ITAD BIR Ruling No. 013-13

January 29, 2013 ITAD BIR RULING NO. 013-13 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Switzerland tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Cirilo P. Noel Chairman and Managing Partner Atty. Luis Jose P. Ferrer Partner, Tax Advocacy and Advisory Group Gentlemen : This refers to your tax treaty relief application filed on August 16, 2012 requesting confirmation, among others, that Procter and Gamble International Operations SA ("Procter and Gamble") does not have a permanent establishment in the Philippines, and as such profits derived by it from the sale of Procter and Gamble products ( "products" ) in the Philippines shall be exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . aScITE Facts The facts, as represented, are as follows: Procter and Gamble (or P&G) is a foreign corporation and a resident of Switzerland based on its Articles of Incorporation and Certificate of Residence issued by the Administration Fiscale Cantonale of Geneva in Switzerland on April 17, 2012. Procter and Gamble is located at 47, route de Saint-Georges, 1213 Petit-Lancy 1, Switzerland. Pursuant to the global operating model of the P&G Companies, Procter and Gamble established a branch in Singapore that serves as the regional operating entity of Procter & Gamble or the "Regional Entrepreneur" for Japan, Korea, for the continent of Australia (New Zealand and Australia), and for the countries of the Southeast Asia that include Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam, or collectively referred to as the "Asia-Pacific Region." This Regional Entrepreneur structure brings Procter & Gamble enhanced responsibility on a regional level over strategic operational areas, such as brand positioning, advertising, pricing and distribution network and it allows P&G to achieve greater consistency across markets, which the consumers expect, as well as for P&G Companies in the region to immediately respond to shifting demands on a regional level by rapidly expanding innovation across a larger region simultaneously. The management of regional capabilities is also further centralized, which enables P&G Companies to create new best-in-class capabilities and better allocate resources to high growth areas and to expand into new markets and untapped channels and consumers more quickly. Procter and Gamble-Singapore Branch , as Regional Entrepreneur, is responsible for the business in the Asia-Pacific Region and carries out strategic functions which are all performed in Singapore. It is the licensee of various intellectual properties, employs extensive resources and utilizes its own assets that are necessary for the accomplishment of its role as the Regional Entrepreneur of P&G for the Asia-Pacific Region. The operations of Procter and Gamble-Singapore Branch are undertaken by its employees in its office in Singapore and it neither owns nor leases any office premises in the Philippines. The supply chain for the Procter & Gamble products or P&G products in the Asia-Pacific Region is managed at the regional level by the Regional Entrepreneur and it is responsible for monitoring quality and ensuring the availability of P&G products in the Asia-Pacific Region. In the performance of its management of the supply chain for P&G products as the Regional Entrepreneur, Procter and Gamble-Singapore Branch engages existing manufacturing entities in many countries of Asia to manufacture P&G products; and consistent with its function to develop local country marketing strategies and distribute its products across the region, Procter and Gamble-Singapore Branch has contracts with a number of distributors to sell P&G products directly to customers in each market in the Asia-Pacific Region. All these contracts entered into by Procter and Gamble-Singapore Branch with various manufacturers and with distributors in the Asia-Pacific Region are concluded in Singapore. Manufacturing and Related Services Agreement On June 25, 2012, Procter and Gamble-Singapore Branch and Procter and Gamble Philippines, Inc. ("Procter and Gamble Philippines") entered into a Manufacturing and Related Services Agreement. Procter and Gamble Philippines is a domestic corporation located at 6750 Ayala Office Tower, Ayala Avenue, Makati City, Philippines. It is in the business of manufacturing and related services in connection with fabricating, producing, assembling, testing, and packaging products, providing services related to the procurement of raw materials, components, and supplies for these products, and providing other related services to the manufacture of the products. Under their Agreement, Procter and Gamble retains Procter and Gamble Philippines to perform manufacturing and related services to Procter and Gamble with respect to the products. Not later than one month before the end of each fiscal year (July 1 to June 30), Procter and Gamble will provide Procter and Gamble Philippines with a written forecast of its estimated monthly demand for each product for the coming fiscal year. Such forecasts represent Procter and Gamble's commercially reasonable, good-faith estimate of its requirements of each product from Procter and Gamble Philippines for such twelve-month period. Prior to or on the first day of each month, Procter and Gamble will deliver a firm order to Procter and Gamble Philippines specifying actual quantities of products to be supplied by Procter and Gamble Philippines during the succeeding month. From time to time, Procter and Gamble will provide Procter and Gamble Philippines with data and documents embodying all the contract specifications required to permit Procter and Gamble Philippines to perform the manufacturing and related services. Procter and Gamble will provide Procter and Gamble Philippines with technical or other assistance as is necessary to enable Procter and Gamble Philippines to perform the manufacturing and related services. Procter and Gamble will be responsible for determination of desired production volumes to be produced by Procter and Gamble Philippines . Procter and Gamble Philippines will ensure that all materials and products to be shipped pursuant to a firm order are free from damage, contamination, deterioration and adulteration and protected against theft, and store these products exclusively in a physically secure area under conditions that maintain the stability, integrity, and effectiveness of such materials and products. Procter and Gamble Philippines will deliver or have delivered the products pursuant to standing instructions from Procter and Gamble provided with firm orders. The purchase price of the products shall be an amount equal to the price determined according to the transfer pricing laws and has been determined to be the sum of the actual manufacturing costs for such product and other related costs (insurance, transportation, taxes), plus a mark-up of 5 percent. Procter and Gamble Philippines will submit an invoice to Procter and Gamble for all shipments of the products payable within 30 days from receipt thereof. The Agreement will take effect on July 1, 2013 up to until June 30, 2018; thereafter the Agreement will be automatically renewed for successive periods of twelve months. Distribution Agreement On June 25, 2012, Procter and Gamble , through Procter and Gamble Singapore Branch , and Procter and Gamble Distributing (Philippines), Inc. ( "Procter and Gamble Distributing Philippines" ) entered into a Distribution Agreement where Procter and Gamble appointed Procter and Gamble Distributing Philippines as exclusive distributor of the products in the Philippines. Procter and Gamble Distributing Philippines is a domestic corporation located at 6750 Ayala Office Tower, Ayala Avenue, Makati City, Philippines. Contracts executed by Procter and Gamble Distributing Philippines with wholesalers, retailers, government, self-services or any commercial establishment or trade channels (" customers "), or any other person will bind Procter and Gamble Distributing Philippines but not Procter and Gamble . Procter and Gamble Distributing Philippines will make all necessary arrangements for delivery of the products to the customers in the Philippines, including executing any necessary written agreements with sub-distributors in the Philippines. The products cover products for fabric and homecare, beauty care, baby and family care, grooming, health care, and snacks and pet. From time to time, Procter and Gamble will forward to Procter and Gamble Distributing Philippines the recommended trade price principles for each of the products which will show, as regards the latter's direct sales to customers, the recommended trade price principles to customers. Procter and Gamble Distributing Philippines' purchase price will be set such that it allows the earning of an operating margin of 2.25 percent of net sales, on the performance of its obligations under the Agreement, whether wholly conducted by Procter and Gamble Distributing Philippines or partially by other entities engaged by it, or such other amount as may be agreed to by the parties from time to time to be an appropriate arm's length return. Procter and Gamble Distributing Philippines will regularly provide Procter and Gamble forecasts for the following months in terms of volume and sales of the products within the Philippines. All orders placed by Procter and Gamble Distributing Philippines will be subject to acceptance by Procter and Gamble . Shipments will be invoiced to Procter and Gamble Distributing Philippines at the prevailing distributor price in the Philippines at the time of shipment. Where there is delivery of the products to the customers, transportation and warehouse associated with the delivery will be paid by Procter and Gamble Distributing Philippines . Until title to the products pass to Procter and Gamble Distributing Philippines , right of possession and control over the products remain with Procter and Gamble . Procter and Gamble Distributing Philippines will pay all invoices for goods purchased within 30 days after the end of the month of the receipt of invoice or such other period as agreed to by the parties. Procter and Gamble Distributing Philippines will invoice the customers to which it sells direct from its stocks and it may extend credit and trade terms to its customers following accepted local commercial practices. Procter and Gamble Distributing Philippines may negotiate or contract with third parties for distribution of items that do not compete with Procter and Gamble products. The Agreement will take effect on July 1, 2013 up to until June 30, 2018; thereafter the Agreement will be automatically renewed for successive periods of twelve months. aICHEc Based on the foregoing, you now request confirmation of the following: 1. Procter and Gamble Philippines and Procter and Gamble Distributing Philippines , as domestic corporations doing business for their own account, shall be subject to income tax on their taxable income and to value-added tax (VAT) under the National Internal Revenue Code of 1997, as amended (the "Tax Code"); 2. Procter and Gamble-Singapore Branch will not have a permanent establishment in the Philippines, pursuant to the Philippines-Switzerland tax treaty and thus, not subject to Philippine income tax and to withholding tax; 3. Procter and Gamble-Singapore Branch will be allowed to register for VAT purposes in the Philippines and to settle its VAT liabilities pursuant to the Tax Code; it shall also be allowed to credit against its output VAT liability or claim as refund and/or tax credit the input VAT on its purchases in the Philippines under the Tax Code. The registration of Procter and Gamble-Singapore Branch , however, shall neither change its status as a non-resident foreign corporation nor shall it be deemed as having a permanent establishment with the issuance by the BIR of the Tax Identification Number; and 4. Procter and Gamble-Philippines may be allowed to act as the VAT agent of Procter and Gamble-Singapore Branch and shall perform, as such, all VAT compliance that may be required by the BIR from a VAT registered taxpayer. Ruling In reply, please be informed as follows: 1. On the income and withholding tax liabilities of Procter and Gamble Philippines and Procter and Gamble Distributing Philippines, as domestic corporations This Office confirms that pursuant to Section 27 (A) of the Tax Code, Procter and Gamble Philippines and Procter and Gamble Distributing Philippines , as domestic corporations, shall be subject to income tax at the rate of thirty percent (30%) of its net taxable income, and to withholding tax in accordance with the Tax Code. 2. On whether Procter and Gamble-Singapore Branch will have a permanent establishment in the Philippines Under Article 7 of the Philippines-Switzerland tax treaty, income derived by Procter and Gamble from the sale of its products in the Philippines may be taxed in the Philippines if such income is attributable to a permanent establishment which Procter and Gamble has in the Philippines, thus: "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." In relation to a permanent establishment other than a fixed place of business (branch, office, etc.), paragraph 4, Article 5 (Permanent Establishment) of the Philippines-Switzerland tax treaty considers Procter and Gamble to have a permanent establishment if it has in the Philippines a person (a) who has, and habitually exercises, an authority to conclude contracts on its behalf or, (b) who has no such authority, but habitually maintains in the Philippines a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of Procter and Gamble , to wit: "4. A person acting in a Contracting State 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 have a permanent establishment in the first-mentioned State if: a) he has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 of this Article; 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." Accordingly, since Procter and Gamble Philippines and Procter and Gamble Distributing Philippines , as the respective manufacturer and distributor of Procter and Gamble products in the Philippines, habitually maintain these products in their premises for Procter and Gamble , and regularly deliver these products to third parties on behalf of Procter and Gamble , both Procter and Gamble Philippines and Procter and Gamble Distributing Philippines are deemed as permanent establishment of Procter and Gamble under paragraph 4, Article 5 of the Philippines-Switzerland States tax treaty. On Procter and Gamble Philippines , the following facts are worth considering: It has been providing manufacturing and related services to Procter and Gamble prior to the effectivity of the Manufacturing and Related Services Agreement on July 1, 2013, and that it will continue to provide these services Procter and Gamble for at least 5 years or until June 30, 2018 thereby satisfying the condition of habitualness and regularity. HDTcEI Procter and Gamble will provide Procter and Gamble Philippines a written forecast of its estimated monthly demand for the products to be manufactured and in accordance with a firm order to Procter and Gamble Philippines specifying the actual quantities of products to be produced. This clearly shows that the products produced belong or will belong at all times to Procter and Gamble . Procter and Gamble Philippines will ensure that all materials and products to be shipped pursuant to a firm order are free from damage, contamination, deterioration and adulteration and protected against theft, and store these products exclusively in a physically secure area under conditions that maintain the stability, integrity, and effectiveness of such materials and products. The requirement of habitually maintaining the products for Procter and Gamble is evident in this case. Procter and Gamble Philippines will deliver or have delivered the products pursuant to standing instructions from Procter and Gamble provided with firm orders. The condition of regularly delivering the products on behalf of Procter and Gamble is satisfied by this fact. On Procter and Gamble Distributing Philippines , the representations below are significant: The Distribution Agreement which authorizes Procter and Gamble Distributing Philippines as exclusive distributor of the products in the Philippines for a period of at least 5 years from July 1, 2013 to June 30, 2018 already makes Procter and Gamble Distributing Philippines to have performed business activities for Procter and Gamble with habitualness and regularity. Where there is delivery of the products to the customers, transportation and warehouse associated with the delivery will be paid by Procter and Gamble Distributing Philippines . This implies that Procter and Gamble Distributing Philippines will maintain the products for Procter and Gamble before they are delivered to the customers. On the other hand, on whether Procter and Gamble Philippines and Procter and Gamble Distributing Philippines are merely agents of an independent status so as to cancel the earlier pronouncement that they are permanent establishments, we quote below paragraph 5, Article 5 of the Philippines-Switzerland tax treaty for study: "5. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of the enterprise, he shall not be considered an agent of an independent status within the meaning of this paragraph." Under paragraph 5, an enterprise is not deemed to have a permanent establishment merely because it carries on business through a broker, general commission agent, or any other agent of an independent status , where such person is acting in the ordinary course of his business. Relative thereto, in Philippine Fund, Inc. vs. Commissioner of Internal Revenue (CTA Case No. 4461 dated May 13, 1994), the Court of Tax Appeals applied the ejusdem generis principle to limit an agent of an independent status (as referred to in tax treaties) to a person whose business activities are the same or similar to those rendered by a broker or a commission agent to the general public. The pertinent portion of this ruling reads: "Petitioner would like this Court to believe that it has no permanent establishment in the Philippines considering that its agent in the Philippines is of independent status. We do not believe so. Pursuant to the requirement of paragraphs 4(a) and 5 of Article 5 of RP-US Tax Treaty, you may be considered as having a permanent establishment if there is a person acting in one of contracting states on behalf of a resident of the other contracting state and such person has habitually exercised an authority to conclude contracts in the name of that resident. This situation will not apply if such representative is 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 . The agent shall not be considered independent if the activities of such agent are devoted wholly or almost wholly on behalf of that resident. xxx xxx xxx Thus the agents representing the petitioner are with authority to conclude contracts as they are specifically authorized to execute documents under the power of attorney and therefore could qualify as a permanent establishment. They could not qualify as an independent agent. This court believes that the agents referred to in the tax treaty are those in the same category as commission agent or broker. This is in accordance with the principle of ejusdem generis . Under this principle on statutory construction where general terms follow the designation of particular things or classes of persons or subjects, the general terms will be construed to include those things or person of the same class of the same nature as those specifically enumerated (Handbook on Statutory Construction by Ruperto G. Martin, 1973 ed. p. 70). This conclusion is supported by the fact that the treaty provision requires this agent to be 'acting in the ordinary course of his business'. So the business of this person or entity are commission agent or broker and they are acting as such to the general public. The agents of the petitioner in our case could not qualify as an agent of independent status considering that they are employees of a banking institution whose duties are entirely different form the assigned task as agent of the petitioner. For instance, Mrs. Hernandez runs the credit and marketing department of the bank. She admitted that the administration of the assets of the petitioner is an additional function and in fact she is designated there in her individual capacity. She is neither a commission agent, a broker nor an independent agent acting in the pursuit of such business. The independency is even questionable inasmuch as the company where she is employed indirectly owned 100% of petitioner. Granting that she is an independent agent, it appears that her activities as an agent are devoted wholly or almost wholly on behalf of that resident and as explained in the next paragraph the transaction between the agent and the petitioner does not seem to be under arm's length condition. Therefore, she could not be considered as an agent with independent status pursuant to Article 5 of the said tax treaty ." (Emphasis added) Moreover, the view that an agent of an independent status as referred to in tax treaties must be involved in the negotiation of sales contracts with third parties (whether or not the agent binds his principal) is supported by the very concept of a broker or a general commission agent and its historical origins. The pertinent commentaries in Income Tax Treaties of the United States (Copyright 1996 by Peter H. Blessing) mention: IEDHAT "Paragraph 6 of the Permanent Establishment article of the U.S. and OECD Model Treaties (Article 5(6)), dealing with independent agents, seems, on its face, at least to a common law reader, to set forth an exception to paragraph 5 for a 'broker, general commission agent or any other agent of an independent status.' A question that has been debated concerns whether paragraph 6 in fact does set forth an exception or whether, instead, it only covers situations in which the agent does not habitually exercise a power to bind the principal by contract ( i.e., situations that are not reached by paragraph 5). The more conventional, majority view (at least in common-law countries) is that paragraph 6 in fact is intended to set forth an exception to paragraph 5. Under that view, an independent agent includes an agent that can bind its principal by contract . The catchall term 'any other agent of an independent status' is not to be limited under the ejusdem principle to agents of the same type as commission agents or brokers. Further, as used in paragraph 6, those terms arguably should be construed by reference to their common-law meanings, since paragraph 6 ultimately was derived, through a circuitous route, from a 1925 U.K. statute. The French terms 'commissionaire' (a person who contracts in his own name) and 'courtier' (a person who only brings parties together and does not bind them by contract) may be considered under this view to be erroneous translations of the English counterparts (or at least as not determinative of the meaning of paragraph 6 in a common-law country, the English terms encompass agents having the authority to bind their principals by contract." (Chapter 3, Page 57) Accordingly, with respect to Procter and Gamble Philippines , since the Manufacturing and Related Services Agreement merely allows it to manufacture Procter and Gamble products for Procter and Gamble but not authorize it to negotiate or conclude sales contracts with third parties on behalf of Procter and Gamble, Procter and Gamble Philippine's business activities cannot be assimilated to those of a broker or a commission agent to the general public. As a broker , Procter and Gamble Philippines must have an authority to bring Procter and Gamble and another person together although Procter and Gamble Philippines will not bind Procter and Gamble and the said person in a contract. As a commission agent , Procter and Gamble Philippines must have an authority to conclude contracts with another person in its ( Procter and Gamble Philippines ) own name but ultimately on behalf of Procter and Gamble . Therefore, to be considered an agent of an independent status , Procter and Gamble Philippines must have the authority to bind Procter and Gamble and another person by contract, particularly, a sales contract transferring the ownership of the products from Procter and Gamble to the other person. With respect to Procter and Gamble Distributing Philippines , we note that under the Distribution Agreement, Procter and Gamble Distributing Philippines , as exclusive distributor of the products in the Philippines, can conclude contracts with wholesalers, retailers, government, self-services or any commercial establishment or trade channels, or any other persons for the sale of Procter and Gamble products. In any case, these contracts will bind only Procter and Gamble Distributing Philippines but not Procter and Gamble . Also, all orders placed by Procter and Gamble Distributing Philippines will be subject to acceptance by Procter and Gamble . This arrangement puts Procter and Gamble Distributing Philippines as a commission agent where it has an authority to conclude contracts with another person in its own name but ultimately on behalf of Procter and Gamble since the products subject of these contracts clearly belong at all times to Procter and Gamble . However, Procter and Gamble Distributing Philippines ' apparent independent status is overridden by the fact that its business activities as exclusive distributor of Procter and Gamble products are and will be devoted wholly or almost wholly on behalf of Procter and Gamble . While Procter and Gamble Distributing Philippines may negotiate or contract with third parties for distribution of items that do not compete with Procter and Gamble products, the fact that there are no specific third parties that Procter and Gamble Distributing Philippines can speak of at this time, and that Procter and Gamble Distributing Philippines as part of the Procter and Gamble Group of Companies will seek to service only Procter and Gamble and other members of the group their common business interest and trade secrets will make Procter and Gamble Distributing Philippines to devote its activities wholly or almost wholly on behalf of Procter and Gamble . This being the case, income derived by Procter and Gamble from the sale of Procter and Gamble products in the Philippines shall be subject to income tax in the Philippines pursuant to paragraph 1, Article 7 of the Philippines-Switzerland tax treaty. In relation thereto, under paragraph 3 of Article 7, in determining the profits of Procter and Gamble attributable to a permanent establishment, there shall be allowed as deduction from such profits, expenses including executive and general administrative expenses incurred by the permanent establishment, to wit: "3. In determining the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere." Simply put, Procter and Gamble , as a foreign corporation, shall be taxed as a resident foreign corporation subject to income tax based on its taxable income (gross income less allowable deductions) 1 derived from sources in the Philippines, under Section 28 (A) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations . (A) Tax on Resident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 3. On the VAT consequences of the transactions With respect to VAT, the provision of services by Procter and Gamble Philippines and Procter and Gamble Distributing Philippines to Procter and Gamble is subject to 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, 2 raise the rate of value-added tax to twelve percent (12%) . . ." CSHEca Similarly, the sale of Procter and Gamble products in the Philippines by Procter and Gamble Distributing Philippines on behalf of Procter and Gamble is subject to VAT since the sale of these products is done in the ordinary course of trade or business of Procter and Gamble , under Section 106, in relation to Section 105, of the Tax Code, to wit: "SEC. 106. Value-Added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 3 raise the rate of value-added tax to twelve percent (12%) . . ." "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." As persons liable to VAT, Procter and Gamble, Procter and Gamble Philippines and Procter and Gamble Distributing Philippines are entitled to claim input VAT credit on their purchase of goods and services which is subject to VAT, under Section 110 of the Tax Code, to wit: "SEC. 110. Tax Credits. A. Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: (a) Purchase or importation of goods: (i) For sale; or (ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or (iii) For use as supplies in the course of business; or (iv) For use as materials supplied in the sale of service; or (v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except automobiles, aircraft and yachts. (b) Purchase of services on which a value-added tax has been actually paid. (2) The input tax on domestic purchase of goods or properties shall be creditable: (a) To the purchaser upon consummation of sale and on importation of goods or properties; and (b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs. However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee. (3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows: (a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity. The term 'input tax' means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with section 111 of this code. The term 'output tax' means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of this Code." 4. On the TIN and VAT Registration of Procter and Gamble Singapore Branch and the constitution of the permanent establishment as agent for the preparation, filing and payment of tax liabilities Pursuant to Sections 3 (B) (1) and 3 (C) (2) of Revenue Regulations (RR) No. 011-08, all persons who are subject to any internal revenue tax or required to render a return, statement, or other document as required by the provisions of the Tax Code are mandated to secure the Taxpayer Identification Number ("TIN"), as well as the provisions of Section 9.236-1 of RR No. 16-05, in implementing Sections 113 and 236 of the Tax Code, which provides that any person who sells, barters, exchanges, leases goods or properties and renders services subject to VAT is required to secure a TIN and register as a VAT taxpayer, thus, Procter and Gamble-Singapore Branch desires to register as a VAT taxpayer. Considering that Procter and Gamble-Singapore Branch is deemed to have a permanent establishment in the Philippines, this Office therefore confirms that Procter and Gamble-Singapore Branch should be able to secure a TIN and to register as a VAT taxpayer in the Philippines. In this regard, Procter and Gamble-Singapore Branch may register as a VAT taxpayer using the business address of its permanent establishment, which already has an existing facility and address. Moreover we confirm that the permanent establishment of Procter and Gamble Singapore Branch would be constituted as the VAT agent of Procter and Gamble-Singapore Branch in the Philippines, and would also be responsible for the tax compliance and related obligation of the Procter and Gamble-Singapore Branch , including, but not limited to the preparation and filing of the required tax returns. 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. IaCHTS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "SEC. 31. Taxable Income Defined. The term ' taxable income ' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws." 2. The VAT rate was increased to 12 percent beginning February 1, 2006 , in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 3. Ibid.