DA ITAD BIR Ruling No. 048-10

May 13, 2010 DA ITAD BIR RULING NO. 048-10 Arts. 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-042-00; BIR Ruling No. DA-ITAD-081-04; BIR Ruling No. ITAD-027-05; BIR Ruling No. DA-ITAD-063-07; BIR Ruling No. DA-ITAD 035-08; BIR Ruling No. DA-ITAD 093-08 OQL Corporate Consultancy Suite B, 5th Floor, Builder's Center Bldg. 170 Salcedo St., Legaspi Village 1223 Makati City Attention: Atty. Domingo A. Lagundi, Jr. Gentlemen : This refers to your letter received by this Office on December 1, 2009, requesting confirmation that the service fees paid by Averon Holdings Corporation (AHC) to Crestern Pte. Ltd. (CPL) are in the nature of business profits in line with the provisions of Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty, and therefore exempt from Philippine income tax and consequently not subject to withholding taxes pursuant to the pertinent provisions of the National Internal Revenue Code (Tax Code) of 1997, as amended, and other related BIR rulings. It is represented that CPL is a nonresident foreign corporation duly organized and existing under the laws of Singapore with Company Registration No. 200917469R as evidenced by its Memorandum and Articles of Association; that its principal office is located at 79 Robinson Road, Robinson Point, 7th Floor, Singapore; that CPL is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on November 26, 2009; that AHC is a domestic corporation with principal office at JAKA I Building, 6780 Ayala Avenue, Makati City. It is further represented that on September 28, 2009, CPL and AHC entered into a Consultancy Agreement (Agreement) whereby CPL agreed to render the following services to AHC: I. Appointment: AHC hereby appoints CPL as a non-exclusive independent contractor to render consultancy services in support of its business operations and activities subject to the terms and conditions set forth herein, and AHC hereby accepts the appointment and agrees to perform the duties and responsibilities set forth herein. II. Responsibilities: CPL, in its capacity as a non-exclusive independent service provider shall perform (or cause to be performed) such services and activities relating to AHC's business operations as may be appropriate, including, but not limited to advisory, investigation and market study outside the Philippines, analysis, prospecting, negotiating, engaging, and providing any other business related services to further the purposes and objectives of AHC. CPL shall provide AHC with ideas, suggestions, recommendation and market opportunities outside of the Philippines in meeting the general objectives and parameters of the Agreement. All services under this contract must be performed outside the Philippines and in no instance shall the independent contractor send any agent or representative in the Philippines to perform such services. aIcTCS III. Negotiating Authority of CPL. Subject to the approval of the Board, AHC authorizes CPL to negotiate, discuss and evaluate necessary operational, financial and legal undertakings outside the Philippines for AHC, and any of its subsidiaries or its successors and assignees. CPL is authorized to communicate on behalf of AHC with the press, marketing agencies, creditors, banks, or holders of any equity or debt securities outside the Philippines as required to satisfy the marketing, announcements, reporting and any requirements by any governmental bodies, agencies, financial institutions or trading companies and to maintain effective relations with such holders in public or private markets. AHC may enter into any agreements with other parties, including its affiliates, for the purpose of engaging one or more property and/or asset consultants that may be required at any time, at AHC's sole cost and expense. CPL may provide property management strategies or policies, asset management procedures, leasing, development and/or similar services to AHC. IV. Operating Authority. CPL shall advise or counsel AHC regarding the maintenance, administration and operating activities of AHC to properly monitor, maintain, and comply with the various governmental requirements on real estate development. CPL shall assist AHC for design and construction commitments and project management strategies and procedures. AHC shall cause CPL to retain qualified financial consultants and legal counsel, as applicable, to assist in developing appropriate compliance procedures and systems with respect to legal or financial reporting obligations and compliance. CPL shall prepare periodic reports for AHC to review its progress, asset portfolio, and performance. All reports, recommendations, advice must be delivered through electronic means of communications like telephone, telegraph, emails, internet and other reliable modes. CPL may act as a non-exclusive agent of AHC in making, financing and disposing of investments, disbursing and collecting for AHC, paying the debts and fulfilling the obligations of AHC outside the Philippines, supervising the performance of overseas professionals engaged by or on behalf of AHC outside the Philippines and handling, prosecuting and settling any claims of or against AHC, the Board of Directors, holders of any securities or AHC's representatives or properties outside the Philippines. That during the duration of the Agreement, CPL will perform the aforesaid services outside the Philippines, or in the event that any services are required in the Philippines, the same shall be only for the short period of time not exceeding one hundred eighty three (183) days within any twelve month period; that AHC will from time to time pay consulting fee to CPL as invoiced by CPL to AHC; that the consulting fee shall be equal to the actual professional time spent at the rate of ONE THOUSAND US DOLLARS ($1,000.00) per hour based on the standard rate prevailing depending on the level of expertise of the consultant actually rendering the services as reflected in the billing statement; that AHC shall pay all out-of-pocket expenses of CPL, including but not limited to: (a) food, travel, lodging, and transportation; (b) organizational expenses including overhead, office facilities, staff, computers, telecommunications, and contracted workers; and (c) legal, accounting, outsourced, subcontracted, and other support services; that in the event that CPL actually bears any expense that should be borne by AHC, AHC shall reimburse such amount to CPL by way of additional charge to the consulting fee billing of CPL; that AHC may terminate the Agreement effective after sixty (60) days from service of written notice of termination to CPL on the ground of fraud, misappropriation, or embezzlement by CPL or any willful violation of the Agreement by CPL or in the event of any gross negligence on the part of CPL in the performance of its duties under the Agreement; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that the Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: DHETIS "Section 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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: 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. xxx xxx xxx" Thus, you invoke the provisions of the Philippines-Singapore tax treaty. Article 7 of the Philippines-Singapore tax treaty provides: "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. xxx xxx xxx." Based on the foregoing, the profits of a Singapore enterprise shall be taxable only in Singapore unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Singapore enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by CPL for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the Philippines-Singapore tax treaty provides: "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' includes specially but is not limited to: ITSaHC 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 or 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. xxx xxx xxx." Inasmuch as it is represented that the Agreement shall continue until terminated by either party, the whole of such Agreement, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of 183 days. In other words, the 183 day period shall be counted based on the total number of days the services are rendered in the Philippines upon the effectivity of the subject Agreement, including all periods resulting from its automatic renewal. Accordingly, for as long as the employees or agents of CPL do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to AHC for the "same or connected project", then CPL is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax. (BIR Ruling No. ITAD-042-00 dated February 10, 2000; BIR Ruling No. DA-ITAD-081-04 dated August 5, 2004; BIR Ruling No. ITAD-027-05 dated April 6, 2005; BIR Ruling No. DA-ITAD-063-07 dated May 15, 2007; BIR Ruling No. DA-ITAD-035-08 dated May 20, 2008; and BIR Ruling No. DA-ITAD 093-08 dated November 7, 2008) Moreover, while the compensation for services rendered outside the Philippines is not subject to the 12% VAT, the fees paid for that portion of the services of CPL which are rendered in the Philippines are, however, subject to 12% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, AHC, being the resident withholding agent and payor in control of payment, shall be responsible for the withholding of the 12% final VAT on such fees before making any payment to CPL. In remitting the VAT withheld, AHC shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from AHC as a VAT-registered taxpayer. In addition, AHC is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306) the first three copies for CPL and the fourth copy for AHC as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) HAaDcS This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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 Legal and Inspection Group