Punongbayan & Araullo

January 17, 2018 ITAD BIR RULING NO. 003-18 Articles 5 and 7, Philippines- Netherlands tax treaty Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on August 5, 2011 requesting confirmation that service fees to be paid by Black Pencil Advertising, Inc. (" BPA ") to Publicis Groupe Holdings B.V. (" PGH ") are exempt from income tax in the Philippines pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Netherlands tax treaty "). TIADCc It is represented that PGH is a foreign corporation organized and existing under the laws of the Netherlands based on the Declaration of Residence issued by the Director General of the Tax and Customs Administration of the Netherlands; that PGH is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission; and that, on the other hand, BPA is a corporation duly organized and existing under the laws of the Philippines as a full service communications agency that helps brands to succeed with the belief that creativity can transform human behavior. It is further represented that on January 1, 2009, BPA entered into an Advisory Service Contract (" Contract ") with PGH where the latter agreed to provide to the former, directly or through other Publicis Group Services Providers with specialized advisory services on a regular basis, as requested by BPA , which may include, but are not limited to the following, to wit: 1. Advice in Commercial and Creative Development (Quality and Product); 2. Advise in Media and Research; 3. Advice in Finance and Administration; and 4. Advice on other Issues such as: Advise on the development of the commercial strategy of BPA ; Advise on the global knowledge database; Advise on the selection of key staff members; Advise on strategies for pursuing new business and key growth strategies. Help select and manage growth of new markets; Advise on accounting and cost control. Advise on efforts to maintain profitability of units; Advise in Real Estate management and space/rents optimization; and Global procurement. That the above-mentioned advisory services are, however, not exclusive, as additional services may be added, as may be agreed upon by PGH and BPA , as they deem necessary; that the term of the Agreement shall take effect beginning August 1, 2009 and shall remain effective until terminated for any reason by either PGH or BPA ; that should PGH and BPA elect to terminate the Contract , the termination of the same shall take effect on the 31st day of December of the year when the notice of the said termination is given by either PGH or BPA ; and that in consideration of the services rendered, BPA shall pay PGH a fee equal to the total direct and indirect costs 1 of providing the services marked up to include a profit on such costs of 8 percent. It is further represented, per the Sworn Certification executed by the BPA Chief Operating Officer, that PGH did not and will not send any of its employees/personnel for the purpose of rendering services in the Philippines for the entire duration of the Contract ; and that the aforementioned services will be done mainly through e-mail correspondences and telephone calls per the Sworn Certification executed by the Director of PGH . It is finally represented that the service fees subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the BPA Chief Operating Officer on March 28, 2011. In reply, please be informed that service fees to be paid to PGH , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides: AIDSTE "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) and (d) above: n Provided, That effective 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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: 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." Thus, you invoked Article 7 of the Philippines-Netherlands tax treaty, to wit: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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 attributable to that permanent establishment." Based on the foregoing, the profits of a corporation with permanent business address in Netherlands shall be taxable only in that State unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the corporation based in Netherlands carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as are attributable to that permanent establishment. Applying this to the instant case, the service fees received by PGH for 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 treaty provides: "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" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." As defined, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes, especially, a place of management, a branch, an office, a factory and a workshop. It also includes the furnishing of services including consultancy services which continues (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Accordingly, all representations show that PGH is not engaged in trade or business in the Philippines to which a branch, an office or any fixed place of business is necessary; it did not furnish services in the Philippines per the sworn declaration of the officers of both companies; and, hence, PGH has neither a permanent establishment nor does it deem to have a permanent establishment in the Philippines to which its business profits may be attributed to. This being so, the service fees of BPA to PGH under the subject Advisory Service Contract are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Netherlands tax treaty. AaCTcI 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, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Cost shall mean all verifiable costs incurred by the Service Providers that are related to the Services. Cost include, but not limited to, material consumed at cost, outside services used at cost, cost of man-hours spent (salaries, bonus or other compensation payable and all fringe benefits payments and associated taxes and social charges), overhead covering the use of equipment, facilities, premises (rent, depreciation, etc.), as well as other regular overhead (telex, telephone, travel and entertainment, etc.) and all subcontracted Services directly attributable to the costs of Services. n Note from the Publisher: Copied verbatim from the official document.