DA ITAD BIR Ruling No. 134-06

October 27, 2006 DA ITAD BIR RULING NO. 134-06 Arts. 7 & 5, Philippines-Malaysia Tax Treaty; BIR Ruling No. DA-ITAD 152-02 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated December 28, 2005 requesting confirmation that the management fees received by Metro Parking (M) Sdn Bhd (MPM) from Metro Parking Management (Philippines), Inc. (MPMPI) are not subject to Philippine income tax and value-added tax (VAT) pursuant to the Philippines-Malaysia tax treaty. It is represented that MPM is a nonresident foreign corporation duly organized and existing under the laws of Malaysia with business address at Lot 1-4, Level 5, Block B South, Pusat Bandar Damansara, Damansara Height, 50490 Kuala Lumpur, Malaysia; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on December 5, 2005; that MPMPI, a subsidiary of MPM, is a corporation organized and existing under the laws of the Philippines with principal business address at 10/F Tower I, The Enterprise Center, 6766 Ayala Avenue, Makati City; that it is engaged in the business of operating and managing one or more buildings for the purpose of renting or leasing property for use as car park, and for the conduct of any lawful trade or business normally associated with the operation of a car park. It is further represented that on January 1, 2005, MPM and MPMPI entered into a Management Consultancy Agreement (Agreement) whereby MPM agreed to render the following services and support functions: 1) provision of management time, planning and training, 2) provision of financial support, 3) provision of review management accounting and audit report annually, 4) provision of car park survey data and analytical studies, 5) provision of car park management consultancy, 6) provision of training and recommendation for improvement on car park operational matters, 7) provision and recommendation of suitable car park equipment, 8) and others as may be required by the MPMPI from time to time. That the above services shall be carried out by MPM from its home office in Malaysia; that for purposes of better coordination to areas of concern that may arise, employees of MPM may visit the Philippines from time to time, whenever necessary; that in consideration for the services to be performed by MPM to MPMPI, the latter shall pay the agreed management consultancy fees in the total amount of P4,800,000.00 (fixed) plus either P3,000,000.00 or 6% of the total gross revenue per annum, whichever is higher, from January 2005 onward; that the fee shall be inclusive of out-of-pocket or any incidental expenses such as airline tickets, hotel accommodation, meal allowances, telecommunication expenses, travel expenses, and the like, incurred by the MPM in coming to the Philippines from Malaysia to perform its duties under this Agreement; that the Agreement shall commence on the 1st day of January 2005 and shall continue in force under the same terms and conditions, unless either party gives written notice to the other, not later than sixty (60) days before the end of the current financial year, of its desire to renegotiate the terms and conditions hereof; 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. SHECcT In reply, please be informed that Article 7 in relation to Article 5 of the Philippines-Malaysia 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 thereof as is attributable to that permanent establishment. xxx xxx xxx" "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, 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, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce; g) a farm or plantation; h) a building site or construction, installation or assembly project which exists for more than 6 months. xxx xxx xxx" Pursuant to Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if such enterprise has a permanent establishment situated in the Philippines and only so much of such profit that is attributable to that permanent establishment. Inasmuch as MPM does not have a fixed place of business in the Philippines, and, as such, is deemed not to have a permanent establishment in the Philippines, the service fees to be paid by MPMPI for the services rendered under the subject Agreement are not subject to Philippine income tax. (BIR Ruling No. DA-ITAD 152-02 dated August 29, 2002) However, inasmuch as it has been represented that MPM may send its personnel to the Philippines to perform the abovementioned services for purposes of better coordination to areas of concern that may arise, whenever necessary, please be informed that Section 25(A)(1) of the National Internal Revenue Code (Tax Code) of 1997 provides: "Sec. 25. Tax on Nonresident Alien Individual. (A) Non-resident Alien Engaged in Trade or Business Within the Philippines. (1) In general . A nonresident alien individual engaged in trade or business in the Philippines shall be subject to income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines', Section 22(G) of this Code notwithstanding. xxx xxx xxx" Based on the foregoing provision, a nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines and therefore shall be subject to Philippines income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. Applying this to the instant case, any income that would be received by the MPM's personnel in the course of their rendition of the abovementioned services to MPMPI, shall be subject to Philippine income tax if their aggregate period of stay in the Philippines exceeded 180 days. Otherwise, said income shall be tax-exempt. As regards the deductibility of the management consultancy fee as an ordinary and necessary business expense on the part of MPMPI, this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer from treating the same as a deductible item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34(A)(1)(b) of the Tax Code of 1997. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003) Moreover, while the payments for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for MPMPI within the Philippines are, however, subject to 10% (12% effective February 1, 2006, under Republic Act No. 9337) 1 value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, MPMPI, 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 MPI. In remitting the VAT withheld, MPMPI 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 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 MPMPI if it is VAT-registered taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchase or treated as an "expense" or as an "asset", whichever is applicable. In addition, it 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 MPI and the fourth copy for MPMPI 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 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. RMC 7-2006 Publishing the Full text of the Memorandum of Executive Secretary Eduardo R. Ermita dated January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax Rate from Ten Percent to Twelve Percent.