DA ITAD BIR Ruling No. 097-07

September 28, 2007 DA ITAD BIR RULING NO. 097-07 Art. 5 & Art. 7, Philippine-United Kingdom Tax Treaty; BIR Ruling No. DA-ITAD 126-02/154-02 Instone Philippines, Inc. 8th Floor 1st E-Bank Building 8737 Paseo de Roxas, Makati City Attention: Atty. Bernard D. Bandonell Gentlemen : This refers to your application for relief from double taxation, which was filed on behalf of Instone International, Ltd. (IIL) formerly Instone Group Services Ltd. 1 (IGSL), requesting confirmation of your opinion that the management fee which your company, Instone Philippines, Inc. (INPHIL) pays to IIL is exempt from Philippine income tax, and therefore, not subject to any withholding tax, pursuant to Article 7 of the Philippines-United Kingdom (Philippines-UK) tax treaty, and Section 28 (B) (1), in relation to Section 23 (F), both of the National Internal Revenue Code (Tax Code) of 1997. CaESTA It is represented that ILL is a company duly registered in the United Kingdom of Great Britain, and is a resident in the United Kingdom for tax purposes, per Certification issued by the Inland Revenue Northern Ireland dated May 6, 2003; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by a Certificate of Non-Registration of Corporation/Partnership issued by the Philippine Securities and Exchange Commission dated June 30, 2004; that INPHIL is a corporation organized and existing under and by virtue of the laws of the Philippines and is a subsidiary of IIL; that it acquired its License To Do Business Under The Foreign Investment Act on account of its being a 99.99% owned by its foreign principal; that it is engaged in the business of "travel and tour agency for any person, firm, corporation or association, whether domestic or foreign, arranging and/or conducting domestic tours for foreign visitors and local tourists, providing tourists guides and, in general, to engage in the business of tours service in or outside the Philippines where laws and regulations will allow" ; 2 that INPHIL exclusively provides its services of booking and confirming reservations for, and issuing of, airline tickets for outbound Filipino seamen exclusively for international shipping companies; that IIL maintains subsidiaries all over the world undertaking services similar to that of INPHIL; that as a subsidiary of IIL, INPHIL caters to clients which are mainly international shipping companies whose bases of operations are outside of the Philippines (for brevity, INPHIL and IIL and the latter's subsidiaries worldwide, shall be referred to as "Instone Group"); that inasmuch as the clients of the Instone Group are closely the same worldwide, IIL adopts uniform systems and procedures in its financial, marketing, and other administrative support services; that those uniform policies and procedures are being monitored by IIL by sending its employee(s) to check on the level of compliance to these policies and procedures by INPHIL; that for such services, IIL collects "group services costs" from its entire subsidiaries equivalent to 1.7% of ticket price; that these "group services costs" are reasonable estimate of the amount expended by IIL in the performance of its service to its subsidiaries including INPHIL; INPHIL treats its share in the "group services costs' as management fee, pursuant to the Management Services Agreement (Agreement) executed and signed by and between IIL and INPHIL on October 10, 2000; and that under the Agreement the services to be rendered are enumerated as follows: "Instone International Limited agrees to provide the following services, in so far as they will be provided totally outside of the Philippines: 1) Policy determination services involving group sales coordination, method of liaison with clients and suppliers and advisory services regarding staff, accommodation and business issues generally, as may be required by Instone Philippines, Inc.; cTaDHS 2) Administrative support which is confined to consultation and recommendation on the supply of staff for ad hoc work regarding Instone Group Information Technology issues, Instone Group quality standards, and policy coordination on sales processing and administration; 3) Financial planning and control services to Instone Group members involving group management accounting, financial accounting advice, group corporate taxation compliance and, in general, financial control; 4) Provide Group treasury policy development on management of group treasury and foreign exchange facilities and group banking facilities; and 5) Generally perform the services with a view to ensuring that Instone Philippines, Inc. meets its requirements in accordance with the policies of Instone Group, and the standards of the International Air Travelers Association (IATA)". It is further represented that Mr. Richard Parotte, as the representative employee of IIL, will monitor and supervise the implementation of the Agreement between INPHIL and IIL by visiting the office of INPHIL in the Philippines, and that the rendition of these services in the Philippines did not exceed a total of one-hundred eighty (180) days in any twelve-month period during the previous years, per sworn statement dated February 11, 2005 executed by Ms. Marie Catherine Han, the General Manager of INPHIL. cAHIST In reply, please be informed that the pertinent portions of Article 7 and Article 5 of the Philippine-United Kingdom tax treaty provide 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 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" "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) if 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 of 183 days within any twelve-month period. xxx xxx xxx" Based on the aforequoted provisions, the profits of IIL, shall be taxable only in the United Kingdom (UK) unless it carries on business in the Philippines through a permanent establishment situated therein. For this purpose, an enterprise which is a resident of UK may be deemed to have permanent establishment in the Philippines if among others, the furnishing of services by such enterprise, through its employees or other personnel, continue within the Philippines for a period exceeding in the aggregate 183 days within any twelve-month period. DTAHEC Inasmuch as all the services and activities of IIL are represented to be rendered outside the Philippines and that its personnel who, in connection with the said services, are anticipated to stay in the Philippines only for a limited period of time not exceeding 183 days within any twelve-month period, IIL is not deemed to have permanent establishment in the Philippines to which its business profits may be attributed to. In view thereof, this Office confirms your opinion and so holds that the management fees derived by IIL for services rendered to INPHIL outside the Philippines are not subject to Philippine income tax and, thus, are not also subject to withholding tax pursuant to Article 7 (1) in relation to Article 5 (3) (b) of the Philippine-United Kingdom tax treaty, and Section 28 (B) (1) in relation to Section 23 (F), both of the Tax Code of 1997. (BIR Ruling No. ITAD 126-02 dated August 02, 2002) IEAacT As regards the compensation of IIL representative, Mr. Parotte, who will come to the Philippines to monitor and supervise the implementation of the Agreement, Article 14 of the same treaty provides, viz: "Article 14 Dependent Personal Services 1. Subject to the provisions of Articles 15, 16, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph (1) of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. xxx xxx xxx." Based on the above, the remuneration derived by Mr. Parotte in connection with his visit to the Philippines shall be subject to Philippine income tax when his stay in the Philippines exceeds in the aggregate 183 days in a fiscal year, and if his remuneration is paid by an enterprise which is a resident of the Philippines, and if his remuneration is borne by a fixed base which IIL has in the Philippines. ATCaDE Considering that Mr. Parotte's stay in the Philippines did not exceed 183 days and his remuneration is borne by IIL, a UK resident, which has no permanent establishment in the Philippines, said remuneration is not subject to Philippine income tax. However, as provided in Section 108 of the National Internal Revenue Code of 1997, the ratable portion of the fee corresponding to services actually rendered in the Philippines is subject to value-added tax (VAT): "SEC. 108. 3 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. 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, INPHIL, 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 IIL. In remitting the VAT withheld, INPHIL 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 INPHIL if it is a VAT-registered taxpayer. In case INPHIL 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, INPHIL 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 IIL and the fourth copy for INPHIL 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 issued on the basis of the foregoing 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. IcHAaS Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. It was incorporated as Pridelure Limited and then changed its name to Instone Aircraft Trading Limited (IATL) as evidenced by Certificate of Incorporation on Change of Name No. 2136314 issued by Companies Registration Office dated September 8, 1987. It further changed its name from IATL to Instone Groups Services Ltd. (IGSL) as evidenced by Certificate of Incorporation on Change of Name No. 2136314 issued by the Registrar of Companies for England and Wales dated April 13, 2001. 2. As stated in Article Two (Primary Purpose) of its Articles of Incorporation. 3. Section 108 was amended by Republic Act No. 9337, 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 receipt derived from the sale or exchange of services, including the use or lease of properties selling price of 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 the 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%) . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx 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.