Baniqued & Baniqued Attorneys at Law

January 24, 2018 ITAD BIR RULING NO. 006-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Korea tax treaty Baniqued & Baniqued Attorneys at Law 8th Floor, Jollibee Centre San Miguel Avenue 1605 Pasig City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on July 15, 2016 requesting confirmation that service fee paid by Advanced Science and Technology Institute (" Institute ") to Satrec Initiative Company Ltd. (" Satrec ") is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Korea tax treaty "). caITAC FACTS Satrec is a corporation organized and existing under the laws of Korea and a resident thereof based on its Certificate of Corporate Registration issued by the Central Office of Registration Data of Korea and Certificate of Residence issued by the Bukdaejeon District Tax Office in Korea. The objectives of Satrec are the development and sales of service using satellite system; the development, manufacture, processing, assembly and sales of aircraft and spacecraft related parts, machineries and composite parts; the development, manufacture, processing, assembly and sale of defense industry products and related products; and the development, manufacture, processing, assembly, distribution, sale and service of nuclear power safety products. Satrec is not registered as a corporation or partnership in the Philippines based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, the Institute is one of the research and development institutes under the Department of Science and Technology of the Philippines. It is established on January 30, 1987 under Executive Order No. 128. The mandate of the Institute is to perform functions relating to scientific research and development in the advanced fields of information and communication technology and microelectronics; undertake long-term researches to strengthen and modernize science and technology infrastructure; conduct research and development work in the advanced fields of information and communication technology and microelectronics; and complement the overall endeavor in the scientific field with intensive activities in the computer and information technologies. On November 12, 2015, the Institute and Satrec entered into a Contract where the Institute contracted Satrec (and the latter agreed) to design, supply, deliver, install and commission a multi-mission satellite ground station with earth observation satellite telemetry. The satellite will be installed at the Institute 's premises within the University of the Philippines Campus in Quezon City, Philippines. The antenna system will include all hardware, firmware, and software necessary to reliably acquire and continuously track a polar orbiting spacecraft. This includes the reflector, auto-track, S/X-band feed, low noise amplifiers, pedestal with tracking and drive assemblies, antenna control unit and user interface software, high power amplifier, frequency converter system, environmental protection equipment, cables, and documentation. The satellite system including related works has cost of P__________, payable under the General Appropriations Act of 2015 of the Philippine government. Based on the Certificate of Acceptance and Completion issued by the Institute , the delivery and installation of the Antenna/Radio Frequency System and Terminal under the above contract has been accepted by the Institute and has been satisfactorily completed by Satrec from December 12-16, 2016 (five days) in accordance with the plans, requirements, schedules and specifications of the contract. CCC of Satrec was sent to the Philippines to supervise the installation of the satellite system. Based on a sworn statement issued by the Institute , the income 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. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), profits derived in the Philippines by a foreign corporation not engaged in trade or business are subject to income tax at the rate of 30%, to wit: " 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 January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, the profits are exempt to the extent required by any treaty obligation on the Philippine government, to wit: " 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." In this connection, you invoke the Philippines-Korea tax treaty. Paragraph 1, Article 7 and paragraphs 1, 2 and 3, Article 5 thereof 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 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 through which the business of an 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, an oil or gas well, a quarry or any other place of extraction of natural resources; g) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities for others. 3. a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months." Under Article 7, profits derived by an enterprise of a Contracting State from sources in the other Contracting State may be taxed in the other State if it carries on business in that State through a permanent establishment situated therein. Under Article 5, 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 includes also a building site or construction, installation or assembly project or supervisory activities in connection therewith, which continues in a Contracting State for a period of more than six months. Accordingly, since Satrec is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or other fixed place of business in the country, and the installation and related supervisory activities it carried out in Philippines does not exceed for more than six months, but for five days only, Satrec is not deemed to have a permanent establishment in connection with its delivery, installation and commissioning of the multi-mission satellite ground station at the Institute 's premises in the Philippines, pursuant to paragraphs 1, 2 and 3, Article 5 of the Philippines-Korea tax treaty. This being the case, service fee paid by the Institute to Satrec for such services is exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. However, since the services are performed in the Philippines, such fee paid to Satrec is subject to value-added tax (" VAT ") under Section 108 (A) of the Tax Code, to wit: " 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%). . ." The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. . ." (Emphasis ours) Relative thereto, the Institute shall withhold VAT on the service fee at the rate of 12% before remitting it to Satrec by using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 1 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. TCAScE Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: " SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents . xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (l2%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense,' whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." n Note from the Publisher: Copied verbatim from the official document.