DA ITAD BIR Ruling No. 063-07

May 15, 2007 DA ITAD BIR RULING NO. 063-07 Arts. 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD 231-02 Heinz UFC Philippines, Inc. 12F Centerpoint Condominium Garnet Road Cor. Julia Vargas Avenue Ortigas Center, Pasig City 1600 Attention: Salvador B. Viray Tax Manager Gentlemen : This refers to your letter dated December 14, 2005, 1 applying for a ruling that the service fees paid by Heinz UFC Philippines, Inc. (Heinz-Philippines) to Heinz Singapore PTE Ltd. (Heinz-Singapore) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent provisions of the Philippines-Singapore tax treaty. It is represented that Heinz-Singapore is a nonresident foreign corporation taxable under the laws of Singapore with office address at 501 Orchard Rd., # 13-01, Wheelock Place, Singapore 238880 as confirmed by the Certificate issued by Sabina H B Cheong (Mrs), Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax of the Authority of Singapore; that Heinz-Singapore is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on September 15, 2005; that Heinz-Philippines, on the other hand, is a company organized and existing under the laws of the Philippines with principal office at 9F Centerpoint Bldg., Garnet Road Cor. Julia Vargas Ave., Ortigas Center, Pasig City; that its primary purpose is to engage in, operate, conduct and maintain the business of manufacturing, importing, buying, selling, distributing or otherwise dealing in, at wholesale, food products, such as but not limited to sauces and condiments which are banana-based, tomato-based or chili-based, infant feeding products (excluding infant milk formula), pet food, tuna products, frozen foods, corned beef, convenience meals and food service products, and brewed soy sauce. SCEHaD It is further represented that in 2002, Heinz Singapore and Heinz Philippines entered into a Services Agreement with a commencement date on April 1, 2002 (clause 3) and termination date (clause 6), whereby Heinz-Singapore shall provide the following services to Heinz-Philippines: I. Business Advice Analysis of market and business opportunities Development of budget and review of performance against budget targets Assistance with business growth through acquisition Development of strategic plans to build brand awareness Supporting due diligence and commercial assessment of prospective JVs or acquisitions Development and training associated with business continuity plans and crisis management II. Finance/Legal Assistance with budgeting and planning Assistance with major capital expenditure Business development (e.g. financial analysis, forecasting, assessment) Special project (e.g. taxation planning, incorporation, reporting) Development and maintenance of reporting IT infrastructure Provision of general legal advice, insurance management, contract drafting III. Treasury Monitoring of cash requirements Monitoring of regional funding requirements Transactional banking and corporate debt services Monitoring of working capital and controllable assets Accounting, budgeting and forecasting of FX, debt and structured finance solutions FX risk management Business process reviews and due diligence processes IV. Human Resources Administration of personnel related issues of affiliates Recruiting and staffing Administration of salaries and benefits Monitoring of WHQ benefits programs Administration of expatriate assignments, organizational structure, career and leadership development process Performance management V. Marketing Assistance with the development, administration and implementation of marketing plans and strategies Coordination of transfer across the region of new products, knowledge, best practice, etc. Representation of local entities on the Global Category Management terms VI. Food Services Monitoring of sales to quick service restaurants such as McDonalds, Tricon and Burger King Development of food service marketing and sales strategies Support of development of affiliate foodservice plans and programs Coordination of regional quick service restaurants pricing Training of regional foodservice sales and marketing personnel Assistance with acquisitions related to foodservices VII. Manufacturing Identification and justification of key manufacturing projects Strategic administration of manufacturing projects Development of operation and manufacturing plans Establishment of manufacturing strategies Administrative assistance with implementation of operational improvements Assistance with manufacturing issues in respect of due diligence process with potential acquisitions Assistance with implementation of safety process and environmental monitoring systems Provision of training for environment, health and safety (EHS) managers Provision of advice on business and regulatory risk related to EHS issues VIII. IT Provision of computer and network infrastructure support and related services Development of regional guidelines Development of local and regional IT initiatives for business development IX. Research and Development Assistance, review and implementation of quality and compliance systems and policies Assistance with the development and implementation of products/process development or cost reduction projects Assistance with handling of quality assurance, quality control, R&D, engineering and external affairs issues (e.g. consumer complaints) Investigation and technical assistance with new business opportunities Technical support and coordination of technical activities X. Procurement Development of Asia Pacific purchasing strategy Identification of Asia Pacific partners for sourcing of key components Advice/assistance on make/buy decisions Negotiation of pricing and terms on supply contracts Provision of Asia Pacific commodity hedging recommendations Recommendations and maintenance on vendor supply base That the nature of the Services required by Heinz-Philippines may, from time to time, require employees of Heinz-Singapore to be present in the Philippines for short periods of time; that the said Services Agreement shall continue without limitation as to time unless and until terminated by the parties; that no technical services were rendered by Heinz-Singapore for the Philippine operations from April 1, 2003 to March 31, 2004 per certification dated November 12, 2005 issued by Ms. Lana B. Parungao, HR & OD Griuo Head of Heinz-Philippines; and that the Services provided will be invoiced to Heinz-Philippines at a fee calculated at Cost plus an arm's length mark-up. In reply, please be informed of that Article 7 of the Philippines-Singapore tax treaty provides as follows: "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." In view of 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 Heinz-Singapore for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines to which said fees may be attributed. 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: 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 Services 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 effectivity of the subject Services Agreement on its commencement date, April 1, 2002, including all periods resulting from its automatic renewal and not only within any 12-month period or a taxable year. Accordingly, for as long as the employees or agents of Heinz-Singapore 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 Heinz-Philippines for the "same or connected project" starting April 1, 2002 until terminated, then Heinz-Singapore 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. DA-ITAD 231-02 dated December 27, 2002) Moreover, while the compensation for services rendered outside the Philippines is not subject to VAT, the fees paid for that portion of the services of Heinz-Philippines which are rendered in the Philippines are, however, subject to value-added tax (VAT) pursuant to Section 108 2 of the Tax Code of 1997, as amended by Republic Act No. 9337. Accordingly, Heinz-Philippines, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to Heinz-Singapore. In remitting the VAT withheld, Heinz-Singapore 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 Heinz-Philippines if it is a VAT-registered taxpayer. In case Heinz-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, Heinz-Philippines is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for Heinz-Singapore and the fourth copy for Heinz-Philippines 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) This ruling shall apply to payments for services for the period starting April 1, 2002 onwards and 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Received by this Office on January 2, 2006. 2. Effective February 1, 2006, the rate is 12% pursuant to Revenue Memorandum Circular No. 7-2006 [Publishing the full text of the memorandum issued by Executive Secretary Eduardo R. Ermita informing the Secretary of Finance that his recommendation to increase the Value-Added Tax rate from 10% to 12% effective February 1, 2006 has been approved by the President].