ITAD BIR Ruling No. 015-09

May 18, 2009 ITAD BIR RULING NO. 015-09 Articles 5 (Permanent Establishment), 7 (Business Profits), 11 (Interest) and 15 (Dependent Personal Services); Philippines-Germany tax treaty Diaz Murillo Dalupan and Company Certified Public Accountants 5th Floor, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village, Makati City 1229 Attention: Mr. Alberto V. Igrubay Manager Tax and Corporate Services Division Gentlemen : This refers to your letter dated August 10, 2007, 1 requesting confirmation that payments to be made by Hfele Philippines, Inc. (Hfele Philippines) to Hfele GmbH & Co Kg (Hfele Germany) under a Cost Allocation and Service Agreement are exempt from income tax and from value-added tax. CacEIS Basic Facts It is represented that Hfele Germany is a corporation organized and existing under the laws of Germany and is a resident of Germany based on the Certificate dated February 10, 2007, issued by the tax authority of Germany; that Hfele Germany is situated at Adolf-Hfele-Strasse 1, D-72202 Nagold, Germany, and is not registered as a corporation or as a partnership in the Philippines based on a Certification of Non-Registration of Corporation or Partnership dated November 15, 2007, issued by the Securities and Exchange Commission; that, on the other hand, Hfele Philippines is a corporation organized and existing under the laws of the Philippines, under Company Registration No. AS092003589, based on its Certificate of Filing of Amended Articles of Incorporation with the Securities and Exchange Commission dated January 24, 2003; that Hfele Philippines is situated at 103 Central Business Park, Amang Rodriguez Avenue, Manggahan, Pasig City, Philippines; and that the primary purpose of Hfele Philippines as a corporation is to engage in, conduct and carry on the business of trading, importing, distributing and marketing of hardware specialist products, such as fittings product lines, furniture connector systems, built-in office furniture systems, and store fixture systems, table bases or miter hinges, fittings for mass-produced furniture, organization trays for office cabinets, desk base and counters installations and electronic locking systems for hotel rooms, as well as other kinds of goods or merchandise as may be permitted by law. It is also represented that on July 18, 2007, Hfele Germany and Hfele Philippines entered into a Cost Allocation and Service Agreement (Agreement) wherein Hfele Germany agreed to provide the following services to Hfele Philippines: 1. Global operations and direct support. All production issues such as central planning, purchase, equipment, technical issues, and quality. 2. Treasury. Cash pooling, bank account matters, indebtedness and related matters, exchange rate matters, credit letters, and other related matters. 3. Communication. Branding policy, institutional advertising, major professional exhibitions, and sales conference. 4. General management. Strategy definitions and implementation and other major business issues. ECcaDT 5. Legal. General legal assistance on matters such as internal control, major contracts, and review of local legal matters. 6. Finance and internal audit. Day to day support, supervision, instructions, budget reviews, internal audit (review of internal control procedures, accounting audit, and investments review). That in consideration for the said services, Hfele Philippines will pay Hfele Germany a cost allocation in accordance with the following formula: C x K Where C corresponds to the Actual Costs of Hfele Germany for services rendered to all its affiliates including Hfele Philippines from January to December of each year, and K is the Allocation Key for services dedicated by Hfele Germany to Hfele Philippines, determined in accordance with the arm's-length principle and based on a fair estimate of such services. That Hfele Germany will invoice Hfele Philippines of the cost allocation on a quarterly basis, and Hfele Philippines will pay Hfele Germany of such amount through telegraphic wire transfer on or before the 10th day of the month following that in which the invoice was issued; and that an interest on late payment will be imposed at the rate generally stipulated on transactions between companies. It is further represented that the Agreement has an initial term of one year from January 1 to December 31, 2005 and may be renewed by the parties by mutual agreement; that based on the notarized Affidavit dated October 3, 2008, by the Managing Director of Hfele Philippines, Mr. Veli Matti Kaikkonen, Hfele Philippines and Hfele Germany have been renewing the Agreement by mutual agreement since 2005 up to present; and that the Agreement may terminate automatically without the requirement of any formalities in case of material breach or default by one party in the performance of its contract obligations or in case of change in the controlling interest of Hfele Philippines. It is finally represented that based on the notarized Affidavits dated October 3 and 8, 2008, by the same Managing Director of Hfele Philippines, the following are the personnel of Hfele Germany who were sent to the Philippines to render services to Hfele Philippines pursuant to the Agreement: TAcSaC 1. Mr. Gerard Brunner. Consulting migration AD/Internet connection set-up and requirements. March 20 to April 2, 2005. 2. Mr. Egor Savelsberg. Purchasing; Export conduct training on Hfele Germany , and Online Ordering System. May 21 to 27, 2005. 3. Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and recommendation. December 22-23, 2005. 4. Mr. Stefan Huber. Managing Director for foreign subsidiaries: a) Checking business operations of the Asian subsidiaries of Hfele Germany . April 10-12, 2006. b) Location checking for future warehouse/office of Hfele Philippines . June 2-4, 2007. That the services rendered by the above employees to Hfele Philippines are for system set-up and upgrade to ensure uniformity of Hfele Philippines with the other subsidiaries of Hfele Germany and for the evaluation and improvement of Hfele Philippines for its future expansion; and that based on the notarized Affidavit dated February 4, 2008, by the same Managing Director of Hfele Philippines , the subject transaction of the request for ruling involving Hfele Philippines and Hfele Germany is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or judicial appeal. Ruling A. On income tax In reply, please be informed that a foreign corporation like Hfele Germany , whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In relation, Section 28 (B) (1) of the Tax Code of 1997, as amended, provides: CITcSH "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 subparagraphs 5(c). Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such income derived by Hfele Germany in the Philippines may be exempt from income tax (or partially exempt if subject only to a reduced income tax rate) if the same is so exempt (or partially exempt ) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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." With respect to a treaty that may be invoked by Hfele Germany and other residents of Germany, there is the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (Philippines-Germany tax treaty) , signed on July 22, 1983, and effective January 1, 1985. Since tax treaties follow the principal method of classification and assignment in mitigating the effects of double taxation of income derived by a resident of a Contracting State in the other Contracting State, it is important to know how income derived by Hfele Germany is classified and taxed under the Philippines-Germany tax treaty. cDEICH Payments for services Payments for services to be made by Hfele Philippines to Hfele Germany are generally treated as business profits unless otherwise proven as royalties such as if the activity involves the grant to use or the right to use an intangible property like know-how (information concerning industrial, commercial or scientific experience). To distinguish between payments for the supply of services and payments for the supply of know-how, the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (Condensed Version, July 15, 2005) made the following commentaries on the subject, thus: "11.1. In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. 11.3. The need to distinguish these two types of payments, i.e. , payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of that kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. CcSEIH In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. 11.4. Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include: payments obtained as consideration for after-sales service, payments for services rendered by a seller to the purchaser under a guarantee, payments for pure technical assistance, payments for an opinion given by an engineer, an advocate or an accountant, and payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently." (Pages 181-182) As a basic difference, contracts for the supply of know-how concern information that already exists or concern the supply of that type of information after its development or creation and generally include specific provisions concerning the confidentiality of that information. Also, in most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. STEacI In the subject Agreement, there is no instance when Hfele Germany, through employees or personnel thereof, will impart any information to Hfele Philippines that already exists or that is recently developed or created by Hfele Germany, and which generally require Hfele Philippines to maintain the confidentiality of such information. On account that Hfele Germany will merely perform technical support and provide consultancy advice to Hfele Philippines in the areas of treasury, communication, general management, legal, and finance and internal audit, but not divulge to Hfele Philippines any special knowledge or experience involved in carrying out such technical support or the provision of such consultancy advice, payments arising under this type of arrangement will not give rise to royalties but merely to payments for services or business profits. On the taxation of business profits, paragraph 1, Article 8 of the Philippines-Germany tax treaty provides: "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." Under paragraph 1, the profits of an enterprise of a Contracting State derived in the other Contracting State may be taxed in the other State if the profits are attributable to a permanent establishment which the enterprise has in the other State. In relation, the term permanent establishment is defined in paragraphs 1 and 2, Article 5 of the tax treaty below "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 warehouse, in relation to a person providing storage facilities for others; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months." In addition, Item 2 of the Protocol supplementing the Philippines-Germany tax treaty treats as a permanent establishment, the furnishing of services which continues for an aggregate period of more than six months within any twelve-month period, thus "2. In relation to Article 5, if an enterprise of a Contracting State carries out activities in the other Contracting State by furnishing services, including consultancy services, through an employee or other personnel, it shall be considered to have a permanent establishment in that Contracting State only if such services continue (for the same or a connected project) within that Contracting State for a period or periods aggregating more than six months within any twelve-month period. No permanent establishment is assumed if the services, including the provision of equipment, are furnished in a Contracting State by enterprises of the other Contracting State, including consultancy firms, in accordance with, or in the implementation of, an agreement between the Contracting States regarding technical cooperation." With respect to a permanent establishment in the form of a fixed place of business like a branch or an office under paragraphs 1 and 2 of Article 5, since the relevant Certification issued by the SEC dated November 15, 2007, confirms that Hfele Germany is not engaged in trade or business in the Philippines, it is unlikely for Hfele Germany to have a branch or an office in the Philippines that might constitute its permanent establishment, at least as of the said date. With respect to a permanent establishment in the case of the furnishing of services which lasts for more than six months within any twelve-month period under Item 2 of the Protocol, a summary of the number of days spent by the personnel of Hfele Germany in the Philippines reveals the following: 1. Mr. Gerard Brunner. Consulting migration AD/Internet connection set-up and requirements. March 20 to April 2, 2005. (14 days) 2. Mr. Egor Savelsberg. Purchasing; Export conduct training on Hfele Germany, and Online Ordering System. May 21 to 27, 2005. (7 days) 3. Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and recommendation. December 22-23, 2005. (2 days) 4. Mr. Stefan Huber. Managing Director for foreign subsidiaries: a) Checking business operations of the Asian subsidiaries of Hfele Germany. April 10-12, 2006. (3 days) b) Location checking for future warehouse/office of Hfele Philippines. June 2-4, 2007. (3 days) In this case, we consider a twelve-month period beginning March 2005 to February 2006, another twelve-month period beginning March 2006 to February 2007, and another one beginning March 2007 to February 2008. The number of days spent by the above personnel are 23 days for the first twelve-month period, 3 days for the second twelve-month period, and 3 days for the third twelve-month period, all of which sum up to less than six-months within each of the said twelve-month periods. This being the case, the furnishing of services by Hfele Germany to Hfele Philippines does not create a permanent establishment for Hfele Germany in the Philippines. ITADaE Accordingly, in the absence of a permanent establishment in the Philippines, payments to be made by Hfele Philippines to Hfele Germany pursuant to the Cost Allocation and Service Agreement are exempt from income tax in the Philippines. Interest on late payment With respect to interest on late payment to be made by Hfele Philippines to Hfele Germany pursuant to the Cost Allocation and Service Agreement, it is noteworthy that the definition of the term "interest" under paragraph 5, Article 11 (Interest) of the Philippines-Germany tax treaty likewise considers this payment as interest , thus: "5. The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived." Paragraph 5 defines two types of interest, (1) interest taking the form of income from debt-claims, including income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, and (2) interest taking the form of income assimilated to income from money lent by the taxation law of the country of source of the income. In the case of interest on late payment to be paid by Hfele Philippines to Hfele Germany, which does not arise primarily from debt-claims but from unsettled or overdue obligations of Hfele Philippines to Hfele Germany in relation to the latter's provision of technical support and consultancy advice to Hfele Philippines, the payment in question is in the second category of interest, that is, as income assimilated to income from money lent by the taxation law of the country of source of the income. As to the taxation of interest, paragraphs 2, 3 and 4, Article 11 of the Philippines-Germany tax treaty provide: "Article 11 INTEREST 1. Interest 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 interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent if such interest is paid: (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, or (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations, b) 15 per cent of the gross amount of such interest in all other cases. 3. Notwithstanding the provisions of paragraph 2: a) interest arising in the Federal Republic of Germany and paid to the Philippine Government and the Central Bank of the Philippines shall be exempt from German tax; SCETHa b) interest arising in the Republic of the Philippines and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Philippine tax. The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply. 4. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a Contracting State shall be exempt from tax in that State if it is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of the other Contracting State as by 'Hermes Deckung' in the case of the Federal Republic of Germany and by the Central Bank in the case of the Republic of the Philippines, or any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Contracting States." Under paragraph 2, interest arising in the Philippines and derived by a resident of Germany is subject to income tax at a rate not to exceed: (a) 10 percent of the gross amount of the interest if it is paid (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, (ii) on any loan of whatever kind granted by a bank, or (iii) in respect of public issues of bonds, debentures or similar obligations; and (b) 15 percent of the gross amount of the interest in all other cases. However, under paragraphs 3 and 4, such interest is exempt from income tax if the interest is paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau, or the Deutsche Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) , or if the interest is derived in respect of a loan made, guaranteed or insured by a governmental instrumentality of Germany such as 'Hermes Deckung' or by any other instrumentality as is specified and agreed in letters exchanged between the competent authorities of the Philippines and Germany. Accordingly, such interest on late payment to be made by Hfele Philippines to Hfele Germany pursuant to the Cost Allocation and Service Agreement is subject to income tax at the rate of 15 percent based on the gross amount thereof. The interest in question cannot be subject to the lower rate of 10 percent under paragraph 2 (a), or be exempt under paragraphs 3 or 4, of Article 11, because the conditions in availing either of these more preferential tax treatments are not present in the case of such interest to be paid to Hfele Germany. ICTHDE Remuneration of personnel Salaries and other similar remuneration to be paid by Hfele Germany to its personnel who provide technical support and consultancy advice to Hfele Philippines in the Philippines, which are generally subject to income tax in the Philippines, may be exempt if the three conditions laid down in paragraph 2, Article 15 of the Philippines-Germany tax treaty below are all complied with concurrently, to wit: "Article 15 DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State." As to the first condition [subparagraph (a)], we recognize that this condition is satisfied for all personnel of Hfele Germany since the number of days spent by each in the Philippines did not exceed 183 days in the calendar years 2005, 2006, 2007 and 2008, thus: 2005 Mr. Gerard Brunner. Consulting migration AD/Internet connection set-up and requirements. March 20 to April 2, 2005. (14 days) Mr. Egor Savelsberg. Purchasing; Export conduct training on Hfele Germany, and Online Ordering System. May 21 to 27, 2005. (7 days) Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and recommendation. December 22-23, 2005. (2 days) 2006 Mr. Stefan Huber. Managing Director for foreign subsidiaries. Checking business operations of the Asian subsidiaries of Hfele Germany. April 10-12, 2006. (3 days) 2007 Mr. Stefan Huber. Managing Director for foreign subsidiaries. Location checking for future warehouse/office of Hfele Philippines. June 2-4, 2007. (3 days) 2007 * None. As to the second condition [subparagraph (b)], this is also satisfied since Hfele Germany, the employer in this case, is not a resident of the Philippines but of Germany, based on the relevant Certificate issued by the tax authority of Germany and based on the relevant Certification issued by the Securities and Exchange Commission of the Philippines. As to the third condition, this is also satisfied since, as mentioned previously, Hfele Germany, the employer, does not have a permanent establishment in the Philippines. ITCcAD Accordingly, since the three conditions are all satisfied for each personnel of Hfele Germany, such salaries and other similar remuneration to be paid to them for the calendar years 2005, 2006, 2007 and 2008 are exempt from income tax in the Philippines. B. On value-added tax Although exempt from income tax, payments to be made by Hfele Philippines to Hfele Germany pursuant to the Cost Allocation and Service Agreement (including interest on late payment as described above) are subject to value-added tax (VAT). Section 108 (A) (1) and (3) of the Tax Code of 1997, as amended, provides: "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 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, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%)." 2 While VAT is generally imposed on any person who sells, barters, exchanges, leases goods or properties, and renders services, generally in the course of its trade or business, services rendered by a nonresident foreign person in the Philippines like Hfele Germany are likewise considered rendered in the course of trade or business of that person and therefore subject to VAT. Section 105 of the Tax Code of 1997, as amended, provides: "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. cETDIA 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." (emphasis supplied) Accordingly, Hfele Philippines, being a resident withholding agent, is liable to withhold VAT on such payments to be made by it to Hfele Germany, the nonresident recipient, at the rate of 12 percent. For this purpose, Hfele Philippines will use BIR Form No. 1600 (Remittance Return of VAT and Other Percentage Taxes Withheld), and, assuming that it is a VAT-registered taxpayer, the VAT withheld may be claimed by Hfele Philippines as input tax upon filing its own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 will be the proof or documentary substantiation for the claim of input tax or input VAT. On the other hand, assuming Hfele Philippines is not a VAT-registered taxpayer, the VAT passed-on to it by Hfele Germany (as evidenced by the duly filed BIR Form No. 1600) will form part of the cost of services rendered by Hfele Germany to Hfele Philippines which the latter can treat as an expense or an asset, as applicable. The VAT withheld will be remitted by Hfele Philippines within 10 days following the end of the month the withholding was made. For this purpose, Section 4.112-2 of Revenue Regulations No. 16-2005, 3 as amended by Revenue Regulations No. 4-2007, 4 provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. STIcEA Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'expense' or 'asset', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." Finally, while Hfele Germany will provide legal services, among others, to Hfele Philippines under the subject Cost Allocation and Service Agreement, particularly, general legal assistance on matters such as internal control, major contracts, and review of local legal matters, this ruling cannot be construed as authorizing Hfele Germany to exercise legal profession in the Philippines, which is generally prohibited under Section 14, Article XII of the 1987 Philippine Constitution. 5 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 Footnotes 1. Received by the International Tax Affairs Division of this Bureau on December 28, 2007. 2. The VAT rate was increased to 12 percent on 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. Entitled Consolidated Value-Added Tax Regulations of 2005, dated September 1, 2005, and effective fifteen days after its publication. 4. Entitled Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005, dated February 7, 2007, and which is effective fifteen days after its publication. 5. " Section 14. The sustained development of a reservoir of national talents consisting of Filipino scientists, entrepreneurs, professionals, managers, high-level technical manpower and skilled workers and craftsmen in all fields shall be promoted by the State. The State shall encourage appropriate technology and regulate its transfer for the national benefit. The practice of all professions in the Philippines shall be limited to Filipino citizens, save in cases prescribed by law."