ITAD BIR Ruling No. 010-09

April 1, 2009 ITAD BIR RULING NO. 010-09 Arts. 5 & 7, Philippines-Malaysia Tax Treaty Ilao & Ilao Law Offices 5K Vernida I Building 120 Amorsolo Street, Legaspi City Makati City Attention: Atty. Gina V. Ilao Gentlemen : This refers to your letter dated August 23, 2007 applying for tax treaty relief on the income payments received by RTS Technology Sdn Bhd (RTS-Malaysia) from Fujitsu Philippines, Inc. (Fujitsu-Philippines) pursuant to the Philippines-Malaysia tax treaty. DHCSTa It is represented that RTS-Malaysia is a resident company in Malaysia under Income Tax Reference Number C 10285554-04 for income tax purposes for the Years of Assessment 2006 and 2007, with business address at 11-5-2 Cheras Business Centre, Jalan 4/101C, Batu 5, Jalan, Cheras, 56100 Kuala Lumpur, Malaysia, as evidenced by the Certificate issued by Mansor Hassan, Director, Policy Division, Department of International Tax, Inland Revenue Board, Malaysia; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on August 21, 2007; that Fujitsu-Philippines is a domestic corporation with principal business address at 2/F United Life Bldg., 837 Arnaiz Ave., Legaspi Village, Makati City; that its primary purpose is to engage in and to carry on the business of merchants, traders, commercial brokers, purchasers and sellers, importers, exporters, indentors and dealers in and with electronic data processing computer systems, peripheral devices and other equipment allied to computer systems, including logic and electronic computer cables, electrical power equipment, communication instruments and equipment, spare parts and accessories, business machines, office equipment as well as goods, wares, merchandise and commodities of every kind and description and technical services of software development and to conduct and carry on any and all business appertaining thereto. It is further represented that on November 14, 2006, RTS-Malaysia and Fujitsu-Philippines entered into an Onshore Services Agreement (Agreement); that under the Agreement, RTS-Malaysia will act as a subcontractor for Fujitsu-Philippines to undertake the project coordination and supervision of the construction of the Manual Toll Collection System of the Subic-Clark-Tarlac Expressway Project; that RTS-Malaysia's work covers only preliminaries during the construction phase of the project, specifically, senior management attendance in coordination meetings and project supervision visits by senior management; that the contract price for the scope of works described in the Agreement is Twelve Thousand Eight Hundred Thirty Eight United States Dollars (US$12,838); that the Agreement shall be valid and effective from the date of its signing and execution thereof by RTS-Malaysia and Fujitsu Philippines, and shall subsist for its entirety unless terminated pursuant to the terms and conditions of the Agreement. It is also represented that the foregoing stage of the project occurred for approximately three (3) months, from October 2007 to December; that in the performance of the services, RTS-Malaysia sent the following personnel who performed the services: Inclusive Dates No. of Days Personnel Present in the Philippines September 1-21, 2007 21 1) Abd Rahim Bin Md Nasir 2) Kum Mun Loong 3) Mohd Salleh Bin Md Yusof October 4-5, 2007 2 1) Abd Rahim Bin Md Nasir 2) Tan Wee Yo October 6-7, 2007 2 1) Abd Rahim Bin Md Nassir 2) Wong Yiew Kong 3) Tan Wee Yo October 8-11, 2007 3 1) Wong Yiew Kong 2) Tan Wee Yo Month of November 2007 (maximum no. of days 7 To be identified during which RTS-Malaysia are expected to be in the Philippines) TOTAL NO. OF DAYS 35 and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a 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 profits and income received by a non-resident foreign corporation such as RTS-Malaysia. 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 . . ., profits and income, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). TaDCEc xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "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" In accordance with the foregoing, we apply Article 7 and, in relation thereto, Article 5 (4) (a) of the Philippines-Malaysia tax treaty, which 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 thereof as is attributable to that permanent establishment. xxx xxx xxx" "Article 5 PERMANENT ESTABLISHMENT "1. For the purposes of this Agreement, 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' shall include 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 other place of extraction of natural resources including timber or other forest produce; EcIaTA g) a farm or plantation; h) a building site or construction, installation or assembly project which exists for more than 6 months. "xxx xxx xxx "4. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State; or b) substantial equipment is in that other State being used or installed by, for or under contract with, the enterprise. xxx xxx xxx" Pursuant to Article 7 of the Philippines-Malaysia tax treaty, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if such enterprise has a permanent establishment situated in the Philippines but only so much of such profits that are attributable to that permanent establishment. However, a permanent establishment may be deemed to exist in the Philippines under Article 5 (4) (a) of the same treaty if supervisory activities are carried on in the Philippines for more than 6 months in connection with a construction, installation or assembly project undertaken in the Philippines. Thus, considering that services under the Agreement were rendered by RTS-Malaysia in the Philippines for an aggregate of 35 days only, RTS-Malaysia is deemed as not having a permanent establishment under Article 5 (4) (a) and consequently payments received by it under the Agreement shall be exempt from Philippine income tax and withholding tax. However, should services continue to be rendered under the Agreement such that the number of days services are rendered in the Philippines exceed 6 months, they shall be deemed as having a permanent establishment under Article 5 (4) (a) and the whole contract price shall be taxable under Section 28 of the Tax Code of 1997 as aforequoted. CAaSED Moreover, while the payment for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for Fujitsu-Philippines within the Philippines are, however, subject to 12% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, Fujitsu-Philippines, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to RTS-Malaysia. In remitting the VAT withheld, Fujitsu-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Fujitsu-Philippines if it is a VAT-registered taxpayer. In case it is a non-VAT registered taxpayer, the passed-on VAT withheld therefrom shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, it is required to issue the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for RTS-Malaysia and the fourth copy for Fujitsu-Philippines as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002) 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.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue