DA ITAD BIR Ruling No. 045-09

April 13, 2009 DA ITAD BIR RULING NO. 045-09 Article 11, Philippines-UK tax treaty; BIR Ruling No. 046-80 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City 1634 Taguig City Attention: Dennis G. Dimagiba Jose Jaime V. Cruz Gentlemen/Ladies : This refers to your letter dated 11 July 2007, filed on behalf of your client, IQNAVIGATOR LTD. (IQN) requesting confirmation of your opinion that the gross amount of royalties derived by IQN from services performed for PILIPINAS SHELL PETROLEUM CORPORATION (PSPC) under their Contract of Services dated 21 February 2007, are subject to final withholding tax at the preferential rate of 25% under Article 11 (2) (b) of the Philippines-UK tax treaty. 1 It is represented that IQN is a nonresident foreign corporation duly organized and existing under the laws of the United Kingdom, with business address at No. 17 Westminster Court, Hipley Street, Old Woking, Surrey GU22 9 LG; that IQN is a resident of the United Kingdom per certification dated 10 April 2007 issued by the HM Revenue & Customs [Local Compliance (South)]; that it is registered as a private limited company with the Registrar of Companies for England and Wales under Company No. 4993515; that IQN was initially registered under the name "Ludgate 327 Limited" on 12 December 2003; that by special resolution, it subsequently changed its name to "IQNavigator Limited" on 3 February 2004; that it is not registered either as a corporation or as a partnership per certification issued by the Philippine Securities and Exchange Commission dated 6 February 2007; that PSPC is a corporation duly organized and existing under the laws of the Philippines with principal office address at Shell House, 156 Valero St., Salcedo Village, Makati City; and that it is engaged in the business of manufacturing, refining and selling petroleum products. TEHIaA It is further represented that on 21 February 2007, IQN and PSPC entered into a Contract for Services (Contract) in respect of the use by PSPC of the IQN Solution; that the IQN Solution is defined in the Contract as a combination of the IQN Application ( i.e. , certain web-based software applications owned by IQN) and services provided by IQN to provide PSPC an end-to-end Contractor management solution comprised of (i) a system to manage the deployment to PSPC of personnel from third party independent job contractors, (ii) a management system to automate time entry and confirmation, expense entry and approval for such personnel, and to provide consolidated reports and/or invoices to PSPC, and (iii) information and metrics presented as reports to PSPC; that under the terms of the Contract, IQN will provide a complete, web-based human resource procurement and management solution to assist PSPC address its temporary staffing requirements in the Philippines; that essentially, IQN will function as a "middleman" for PSPC and third party independent job contractors in the Philippines; that through the IQN Solution, IQN can create a private virtual marketplace where PSPC can interact with these independent human resource providers/suppliers and negotiate the assignment or deployment of desired individuals with skill sets in IT, finance/accounting, administrative/clerical and consulting work, to help PSPC augment its workforce in these areas; that if PSPC need human resource to meet a particular staffing requirement, it will communicate its request through a private website maintained on the internet by IQN for PSPC; that based on job requisitions prepared and transmitted online by PSPC through the site, the third party independent job contractors respond by submitting the names, CVs, and pay rates of workers who will match the specifications of PSPC's workforce needs; that if PSPC accepts the offers made by the independent human resource providers/suppliers, an IQN work order/contract is generated on-line for a particular worker, who can then commence to render services for PSPC; that the services that IQN offers are not limited to the establishment of a private site for PSPC to interact with the providers/suppliers solely for the purpose of identifying individuals that can be assigned to PSPC, and does not end with the generation of the work order for selected workers; that the IQN Solution also assists PSPC manage the over-all costs of engaging a particular individual through an electronic timekeeping and invoicing system; that through the IQN Solution, reports are generated from information that are recorded by the workers through the site and which PSPC can use to determine the time spent and expenses incurred by the employee on the job and other pertinent data; that the invoices representing approved worker timecards and payment requests by the providers/suppliers are also consolidated and generated on-line through the IQN Solution, and are issued to PSPC by IQN on behalf of the providers/suppliers; that PSPC will pay the providers/suppliers based on the sums billed through the IQN-generated invoice; and that in consideration for the use of the IQN Solution and the related services performed by IQN, PSPC agrees to pay IQN a vendor management fee which is based on a fixed percentage (either 1.85% or 3%) of the sums determined to be payable by PSPC to the third party independent job contractors for each applicable invoice period using the IQN Solution. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337 (Tax Code of 1997, as amended), provides as follows, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the same Code provides as follows, to wit: "SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 2 xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, the provisions of the Philippines-UK tax treaty may apply Article 11 of which, provides as follows, viz. : "Article 11 Royalties 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. (b) in all other cases, 25 per cent of the gross amount of the royalties. 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 of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, and for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the above provision, royalty payments will be taxed at a preferential rate of fifteen percent (15%), if the payor is a BOI-registered enterprise and engaged in preferred areas of investments or if said payments are in respect of cinematograph films or tapes for television or radio broadcasting. In all other cases, the twenty five percent (25%) preferential tax rate applies. Considering that PSPC is not a BOI-registered enterprise engaged in pioneer areas of investment, and that the vendor management fees are not in respect of cinematograph films or tapes for television or radio broadcasting, the said royalty payments are subject to the preferential tax rate of 25% of the gross amount of the royalties pursuant to Article 11 (2) (b) of the Philippines-UK tax treaty. (BIR Ruling No. 046-80 dated May 8, 1980) HTaSEA Furthermore, the vendor management fees by PSPC are subject to the 12% value-added tax (VAT), pursuant to Section 108 of the Tax Code of 1997, as amended, in relation to the Memorandum from the Executive Secretary dated 31 January 2006 increasing the VAT rate to 12% as circularized in Revenue Memorandum Circular No. 7-2006. Accordingly, PSPC, being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of IQN by filing a separate VAT return for and on behalf of the IQN using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from PSPC, if it is a VAT-registered taxpayer. In case PSPC is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the purchased service to be treated either as an "expense" or an "asset", whichever is applicable. In addition, PSPC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to IQN upon its request, and the fourth copy to be retained by PSPC as its file copy. [Section 4.114-2 (b), Revenue Regulations (RR) No. 16-2005, as amended by RR Nos. 4-2007; Section 4.114 (D), RR No. 2-98, as last amended by RR No. 28-03] This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Formally known as the CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS. 2. TITLE II TAX ON INCOME.