Tax Status of a Singaporean Professional Partnership Maintaining an Office in the Philippines and Hiring Filipino Personnel

August 21, 1992 BIR RULING NO. 227-92 25 (a) 102 (a) (2) 000-00 227-92 J.P. Tolentino & Co. Rm. 800 Filipinas Life Bldg. 6786 Ayala Avenue Makati, Metro Manila Attention: Mr . Joaquin P . Tolentino Gentlemen : This refers to your letter dated April 16, 1990 stating that your client, a professional partnership organized under the laws of Singapore, is engaged in architectural services; that it is composed of Singaporean architects who are all residing in Singapore; that it will lease an office space in Metro Manila, hire Filipino draftsmen-architects and other office personnel to prepare plans and specifications for construction projects being undertaken outside of the Philippines; that the administrative expenses to cover salaries, telephone, rentals, etc. for the office shall be subsidized by their company in Singapore and remitted inwardly from Singapore (and obviously) in foreign currency. LLphil Based on the foregoing representations, you posed the following questions "1. What is the tax status of our client? "2. What are the taxes that they are supposed to pay? "3. Are their employees subject to the withholding tax on wages? "4. Are their income payments such as rental of office space subject to expanded withholding tax? "5. Are they subject to Philippine Income Tax? If yes, what is the basis? "6. Are they subject to percentage tax or Value Added Tax? If yes, what is the basis?" In reply, please be informed as follows: Ans. to Q. 1, 2, 5 & 6 . Pursuant to Article 5, paragraph 8(e) of the RP-Singapore Tax Treaty, a permanent establishment is deemed not to include the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character for the enterprise. Article 14(1) of the same treaty also provides that income for personal services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. Based on the foregoing, it is our opinion that a Singaporean professional partnership, no member of which resides in the Philippines, which merely maintains an office in the Philippines and hires Filipino draftsmen to prepare plans for projects located in Singapore or elsewhere falls within the class of a place of business for the supply of information, scientific research, or for similar activities which have a preparatory or auxiliary character, the maintenance of which does not give rise to a permanent establishment in the Philippines; hence, not subject to Philippine taxes. The fact that an Office has been actually established in the Philippines to avail of the service of the Filipino draftsmen does not make such office a branch. Obviously, this was done in order to take advantage of the cheap cost of local draftsman's services. There is no evidence of actual contracting for designing and construction of buildings in the Philippines and for which the local office has been paid. Thus, as long as the Philippine office performs no services and/or earns nothing for services rendered in the Philippines, it is not subject to either 10% VAT or 2% tax. Answer to Q. 3 . Pursuant to Section 36(a)(3) of the Tax Code, the salaries of employees composed of Singaporeans and Filipinos in the local office constitute compensation for labor or personal services performed in the Philippines; hence, subject to Philippine income tax under Section 21(a) and to the withholding tax at source, pursuant to Section 72 of the Tax Code as implemented by Revenue Regulations No. 6-82, as amended. Answer to Q. 4 . Likewise, your client's payment for gross rental of office space amounting to not less than P500.00 shall be subject to the expanded withholding tax of 5% pursuant to Section 1(c) of Revenue Regulations No. 6-85. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue