DA ITAD BIR Ruling No. 093-08

November 7, 2008 DA ITAD BIR RULING NO. 093-08 Articles 7 & 5, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD 05-06 Securities Clearing Corporation of the Philippines 2nd Floor, Philippine Stock Exchange Plaza Ayala Triangle, Ayala Avenue, Makati City Attention: Ms. Renee D. Rubio Chief Operating Officer Gentlemen : This refers to your letter dated 20 November 2006 requesting confirmation of your opinion that the payments by Securities Clearing Corporation of the Philippines (SCCP-Philippines) to The Capital Markets PTE Limited (Capco-Singapore) for the application testing and troubleshooting services of Capco-Singapore's proprietary clearing and settlement software solutions licensed by SCCP-Philippines from The Capital Markets Company NV (Capco-Belgium) is not subject to Philippine income tax pursuant to the Philippines-Singapore tax treaty, and that the services rendered by Capco-Singapore are also exempt from value-added tax (VAT) and thus, SCCP-Philippines has no obligation to remit any VAT to the Philippine Government. HCEaDI It is represented that Capco-Singapore is a resident of Singapore for income tax purposes for the year of Assessment 2006, as confirmed by the Certificate of Residence issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore; that its principal office is located at 16 Collyer Quay #11-02 Hitachi Tower Singapore 049318; that Capco-Singapore specializes in providing technology, market infrastructure and business innovation solutions for broker dealers, institutional investors, and financial industry services providers such as exchanges, central clearing organizations, depositories and custodians; that Capco-Singapore is not registered either as a corporation or as a partnership as evidenced by the Certification of Non-Registration of Corporation/Partnership dated September 9, 2005 issued by the Securities and Exchange Commission; that SCCP-Philippines is a domestic corporation with office address at 2nd Floor, Philippine Stock Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that on 25 December 2003, Capco-Belgium sold a non-transferable and non-exclusive license for the perpetual use of a Central Clearing & Central Settlement software (CCCS) including its documentation and source code to the Philippine Stock Exchange (PSE); that on 25 October 2004, the PSE assigned the license with Capco-Singapore's consent, to its subsidiary SCCP-Philippines; 1 that on 02 June 2005, Capco-Singapore and SCCP-Philippines entered into a Contract for Application Testing and Troubleshooting Services; that the Application Testing Services (Contract) include the following: STADIH Enhancement of existing test plans for SCCP-Philippines. Performance of complete cycle testing of the application. Identification and documentation of existing material bugs and other outstanding material issues. Documentation appropriate approach/strategy to implement: Trade-giveup/take up Trade amendments/deletions Risk Management That the Application Troubleshooting Services include: 1. Resolving the following issues important to the commercial/production roll out of the system: Partial delivery and credit during settlement run Sweep-out Process Realignment Procedure Material errors encountered in running the Job Schedular File upload utility on CCH Other material issues that occur in relation to the above items during the performance of Capco-Singapore Services 2. Troubleshooting any material issues in the application. 3. Assisting in the full cycle retesting of failed scenarios in the CCCS application. 4. Documenting all outstanding and major changes made into the system to address the above identified issues. 5. Document all other material items that may be experienced during the testing or may occur on implementing the suggested fixes but cannot be completed in the required timeframe, including the estimated effort or, in Capco-Singapore reasonable opinion, material changes required to resolve these items. DCHIAS That for the services under the Contract, SCCP-Philippines shall pay Capco-Singapore a fee of Eighteen Thousand US Dollars (US$18,000.00), exclusive of any Philippine sales tax; that as evidenced by a Certification dated 03 September 2008 issued by the Vice President and Chief Operating Officer of SCCP-Philippines, Capco-Singapore sent two (2) consultants, Handiono Zunnaedi and Jason Goh Teck Yong, to perform services under the Agreement and stayed in the Philippines for a total of five (5) days starting from 6 to 10 June 2005; it was further certified that the services rendered by the said consultants for the application testing and troubleshooting were completed during the aforesaid period and no other personnel from Capco-Singapore subsequently provided additional services to SCCP-Philippines pursuant to 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. AcEIHC In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, profits derived from the Philippines by a foreign corporation are generally subject to income tax at the rate of thirty-five percent (35%) based on the gross amount thereof. It provides: "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 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%)." IEDaAc However, Section 32 (B) (5) of the same Tax Code provides as follows: "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." Accordingly, paragraph 1 of Article 7 (Business Profits) 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. TDCcAE xxx xxx xxx" In view of the foregoing, the profits of an enterprise of a Contracting State shall be taxable only in that Contracting 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 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 Capco-Singapore 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 same tax treaty defines a permanent establishment, as follows: "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. DSCIEa 2. The term 'permanent establishment' includes specially but is not limited to: xxx xxx xxx 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" It is clear from the aforequoted provisions that a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continues within the Philippines for a period or periods aggregating more than 183 days. It shall be noted that the 183-day period shall be counted based on the total number of days the service is rendered in the Philippines for the entire duration of the same or a connected project. Moreover, it shall be reckoned from the start of the project and until its completion that may span to two or more taxable years including all periods resulting from its automatic renewal or extension thereof. Thus, the counting of the days of service rendered in the Philippines is not interrupted by the end of a taxable year but continues until the completion of the same or a connected project. cIACaT Applying the same to the instant case, Capco-Singapore is deemed not to have a permanent establishment in the Philippines considering that the 2 consultants of Capco-Singapore sent to the Philippines to perform services for SCCP-Philippines under the subject Contract did not stay in the Philippines for a period or periods aggregating more than 183 days for the same or connected project. Hence, the income derived by Capco-Singapore from services rendered to SCCP-Philippines shall not be subject to Philippine income tax and, consequently, to withholding tax. (BIR Ruling No. DA-ITAD 05-06 dated January 24, 2006) As to the value-added tax (VAT) on the fees paid to Capco-Singapore, while the payment for services rendered outside the Philippines is not subject to the 12% VAT, the fees paid for that portion of the services of Capco-Singapore which were rendered in the Philippines are, however, subject to 12% VAT, pursuant to Section 108 of the Tax Code of 1997, as amended. It provides: "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: 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%), 3 after any of the following conditions has been satisfied: HScaCT xxx xxx xxx 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 procedure for withholding and paying the VAT, SCCP-Philippines, 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 Capco-Singapore. In remitting the VAT withheld, SCCP-Philippines 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 SCCP-Philippines if it is a VAT-registered taxpayer. In case SCCP-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, SCCP-Philippines 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 Capco-Singapore and the fourth copy to be retained by SCCP-Philippines. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002) DaScAI 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 Legal and Inspection Group Footnotes 1. BIR Ruling No. 42-06 dated April 11, 2006. 2. TITLE II TAX ON INCOME. 3. 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. ADCETI