Department of Agrarian Reform

May 18, 2021 ITAD BIR RULING NO. 010-21 Articles 5 (Permanent Establishment) and 7 (Business Profits) of the Philippines-Italy Tax Treaty, in relation to Sections 28 (B) (1) and 32 (B) (5) of the National Internal Revenue Code of 1997, as amended Department of Agrarian Reform Elliptical Road 1101 Diliman, Quezon City Attention: Eleanor C. Hipolito Project Development Officer II Project Management Service Gentlemen : This refers to your tax treaty relief application that was filed on December 17, 2019 requesting confirmation that income payments made by the Department of Agrarian Reform ( DAR ) to Etimos Foundation Onlus ( Etimos ) are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion (Philippines-Italy Tax Treaty). HTcADC FACTS Etimos is a foundation organized and existing under the laws of Italy based on its Articles of Association and the Certification issued by the Prefecture Government of Padua in Italy. It is considered an onlus or a non-profit making organization of social value pursuant to Italian Legislation Decree No. 460/1997, and in accordance with the principles and legal model of a holding foundation within the widest sphere of foundations regulated by the Italian Civil Code, Presidential Decree No. 361/2000 and other relevant laws. Its registered office is in Padua, Italy. Etimos is active in the sectors of social and healthcare, education, training, protection and promotion of nature and the environment, promotion of culture and the arts, protection of civil rights and charity. In particular, it was organized for the following activities only: (a) research, training, welfare support, health care and humanitarian activities in the interest of the population, specifically those who are economically and socially disadvantaged; (b) activities in favor of the most vulnerable people who cannot always count on complete welfare ( e.g. ,children and elderly people);(c) promoting a culture of solidarity, both at a national and international level, encouraging projects and activities which take inspiration from this culture; (d) enhancing the value of human, ecological, social and economic resources and activities for their developments; and (e) fostering dialogue among social stakeholders active in the field of cooperation, solidarity and development, preparing and managing projects and activities in partnership with other stakeholders (among which are foundations, associations, cooperatives, nongovernment organizations, other onlus ,universities, research institutes, local governments, businesses, credit institutions and their groups. The assets of Etimos consist of assets contributions from its founder and members; real estate and securities transferred to the foundation in any capacity, including inheritance, legacy, donation, and grant of any kind, if specifically aimed at increasing the capital; and income and further amounts aimed at increasing its capital based on a resolution of the Board of Directors. Its revenue consists of capital income, assets, grants or any other amount transferred to the foundation aimed at implementing statutory objectives and not specifically aimed at increasing its capital, and restricted grants aimed at the implementation of a specific project. Income, profits and operating surplus shall compulsorily be used by the Board of Directors of the foundation to implement institutional activities and directly related activities. The Board of Directors is not authorized to distribute, even in an indirect way, income, profits and operating surplus, together with funds, reserves or capital during the life of the foundation, unless their destination is imposed by law or made in favor of other non-lucrative organizations with social value that by law, Articles of Association or regulations belong to the same organization. Upon dissolution, any asset that will remain thereafter shall be transferred to other not-for-profit organizations with social value or destined to activities of public utility, upon resolution of the control body, unless otherwise required by law. Etimos is a fiscal resident of Italy based on its Certificate of Residence issued by the Agenzia Entrate (Revenue Agency) of Italy on November 8, 2019. 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 December 3, 2019. On the other hand, DAR is the Philippine government agency that implements the National Government's Comprehensive Agrarian Reform Program by providing land tenure security to landless farmers through land acquisition and distribution, leasehold arrangement implementation and other land tenure improvement services, and providing legal intervention to agrarian reform beneficiaries through adjudication of agrarian cases and agrarian legal assistance, and implementing, facilitating and coordinating the delivery of support services to such beneficiaries through social infrastructure and local capability building, sustainable agribusiness and rural enterprise development, and access facilitation and enhancement services. On March 23, 2011, the Philippine Government, represented by the DAR, and the Italian Government, represented by the Italian Embassy in the Philippines, entered into a Memorandum of Understanding (MOU) for the implementation of the Italian Assistance to the Agrarian Reform Community Development Support Program (Program) aimed at increasing and stabilizing household incomes in about thirty-five (35) agrarian reform communities in identified provinces of Mindanao, and enhancing access to key services in these communities and neighboring communities. The estimated total cost of the Program is __________, out of which __________ will be extended by the Italian Government as a soft loan and __________ as a grant. Up to 80% of the loan shall be used to finance the purchase of goods and services from the Philippines and neighboring countries, and not less than 20% for the purchase of goods and services from Italy. The loan bears interest at the rate of _____% per annum and shall be repaid in twenty-one (21) years with a grace period of ten (10) years. The MOU also provides that the Philippine Government shall provide a counterpart fund to the Program amounting to __________ including contributions from local government units. On April 11, 2011, the Department of Finance entered into a Financial Agreement with Artigiancassa S.p.a (Artigiancassa) to formalize the loan granted to DAR under the MOU and the terms and conditions for the repayment of such loan. Artigiancassa, with registered office in Rome, Italy, is a member of the Bank Group Banea Nazionale del Lavoro S.p.a. and is listed in the Register of Banks and the Companies Register in Italy. It acts as fund administrator, on behalf of the Ministry of the Economy and Finance of Italy, of the Revolving Fund for Development Cooperation, which was established under Italian Law No. 227 on May 24, 1977. On January 18, 2019, DAR entered into a Service Contract with Etimos whereby the former appointed the latter to be the contractor for the project "Italian Technical Assistance International Consultancy Provision of Technical Assistance and Support to the Microfinance Sub-Component of the Italian Agrarian Reform Community Development Support Program." The Project has a contract price of Php__________, and is estimated to be completed within twenty-four (24) months or until December 31, 2020. On June 6, 2019, the parties amended the Service Contract to modify the payment schedule of the project cost, which now provides: CAIHTE Report Month (from date of signature of the Service Contract) Percentage of payment Inception Report 1st month ___ % (Php __________ ) First Progress 4th month ___ % (Php __________ ) Interim Report 6th month 0% Second Progress 9th month ___ % (Php __________ ) Midterm Report 15th month ___ % (Php __________ ) Third Progress 18th month ___ % (Php __________ ) Draft Final 21st month ___ % (Php __________ ) Final Report 24th month ___ % (Php __________ ) To implement the Project, four (4) employees of Etimos (the Consultants) rendered the needed services in the Philippines on its behalf for a total of 92 days as of March 3, 2020. Their dates of arrival in, and departure from, the Philippines based on their passports are summarized as follows: Name of Personnel Date of Arrival in the Philippines Date of Departure from the Philippines Total number of days in the Philippines AAA __________ __________ 4 BBB __________ __________ 7 CCC __________ __________ 4 BBB __________ __________ 9 BBB __________ __________ 8 DDD __________ __________ 20 DDD __________ __________ 2 DDD and BBB __________ __________ 7 DDD __________ __________ 3 DDD __________ __________ 13 DDD __________ __________ 15 TOTAL 92 Based on the Sworn Statement issued by the Undersecretary for Foreign Assisted and Special Projects of DAR on January 18, 2021 and the Contract of Lease between Etimos and RD Realty Development Corporation dated July 11, 2019, Etimos has been renting an office space at the 2nd Floor of RD Realty, National Highway, Dadiangas East, General Santos City, South Cotabato since March 25, 2019. The lease period is for a period of two (2) years and will expire on March 24, 2021. The office of Etimos has an area of 42 square meters and has three (3) divisions: (a) conference room; (b) audio/video equipment; and (c) office desks/working space. A local staff of Etimos who is responsible for administrative works is manning the rented space and the employees of Etimos are working here while the Project is ongoing. RULING Generally, income derived by a nonresident foreign corporation from sources within the Philippines is subject to income tax at the rate of 30% under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, 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, pursuant to Section 32 (B) (5) of the Tax Code, such income shall be exempt from income tax if a valid and effective tax treaty provides for such exemption, thus: "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." Pertinent to the case are paragraph 1, Article 7 (Business Profits), and paragraphs 1 and 2, Article 5 (Permanent Establishment) of the Philippines-Italy Tax Treaty: aScITE " 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 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, quarry or other place of extraction of natural resources; g) a building site or construction or assembly project, or installation project, which exists for more than six months, or supervisory activities or consultancy services in connection therewith, where such activities or services continue for a period of more than six months." (Emphasis supplied) Under Article 7, the profits of an enterprise that is a resident of Italy, like Etimos in this case, shall be taxable in the Philippines only if the profits are attributable to a permanent establishment in the Philippines. Article 5 defines the term "permanent establishment" as a fixed place of business in 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. In the instant case, the rented office space of Etimos in General Santos City, South Cotabato constitutes its permanent establishment in the Philippines. It is a fixed place of business through which the business of Etimos is wholly or partly carried on. Moreover, the lease period of two years indicates some degree of permanency and the intention of Etimos to continuously carry out its business in the Philippines over such period of time. Accordingly, income payments made by DAR to Etimos in connection with the Project are subject to income tax in the Philippines pursuant to paragraph 1, Article 7 of the tax treaty. Etimos alleged that the profits it derived from services provided to the DAR are exempt from income tax pursuant to Articles 14.1 and 14.2 of the Financial Agreement, to wit: " 14.1 Any present or future tax, which may be due in the Republic of the Philippines for any reason whatsoever related to this Financial Agreement and to the Acknowledgment of Indebtedness, shall be exclusively borne by the Borrower. 14.2 Any tax due in Italy related to this Financial Agreement shall not be borne by the Borrower." An examination of the above provisions reveals that the tax assumed by the borrower, the Government of the Philippines, under the Financial Agreement pertains only to the tax on interest income earned by Artigiancassa and not to the profits derived by Etimos under the Service Contract. In substance, the Financial Agreement sets forth only the provision of a soft loan by Artigiancassa, on behalf of the Italian Government, to the Philippine Government for the implementation of the Program and the respective obligations of the parties thereto. It did not mention any exemption or assumption of taxes on services to be provided by those engaged in the implementation of the Program or Project. Finally, since the services are performed in the Philippines, payments therefor are subject to value-added tax (VAT) at the rate of 12% under Section 108 (A) of the Tax Code, viz. : "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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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. .." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 1 DAR shall, before making any payment to Etimos, withhold VAT at the rate of 12% of such gross payment. DAR shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld),and remit the VAT withheld within ten (10) days following the end of the month the withholding was made. The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for the claim of input VAT if the DAR is a VAT-registered taxpayer. Otherwise, the passed-on VAT shall form part of the cost of purchased services, which may either be treated as an "asset" or "expense," whichever is applicable. DETACa This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation 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. 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).