ITAD BIR Ruling No. 004-17

February 10, 2017 ITAD BIR RULING NO. 004-17 Articles 5 & 7, Philippines-Singapore Tax Treaty National Archives of the Philippines VELCO Centre, R.S. Oca corner A.C. Delgado Streets Port Area 1018 Manila Attention: Ms. Jocelyn G. Reyes Chief, Administrative Officer Gentlemen : This refers to your tax treaty relief application filed on December 10, 2015, on behalf of MICROGRAPHICS DATA PTE. LTD. (" Micrographics "), requesting confirmation that its income derived from NATIONAL ARCHIVES OF THE PHILIPPINES ("NAP") is exempt from Philippine 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 Micrographics is a resident of Singapore within the meaning of the Philippines-Singapore tax treaty based on the Certificate of Residency issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore; that based on the Accounting and Corporate Regulatory Authority of Singapore, Micrographics is company duly incorporated and registered under the laws of Singapore; that it is engaged in the business of document preservation and acts as data conversion centre and manufacturing chemistry for microfilm and photograph; that Micrographics is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission; and that, on the other hand, NAP is an agency of the Philippine government mandated to collect, store, preserve and make available, archival records of the government and other primary sources pertaining to history and development. ATICcS It is further represented that on September 30, 2015, Micrographics and NAP entered into a Contract for the Delivery and Installation of Archives Writer / Plotter for the delivery and installation of an Archive Writer/Plotter for the conversion of NAP 's Archival Collection in digital to microfilm format; and that the consideration for the services is ____________________ Pesos (Php_______________). Furthermore, it is represented that Micrographics rendered services in the Philippines for a total of 12 days in taxable years 2015 and 2016 by the following employees: Name Designation Nationality Inclusive Date of Presence in the Philippines AAA __________ __________ Dec. 13 to 18, 2015 BBB __________ __________ Dec. 13 to 18, 2015 CCC __________ __________ Aug. 7 to 12, 2016 BBB __________ __________ Aug. 9 to 12, 2016 Finally, it is represented that per Sworn Statement issued by NAP on December 4, 2015, the transaction subject of request for 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 Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income received by a nonresident foreign corporation. It provides: " 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 (C) and (d): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides exemption in the following instance: " 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. xxx xxx xxx" Relative thereto, Article 7 (1), in relation to Article 5, of the Philippines-Singapore tax treaty provides: TIADCc " 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." " 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; i) * 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. xxx xxx xxx" Based on the foregoing, a corporation resident of Singapore and which carries on business in the Philippines through a permanent establishment situated therein may be subject to Philippine income tax on profits derived in the Philippines. For this purpose, that corporation may be deemed to have a permanent establishment in the Philippines if it has a fixed place of business ( e.g ., a branch, an office) in the Philippines, or funishes services in the Philippines through employees or other personnel thereof for a period or periods aggregating more than 183 days. Accordingly, since Micrographics is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is relevant, and it did not furnish services in the Philippines for more than 183 days, but for a total of 12 days only in 2015 and 2016, Micrographics 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 fees paid by NAP to Micrographics for the delivery and installation of an Archive Writer/Plotter are exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. However, as provided in Section 108 of the Tax Code of 1997, the delivery and installation of the Archive Writer/Plotter by Micrographics at NAP 's place of business in the Philippines is subject to value-added tax (VAT): "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%) ( now 12% ) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" Relative thereto, NAP shall withhold VAT on the service fees at the rate of 12 percent before remitting them to Micrographics . NAP shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed form and accompanying proof of payment shall serve as documentary substantiation for NAP 's claim of input VAT on the services performed by Micrographics ; otherwise, if it is not a VAT-registered taxpayer, NAP may treat the VAT as 'cost' or 'expense,' whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. AIDSTE 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