AAA

January 15, 2019 ITAD BIR RULING NO. 003-19 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty AAA _____________________ _____________________ _____________________ Dear AAA : This refers to your tax treaty relief application filed on June 16, 2017, on behalf of Rapiscan Systems Pte. Ltd. (" Rapiscan "), requesting confirmation that income derived by Rapiscan from Philippine Ports Authority (" PPA ") is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Singapore tax treaty "). It is represented that Rapiscan is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore; that the objects for which Rapiscan is established are to procure, manufacture, sell, test, install and commission, maintain and service security x-ray equipment, security metal detectors, including x-ray scanners, metal detecting equipment, explosives and narcotics detection equipment, auxiliary equipment peripheral or collateral thereto and spares therefor, and to conduct training on the application, use and maintenance of such equipment; that Rapiscan 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; that, on the other hand, PPA is a government agency in the Philippines with mandate to establish, develop, regulate, manage and operate a rationalized national port system in support of trade and national development. 1 It is further represented that on March 31, 2016, PPA and Rapiscan entered into a Contract for the Repair of Forty-one (41) Units of Baggage X-Ray Machines and Walk-through Metal Detectors where Rapiscan agreed to provide services to PPA for the repair of the latter's x-ray machines and walk-through metal detectors in ports operated by PPA throughout the Philippines; that the contract price for the project was 56,035,526.40 pesos; that the person designated to perform the services was BBB, a Filipino; that based on a certification issued by PPA, Rapiscan had conducted and completed the services from April 4 to July 4, 2016 in different port management offices under the jurisdiction of PPA ; and that BBB performed these services for 42 days based on the passport entries submitted. It is finally represented based on a sworn statement issued by PPA that the transaction subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, income derived by a nonresident foreign corporation is subject to income tax at the rate of 30%, thus: "Section 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 subparagraphs 5(c) and (d): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required under any treaty obligation to which the Philippines is a signatory, thus: "Section 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." Relative thereto, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Singapore 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 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." "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 specially 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 ; j) n 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." Under Article 7, profits derived by an enterprise resident of Singapore may be taxed in the Philippines if the profits are attributable to a permanent establishment which the enterprise has in Philippines. Under Article 5, a permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on, and includes especially, a seat of management, a branch, an office, a store or other sales outlet, and a factory. A permanent establishment includes also the furnishing of services, including consultancy services, by an enterprise through employees or other personnel, which continue (for the same or a connected project) for a period or periods aggregating more than 183 days. Accordingly, since Rapiscan is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is necessary, and it did not furnish services in the Philippines for more than 183 days, but for a total of 42 days only throughout the duration of the project from April 4 to July 4, 2016, Rapiscan is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being the case, the contract price for the project paid by PPA to Rapiscan for the repair of PPA 's baggage X-ray machine and walkthrough metal detectors in its different port management offices in the Philippines is exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. Finally, although exempt from income tax, payments made to Rapiscan for services performed in the Philippines are subject to value-added tax (" VAT ") at the rate of 12% under Sections 108 (A) and 105 of the Tax Code, thus: "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%) . . ." "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code . The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716 . The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity . The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Under the VAT system, services rendered in the Philippines by a nonresident and non-VAT registered foreign person like Rapiscan , are subject to VAT. Relative thereto, PPA shall withhold VAT on the payments at the rate of 12% before remitting them to Rapiscan . PPA shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld), and shall remit the VAT withheld within 10 days following the end of the month the withholding was made. 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. http://www.ppa.com.ph/ . n Note from the Publisher: Copied verbatim from the official document.