DA ITAD BIR Ruling No. 083-06

July 28, 2006 DA ITAD BIR RULING NO. 083-06 Arts. 5 & 7, Philippines-United Kingdom of Great Britain and Northern Ireland; BIR Ruling No. DA-ITAD 125-03 Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22F Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Ma. Georgina J. Soberano Principal, Tax & Corporate Services Jonas L. Lasala Assistant Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated April 7, 2006 requesting confirmation of the following: 1. The consultant's fee received by De La Rue International (DLRI), formerly Thomas De La Rue Limited, under its Contract for Consultancy Services for the Implementation of the Master Plan for the Rehabilitation and Upgrading to a World Class Facility of the Security Plant Complex, Bangko Sentral ng Pilipinas, Quezon City, Packages 3 & 4 (Contract) with the Bangko Sentral ng Pilipinas (BSP) is exempt from income tax pursuant to the Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty (Philippines-UK tax treaty); and EACTSH 2. Only the payments for services actually rendered by DLRI in the Philippines are subject to the final withholding value-added tax (VAT). It is represented that DLRI is a nonresident foreign corporation organized and existing under the laws of the United Kingdom with principal office at De La Rue House, Jay Close, Viables, Basingstoke, Hampshire RG22 4BS, England and a resident of the United Kingdom for taxation purposes within the meaning of Article 4 of the Philippines-UK tax treaty, as evidenced by the Certificate of Residence dated February 7, 2006 under Ref 660/26600 53840 7393 issued by the Inspector of Taxes of Bristol Large Business Service (CT) HM Revenue & Customs; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission on March 15, 2006; that BSP is a government-owned instrumentality organized and existing by authority of Republic Act No. 7653, otherwise known as the New Central Bank Act with principal office address at Mabini corner Ocampo Street, Malate, Manila. It is further represented that on May 26, 2004, DLRI and BSP entered into a Contract wherein DLRI and BSP agreed that DLRI shall provide consultancy services for the latter; that the consultancy services to be rendered by DLRI shall be for the implementation of the modules of packages 3 & 4 of the SPC Master Plan; that these modules covered by the Contract pertain to the existing Security Systems, Banknote Operations, Mint and Refining Operations, and General Services of the BSP; that the consultancy services shall involve the review and appraisal of said systems as well as the production of written reports or recommendation; that: to facilitate the review, DLRI representatives shall visit the Philippines on varying periods depending on the modules being serviced; that the "terms of Reference" attached to the Contract provides for the duration of visits of DLRI representatives in the Philippines for each module as follows: Module A, Security System 3 weeks Module B, Banknote Operations 3 weeks Module C, Mint and Refining Operations 1-2 weeks Module D, General Services 1 week that for and in consideration of the consultancy services provided, BSP will pay DLRI the total amount of 372,600.00 (P39.123 million) as approved by Monetary Board Resolution No. 399 dated March 25, 2004; and that DLRI will start work on the last module not later than twelve (12) months after issuance of Notice to Proceed and that DLRI will complete the last module not later than eighteen (18) months from the said date. In reply, please be informed that Article 7 of the Philippines-UK tax treaty provides, viz : "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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. xxx xxx xxx." Based on the foregoing, the profits of an enterprise which is a resident of the United Kingdom shall be taxable only in the United Kingdom unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise which is a resident of the United Kingdom 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 consultancy fees received by DLRI 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-UK 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. xxx xxx xxx 3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. IDSETA xxx xxx xxx." Inasmuch as it has been represented that the duration of stay of the personnel of DLRI in the Philippines for the purpose of performing the consultancy services is less than an aggregate of 183 days within any twelve-month period, as certified by the BSP in its letter dated March 9, 2006, DLRI is deemed not to have a permanent establishment in the Philippines. (BIR Ruling DA-ITAD No. 125-03 dated August 11, 2003) Hence. the income derived by DLRI from the consultancy services rendered to BSP shall not be subject to Philippine income tax and, consequently, to withholding tax. Moreover, while the compensation for services rendered outside the Philippines is not subject to the VAT, the fees paid for that portion of services of DLRI which are rendered in the Philippines are, however, subject to value-added tax (VAT) at the rate of 10% from May 26, 2004 and 12% 1 from February 1, 2006 onwards pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, BSP, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to DLRI. In remitting the VAT withheld, BSP 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 BSP if it is a VAT-registered taxpayer. In case it 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, BSP 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 DLRI and the fourth copy for 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 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. Per Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 119, 121, 148, 151, 236, 237 And 288 of the National Internal Revenue Code of 1997, as amended, And For Other Purposes.)