DA ITAD BIR Ruling No. 117-06

October 6, 2006 DA ITAD BIR RULING NO. 117-06 Art. 5&7, Philippines-Singapore tax treaty; Sec. 108 of the NIRC of 1997; BIR Ruling No. 077-84 RPI Communications Inc . 2008 Herrera Tower, Herrera St., Salcedo Village, Makati City Attention: A.S. Anderson Gentlemen : This refers to your letter dated July 22, 2005, applying for relief from double taxation on the payment of RPI Communications Inc. (RPI) to Computer Printing Specialist Pte Ltd. (CPS-Singapore), for the work carried out as their consultant, pursuant to their Service Agreement. It is represented that CPS-Singapore is a nonresident foreign corporation duly organized and existing under the laws of Singapore with office address at Level 31, 6 Battery Road, Singapore 049909 as certified by the Accounting and Corporate Regulatory Authority of Singapore on September 6, 2005; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated August 17, 2005; that RPI is a corporation duly organized and existing under the laws of the Philippines with principal address at Suite 2008 Herrera Tower, V.A. Rufino cor. Valero Sts., Salcedo Village, Makati City. It is further represented that RPI and CPS-Singapore entered into a Service Agreement for a project, the duration of which is from June 15, 2005 to November 30, 2005; that under the Agreement. RPI has agreed to get the service of CPS-Singapore through its subcontractor John Stanley-Critchlow for technical management and consultancy services for RPI's forthcoming projects to include initial project appraisal, evaluation, installation, documentation and commissioning oversight; that Mr. Critchlow visited the Philippines to render the said services on May 29 to June 2, 2005 and in October 19 to October 21, 2005; that in consideration for the said service, RPI agreed to pay CPS-Singapore the amount of One Hundred Twenty Thousand Singapore Dollars (S$120,000.00) net of taxes and bank charges and exclusive of the expenses incurred on behalf of RPI by the Project Manager or any representative of CPS-Singapore. HSAcaE In reply, please be informed that Article 7(1) 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. xxx xxx xxx" In relation, thereto, paragraph (1), (2) and (3) of Article 5 of the same treaty provide, viz : "Article 5 PERMANENT ESTABLISHMENT 1. For the purpose 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 especially 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 . ( Emphasis ours ) ITSacC 3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise. xxx xxx xxx" Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean corporation shall not be subject to Philippine income tax. For this purpose, 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 through its employees or other personnel continue (for the same or connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the services rendered by Mr. Critchlow on behalf of CPS-Singapore did not exceed an aggregate 183 days, CPS-Singapore is deemed not to have a permanent establishment in the Philippines. Hence, the service fees paid by RPI to CPS-Singapore under the subject Agreement are not subject to Philippine income tax and consequently to withholding tax. ( BIR Ruling No. 077-84 dated April 27, 1984 ) However, the fees paid by RPI to CPS-Singapore for the services rendered in the Philippines through its personnel are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, RPI being the payor in control of the payment shall be responsible for the withholding of VAT on such fees by filing a separate VAT return for and on behalf of CPS-Singapore using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If RPI is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input VAT by RPI upon filing its own VAT return. If it is not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the services purchased which may be treated as an "expense" or "asset" on the part of RPI, whichever is applicable. In addition, RPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for CPS-Singapore and the fourth copy for RPI as its file copy. caEIDA 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