, pursuant to Section 25 (a) of the Tax Code, as amended. This ruling is 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. This ruling modifies BIR Ruling No. 08-97 dated January 22, 1997. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue