Du Baladad and Associates

May 17, 2021 ITAD BIR RULING NO. 009-21 Articles 5 (Permanent Establishment), 7 (Business Profits) and 12 (Royalties); Philippines-Singapore tax treaty Du Baladad and Associates 20th Floor, Chatham House Rufino corner Valero Streets Salcedo Village 1227 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on September 19, 2011 requesting confirmation that software payments made by the Bank of the Philippine Islands ("BPI") to Welcome Real-Time (Aspac) Pte. Ltd. ("Welcome") ( formerly Axiomatique International Pte. Ltd.) are 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") . FACTS Welcome is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its amended Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. The objects for which the company is established are, among others, to design, develop, commission, modify, assemble, import, export, acquire, market, buy, sell, supply, distribute, license the use of computer software and products including smart card based software applications and systems, and provide related services including technical consultancy services, information technology consultancy services, computer consultancy services, software development services, and software maintenance services. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, BPI is a domestic corporation that provides banking services. It is a universal bank and together with its subsidiaries and affiliates, offers a wide range of financial products and solutions that serve both retail and corporate clients. Its services include consumer banking and lending, asset management, insurance, securities brokerage and distribution, foreign exchange, leasing, and corporate and investment banking. 1 On March 3, 2004, BPI and Welcome entered into an XLS License and Services Agreement (the "Agreement" ) whereby Welcome granted BPI a non-exclusive and non-transferable license to use the XLS Loyalty Host System ("software") , and agreed to provide related services including point-of-sale services, smart card services, card care integration services, training, project management, and support and maintenance. BPI may use the software in object code form on its designated computers. BPI shall not make any copies of the software, except solely for archival or backup purposes. All copies are and shall remain the property of Welcome . BPI shall not sell, transfer, or make the software available to third parties, or reverse assemble or decompile the software in whole or in part. BPI owns the media on which the software is recorded, but acquires no ownership or other rights to the software except those expressly granted in the Agreement. All programs, specifications, works of authorship, inventions, techniques, concepts and ideas developed, provided or disclosed to BPI by Welcome pursuant to the provision of services shall remain the property of Welcome .The license term for the software is effective on the delivery date, and shall be: (i) for the duration of the legal protection of the software under applicable laws and international conventions, and (ii) effective only during such time as periodic license fees are paid by BPI ,and only until the termination of the license or Agreement. CAIHTE In consideration, BPI will pay license fees to Welcome as described below: Product description License fee XLS Loyalty Host System l. XLS Server V6 for Solaris (4 Central Processing Units ("CPUs") ) US$________ 2. Paper Coupons Module ________ 3. e-Coupons Module ________ 4. Points/Cash Back Module ________ 5. RFM Campaigns Module ________ 6. Generic Campaigns Module ________ 7. Events Module ________ 8. Geographical Segmentation Module ________ 9. Card Filters Module ________ 10. Report Module ________ Total ________ Discounted Special Price ________ XLS for Point-of-Sale Terminal 1. XLS for Point-of-Sale Terminal License (Ingenico MPT 710) US$____ per terminal XLS for Smart Cards 1. XLS for Smart Card License (Gemplus M/Chip) US$____ per card BPI will also pay service fees to Welcome based on the following schedule: Services Description Amount XLS Loyalty Host System related services 1. XLS Server V6 Installation US$________ 2. XLS Server V6 Point-of-Sale Terminal End-to-End Integration ________ 3. (Amended) XLS Server V6 to Support ISO 8583 ________ XLS for Point-of-Sale Terminal Related Services 3. Payment Loyalty Integration 30 man-days at US$________ 4. (Amended) Payment Loyalty Integration ________ 5. (Amended) Integration with Ingenico NPT 710 and 5300 to Support ISO 8583 Message Type ________ XLS for Smart Cards Related Services 4. XLS for Smart Cards Industrialization Process US$________ 5. Card Issuer HSM Integration ________ 6. Technical Consulting Services 9 man-days at ______ XLS Card Care Integration Services 7. XLS Card Care Integration Services To be quoted separately XLS Training 8. Introduction to XLS: Functional Training 1 man-day at US$______ 9. Marketing Campaigns Definition Training 2 man-days at ______ 10. XLS Server Functionalities Training 1 man-day at ______ 11. XLS for Point-of-Sale Terminal Training 1 man-day at ______ Project Management 12. Project Management US$_______ Support and Maintenance 13. XLS Server V6 Basic Support and Maintenance _______ 14. XLS Card Care Basic Support and Maintenance 0 Based on the Deliverable Acceptance Form signed by representatives of Welcome and BPI , Welcome has successfully delivered to BPI ,and the latter has accepted, the following activities carried out by Welcome on October 13-22, 2004: a) installation of XLS Server V6 Loyalty Host System to support secure sockets layer between administrative module and database; b) installation of XLS Server for database and administrative modules on production server and test server; c) operational and functional training on XLS Server, XLS Point-of-Sale Terminal and XLQ Key Encryption Tool and SAM Card Tool; d) provided CD containing XLS documents and installers; and e) provided four card readers for SAM and one server. Based on the Certification executed by BPI on October 13, 2011, no services under the Agreement will be performed by employee or personnel of Welcome in the Philippines. RULING Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") ,income derived by a nonresident foreign corporation is 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: * 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 by any treaty obligation binding upon the Philippine government, to wit: DETACa " 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." For this purpose, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty provide as follows: " 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; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) 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, 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 such, the profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. aDSIHc Relative thereto, under Article 5, a permanent establishment means a fixed place in which the business of an enterprise is wholly or partly carried on, and includes especially, a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. It includes also the furnishing of services, including consultancy services, by a resident of a Contracting State, through employees or other personnel thereof, where such activities continue in the other Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Welcome is not engaged in trade or business in the Philippines, does not have a branch, an office or other fixed place of business in the Philippines, and did not furnish services in the country for more than 183 days, but performed them outside the Philippines. Welcome 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 so, the service fees paid by BPI to Welcome in relation to the XLS Software are exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. On the other hand, the license fees for the software are considered royalties ,being payments for the use, or the right to use, copyright of literary, artistic or scientific work. Under the Agreement, all programs, specifications, works of authorship, inventions, techniques, concepts and ideas developed, provided or disclosed to BPI by Welcome pursuant to the provision of services shall remain the property of Welcome . BPI owns the media on which the software is recorded, but acquires no ownership or other rights to the software except those expressly granted in the Agreement. In Commissioner of Internal Revenue vs. Smart Communication, Inc . (G.R. Nos. 179045-46, August 25, 2010) ,the Supreme Court held that where the nonresident software licensor has intellectual property rights over the software licensed to a domestic taxpayer, payments made under such circumstances are royalties and subject to a reduced rate under a tax treaty, to wit: "In the instant case, it was established during the trial that Prism does not have a permanent establishment in the Philippines. Hence, 'business profits' derived from Prism's dealings with respondent are not taxable. The question is whether the payments made to Prism under the SDM, CM, and SIM Application agreements are 'business profits' and not royalties. Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement, reads: '1.3 Intellectual Property Rights (IPR) The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be retained by PRISM. PRISM, however, shall provide the Client the APIs for the SDM at no cost to the Client. The Client shall be permitted to develop programs to interface with the SDM or the SDM Libraries, using the related APIs as appropriate.' (Emphasis supplied.) Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement and paragraph 1.3 of the Programming Services (Schedule A) of the SIM Agreement provide: '1.4 Intellectual Property Rights (IPR) The IPR of all components of the CM belong to the Client with the exception of the following components, which are provided, without technical or commercial restraints or obligations: ETHIDa xxx xxx xxx 1.3 Intellectual Property Rights (IPR) The Client shall own the IPR for the Specifications and the Source Code for the SIM Applications. PRISM shall develop an executable compiled code (the "Executable Version") of the SIM Applications for use on the aSIMetric card which, however, shall only be for the Client's use. The Executable Version may not be provided by PRISM to any third [party] without the prior written consent of the Client. It is further recognized that the Client anticipates licensing the use of the SIM Applications, but it is agreed that no license fee will be charged to PRISM or to a licensee of the aSIMetrix card from PRISM when SIMs are supplied to the Client.' The provisions in the agreements are clear. Prism has intellectual property right over the SDM program, but not over the CM and SIM Application programs as the proprietary rights of these programs belong to respondent. In other words, out of the payments made to Prism, only the payment for the SDM program is a royalty subject to a 25% withholding tax .A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application Agreements is therefore in order." (Emphasis ours) Under paragraphs 1 and 2, Article 12 of the Philippines-Singapore tax treaty, royalties arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a reduced rate provided the income recipient is the beneficial owner of such royalties, to wit: " Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 per cent of the gross amount of the royalties." The royalties are subject to 15% withholding tax if they are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities, or are paid in respect of cinematographic films or tapes for television or broadcasting. In all other cases, the royalties are subject to 25% withholding tax. Accordingly, since BPI is not registered with the Board of Investments, and the license fees for the software are not paid in respect of cinematographic films or tapes for television or broadcasting, the license fees paid by BPI to Welcome are subject to income tax at the rate of 25% pursuant to paragraph 2 (c),Article 12 of the tax treaty. Value-Added Tax Under Section 108 (A) of the Tax Code, payments for the sale or exchange of services including the use or lease of property in the Philippines are subject to value-added tax ("VAT") at the rate of 12%,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) cSEDTC Based on the destination principle of the VAT system, services rendered in the Philippines, including the use or lease of properties in the Philippines, are subject to VAT, while those performed abroad are exempt. Thus, the license fees paid by BPI to Welcome for the use of the latter's software in the Philippines are subject to VAT ,while service fees paid by BPI to Welcome for services performed by the latter outside the Philippines are exempt from VAT under Section 108 (A) of the Tax Code. Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005. 2 BPI shall withhold VAT on the license fees at the rate of 12% before remitting them to Welcome . BPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for BPI 's claim of input VAT on the fee. VAT withheld shall be remitted within ten 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. https://www.bpiexpressonline.com/p/1/776/about-bpi 2. 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).