Rubio and Rubio

June 4, 2019 ITAD BIR RULING NO. 012-19 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Singapore tax treaty Rubio and Rubio Level 3, Joy Nostalg Center 17 ADB Avenue, Ortigas Center 1605 Pasig City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on September 28, 2016 requesting confirmation that payments made by Exclusive Networks-PH, Inc. (" Exclusive Networks ") (formerly Transition Systems Philippines Pte. Ltd. ) to F5 Networks Singapore Pte. Ltd. (" F5 Networks ") 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 F5 Networks is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. F5 Networks is engaged in the provision of technical support, sales, after sales and maintenance services for computer software, peripheral equipment and products, and training of personnel in the use, maintenance and service of such software, equipment and products. 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, Exclusive Networks is a domestic corporation organized and existing under Philippine laws. Based on its amended Articles of Incorporation, General Information Sheet as of September 21, 2017 and Audited Financial Statements as of December 31, 2016, Exclusive Networks is engaged in trading and distribution activities on a wholesale basis. Exclusive Networks and F5 Networks are not related entities. Exclusive Networks ' immediate parent is Transition Systems Asia Pte. Ltd. (" Transition ") of Singapore and its ultimate parent is Exclusive France Holding SAS of France. On April 18, 2016, Exclusive Networks and F5 Networks entered into an F5 Networks Distributor Agreement (" Agreement ") where F5 Networks appointed Exclusive Networks as its non-exclusive distributor in the Philippines for the promotion, sale and delivery of products and services to resellers and channel partners for their resale to end-users. The Agreement took effect on April 18, 2016, and will be in effect for one year; thereafter, the Agreement will be automatically renewed for another one year, to a maximum of two years. Products refers to application, delivery, networking, and data virtualization products and services that enable organizations to provide reliable, consistent access to internet and intranet applications. Services means consulting, training, installation and other professional services and technical support and maintenance which Exclusive Networks are authorized to market and resell under the Agreement. Title and risk of loss or damage to the products will pass to Exclusive Networks upon shipment of these products by F5 Networks to the first carrier. Based on Exclusive Networks ' Summary of Sales and Purchases, its reported sales for F5 Networks products and services in 2016 constituted 18.02% of its total sales. The remaining sales of Exclusive Networks involved at least eight other similar products and services ( i.e. , Aruba, Barracuda, Extreme, Palo Alto, Perle, Rapid 7, Tempe, Transition). Prior to the effectivity of the Agreement, Exclusive Networks has no reported sales of F5 Networks products and services in 2013, 2014 and 2015. Based on a sworn statement issued by Exclusive Networks , 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 proceeding, 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 "), income derived by a foreign corporation not engaged in trade or business 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: 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, such income is 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." For this purpose, paragraph 1, Article 7 and paragraphs 1, 2, 4 and 5, 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. xxx xxx xxx 4. A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom paragraph 5 applies, shall be deemed to be a permanent establishment in the first-mentioned Contracting State if a) he has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that enterprise unless the exercise of such authority is limited to the purchase of goods or merchandise for that enterprise; or b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise . 5. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the enterprise were not made under arm's length conditions." From the foregoing, profits derived by F5 Networks from the sale of its products and services in the Philippines through its distributor, Exclusive Networks , may be taxed in the Philippines if these profits are attributable to a permanent establishment which F5 Networks has in the Philippines. F5 Networks , however, is not deemed to have a permanent establishment because it is not engaged in trade or business in the Philippines to which a fixed place of business such as an office or a branch is necessary. Moreover, it is presumed that Exclusive Networks is not a dependent agent of F5 Networks because they are not related parties to begin with, and that Exclusive Networks was not established to perform business activities for F5 Networks as its primary or exclusive principal, but to perform business activities in general. To be dependent, a person performing business activities to a principal is not doing so in the course of carrying on its business as an independent agent. This distinction is emphasized in the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital ( Condensed Version, November 21, 2017 Edition ), which provide: "83. Persons whose activities may create a permanent establishment for the enterprise are persons, whether or not employees of the enterprise, who act on behalf of the enterprise and are not doing so in the course of carrying on a business as an independent agent falling under paragraph 6 . Such persons may be either individuals or companies and need not be residents of, nor have a place of business in, the State in which they act for the enterprise. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such a case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term 'permanent establishment' in this context presupposes, of course, that the person makes use of this authority repeatedly and not merely in isolated cases." (Emphasis ours) Based on the representations given, Exclusive Networks is an independent agent when it was contracted by F5 Networks . Finally, Exclusive Networks ' independent status is not diminished when it performs business activities for F5 Networks because such activities are not devoted wholly or almost wholly on behalf of F5 Networks . Upon review of Exclusive Networks ' financial documents in 2016, aside from F5 Networks, Exclusive Networks has reported sales for at least eight other brands of network products and services ( i.e. , Aruba, Barracuda, Extreme, Palo Alto, Perle, Rapid 7, Tempe, Transition). More importantly, Exclusive Networks ' percentage of sales relating to F5 Networks products and services constitutes only 18.02% of its total revenues thereby not deeming its activities to be devoted wholly or almost wholly on behalf of F5 Networks . Accordingly, since F5 Networks does not have a permanent establishment under Article 5 of the Philippines-Singapore tax treaty, payments (cost of goods) made by Exclusive Networks to F5 Networks for the purchase of the F5 products are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. On the other hand, net profit (revenue less cost of goods and services sold and other allowable expenses) derived by Exclusive Networks , a domestic corporation, from distributing F5 Networks products and services in the Philippines is subject to income tax at the rate of 30% under Section 27 (A) of the Tax Code, to wit: " SEC. 27. Rates of Income tax on Domestic Corporations . (A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Finally, the importation of F5 Networks products by Exclusive Networks is subject to value-added tax (" VAT ") at the rate of 12% under Section 107 (A) of the Tax Code, thus: " SEC. 107. Value-Added Tax on Importation of Goods . (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of the value-added tax to twelve percent (12%) . . ." 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 n Note from the Publisher: Copied verbatim from the official document.