DA ITAD BIR Ruling No. 086-06

August 4, 2006 DA ITAD BIR RULING NO. 086-06 Articles 5 & 7, Philippines-United Kingdom tax treaty Sec. 108, National Internal Revenue Code of 1997; BIR Ruling No. ITAD-167-00 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati, Philippines Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated April 27, 2006, requesting confirmation that the payments for services by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt Benckiser Corporate Services Limited (RBCL), are not subject to Philippine income tax pursuant to 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 (Philippines-United Kingdom tax treaty). From the documents submitted it is represented that RBCL is a corporation organized and existing under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, Berkshire, SL1 3UH, UK as supported by the Residence Certificate issued by HM Revenue & Customs on February 13, 2006; that RBCL is not registered to do business in the Philippines as supported by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 26, 2006; that RBCL is a corporation organized and existing under the laws of the Philippines with principal office at Unit 2601 The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City, Metro Manila. It is further represented that on January 1, 2005, RBCL and RBPI entered into a Services Agreement whereby RBPI, as recipient, engages RBCL, as provider, to render services which cover all head office services, which include, but are not limited to, the following specific services: Area EVPs Overseeing the commercial operations of RBPI; Monitoring and assessing the investment needs of RBPI; Managing the launch of new products in the Philippines on behalf of RBPI. Management Organisation Managing the global brand categories on behalf of RBPI; Carrying out product innovation on behalf of RBPI; Overseeing the supply function on behalf of RBPI; Carrying out HR and IS functions on behalf of RBPI. Competitive Intelligence SaCDTA Providing a corporate view of key competitors and industry players to RBPI; and Producing reports by country and product for use by RBPI. Supply (Only for Manufacturers) Negotiating contracts for raw materials and packaging for RBPI; Seeking out cheaper sources of supply for RBPI; Optimising inventory levels for RBPI; and Introducing and establishing best practices for RBPI in matters relating to supply. Chief Financial Officer Carrying out commercial reviews of RBPI's operations Corporate Treasury Raising funds for RBPI; Negotiating facilities for RBPI with financial institutions; Managing foreign exchange risk, interest rate risk, credit risk and liquidity risk on behalf of RBPI. Group Tax Ensuring RBPI's tax returns are completed on time; Reviewing RBPI's tax returns; Developing best practice for tax compliance for RBPI; and Providing specialist tax advice for RBPI. Insurance Negotiating, managing and monitoring insurance policies for RBPI; Internal Audit Reviewing and appraising the effectiveness of control systems for RBPI; Identifying efficiency improvements for RBPI; and Assisting in ad-hoc projects as required by RBPI. Information Systems Improving the effectiveness and efficiencies of Group IT products and services for RBPI; Providing an IT helpdesk for RBPI; Negotiating, purchasing and evaluating Group IT products and services for RBPI; Advising on, developing and managing IT projects for RBPI; Coordinating and managing global IT vendors on behalf of RBPI. Legal Advising on new business opportunities and reviewing related agreements for RBPI; Negotiating contracts and advising on contract law on behalf of RBPI; Advising on competition law; Managing and administering trademarks and patents for RBPI; Carrying out patent searches for RBPI. New Initiatives and the Internet Researching and identifying new products or business ventures to exploit the internet on behalf of RBPI; Monitoring competitor activity for RBPI. Media Buying Negotiating media purchases and liaising and co-ordinating all media relations on behalf of RBPI; Corporate Sales Developing training programmes for RBPI's sales staff Human Relations Designing, specifying and implementing employment contracts, human resource policies and procedures for RBPI; Performing the payroll function for companies and expats as required by RBPI; Performing the payroll function for companies and expats as required by RBPI; Assisting in the design of career development models for RBPI; Facilitating and advising in respect of overseas secondments on behalf of RBPI; and ESCDHA Developing, assisting with, and providing support for, training of the Recipient's world-wide employees. Professional Services Providing marketing assistance in the form of paying fees to certain dishwasher manufacturers for the supply of dishwashing goods. Documents show that activities which constitute shareholder or control services are excluded from the coverage of the Service Agreement; it is further asserted that RBCL will perform the corporate services at its own business premises in the United Kingdom; that, however, should the provision of the corporate services require RBCL's employee to travel to the Philippines, such employee will stay in the Philippines only for a few days of not exceeding 3 days in a month and the employees' aggregate stay in the Philippines will not exceed 183 days within any twelve month period; that in consideration for the services, RBPI agrees and undertakes to pay service fees to RBCL plus a mark-up ranging from 4% to 8% depending on the type of service performed; and that the Service Agreement shall be effective as of January 1, 2005 and for a period of at least two years unless terminated in accordance with provisions thereof. In reply, please be informed that Article 7(1) and, in relation thereto, Article 5 of the Philippines-United Kingdom tax treaty provide: "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." "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" shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. 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 . (Emphasis supplied) xxx xxx xxx" Based on the foregoing, the service fee of RBPI to RBCL under the Service Agreement shall not be subject to Philippine income tax if RBCL, being a resident of the United Kingdom, does not have a fixed place of business in the Philippines; or if it has such a fixed place, said fee is not directly or indirectly attributable to such fixed place. However, should employees of RBCL be required to render services in the Philippines and such furnishing of services exceeds in the aggregate 183 days within any twelve-month period, such shall be deemed to constitute as a permanent establishment of RBCL in the Philippines. Accordingly, such service fee shall be subject to Philippine income tax. From the representations herein, it can be ascertained that RBCL does not have a fixed place of business in the Philippines and the duration of stay in the Philippines by its personnel in the rendition of services under the subject Services Agreement shall not be more than 183 days in any twelve-month period. In view thereof, the payment for services by RBPI to RBCL shall not be subject to Philippine income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-United Kingdom tax treaty. (BIR Ruling No. ITAD-167-00) IHcSCA However, as provided in Section 108 of the National Internal Revenue Code of 1997, the fee for such services rendered in the Philippines is subject to value-added tax (VAT): "SEC. 108. 1 Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee . . ." (Emphasis supplied) With regard to the procedures for withholding and paying the VAT, RBPI, 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 RBCL. In remitting the VAT withheld, RBPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the 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 RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for RBCL and the fourth copy for RBPI 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 is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will 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. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of file previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%). xxx xxx xxx 2. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.