Carag Zaballero Llamado

August 29, 2019 ITAD BIR RULING NO. 022-19 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Malaysia tax treaty Carag Zaballero Llamado and Abiera Law Offices Suite 2602, 26th Floor, The Atlanta Centre 31 Annapolis Street, Greenhills 1500 San Juan City Attention: AAA BBB CCC Gentlemen : This refers to your tax treaty relief application filed on August 31, 2011 requesting confirmation that commission and service fee paid by Demo Power Philippines, Inc. (" Demo Power ") to OMG Asia Pacific Sdn. Bhd. (" OMG Asia ") are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Malaysia tax treaty "). FACTS OMG Asia is a foreign corporation organized and existing the laws of Malaysia and a resident thereof based on its Memorandum and Articles of Association, Certificate of Incorporation, and Certificate of Residence issued by the Inland Revenue Board of Malaysia. The primary purpose of OMG Asia is to carry on the business of an operational headquarter in providing management services to the marketing of trading stamps and to direct marketing consultancy advice; provide marketing communication services and consultants; undertake promotional campaigns; and acquire and provide promotional requisites, among others. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Demo Power is a domestic corporation engaged in marketing products and programs through in-store marketing of consumer packaged goods in supermarkets, convenience stores, separate drugstores, department stores, and other venues for general retailing, based on its General Information Sheet as of June 17, 2013 and Audited Financial Statements as of December 31, 2013. Demo Power is 80 percent-owned by Demo Power Ltd. of Hong Kong, and its ultimate parent is RBM Investment Ltd. of Malaysia. EcTCAD On July 8, 2011, Demo Power and OMG Asia entered into a Management Services Agreement where Demo Power appointed OMG Asia to provide management services to Demo Power in relation to its in-store marketing business in the Philippines. OMG Asia had represented itself as having in-depth experience in in-store marketing services and having established accounts with international and regional customers in the Southeast Asian region, and extensive retail network contact in the Asia Pacific region. The core business of Demo Power and OMG Asia is in in-store marketing services in the retail industry, and Demo Power could benefit from OMG Asia 's experience and expertise in this area of services. Under the Agreement, OMG Asia will provide the following onshore services to Demo Power : 1. Securing retailer contracts Retailer contract covers not only retailer but also existing retailer for the purpose of renewal of contract. OMG Asia will assist Demo Power in securing in-store marketing contracts with retailers based on their executive retailer contracts. 2. Understanding retailer profile Understanding retailer profile is essential to ensure the right product portfolio to be offered to customers at the right price. OMG Asia will provide services to Demo Power on reach and frequency study, rate card analysis and discount structure, and product portfolio offerings. 3. Managing retailer contracts Retailer contracts are important in in-store marketing business, and review and management of these contracts are essential. OMG Asia will provide services to Demo Power on drafting of retailer contracts, duration of contract negotiation, renewal clause, remuneration and commitments, new store strategies, and new products opportunities. 4. Reviewing and maintaining retailer contracts Demo Power needs to update the retailers on their performance of in-store marketing programs and revenue share attributable to these retailers. OMG Asia will provide services to Demo Power in connecting to the right person from the retailer's end; recommending the report format and the information to be presented; and managing top level management of retailers. In addition, OMG Asia will provide offshore services to Demo Power which will be done in the former's head office in Malaysia. These services will focus on business strategies, sales, and operations and organizations. In consideration, Demo Power will pay commission and service fee to OMG Asia as follows: a) Commission equivalent to 15 percent of Demo Power 's gross revenues from retailer contracts secured through OMG Asia , including contract renewals negotiated and concluded by OMG Asia ; and b) Service fee equivalent to 45 percent of Demo Power 's pre-tax profit after deducting all business related expenses. The commission and service fee will be calculated every month and payable within seven days upon receipt of invoice for the month. The Agreement took effect on September 1, 2011 and will expire on August 31, 2016, and will be renewed for subsequent periods of five years. Based on a sworn statement issued by Demo Power , OMG Asia rendered offshore and onshore services to Demo Power through its personnel: DDD (__________) and EEE (__________). For offshore services , these personnel developed Demo Power 's plan in accordance with its strategies, among others, and provided financial leadership to Demo Power , and were instrumental in forming the company's accounting strategies, among others. For onshore services , these personnel rendered guidance in understanding retailer profiles in connection with Demo Power 's accounting strategies, and supervised and gave direction on the company's management and review of its retailer contracts. These personnel rendered services in the Philippines for 13 days in 2011; 22 days in 2012; 50 days in 2013; 11 days in 2014; and 9 days in 2015, to wit: a) DDD Nature of work Dates of physical presence Provided guidance in understanding retailer profiles. Gave direction in the management and review of retailer contracts. 2011 April 5; June 14; August 28 2012 January 20-21; March 7; April 26; May 20, 21, 24; June 11; August 20; October 25; December 5 2013 January 22; February 7, 25, 28; April 20; May 3, 8, 16; August 8; September 27; November 5, 20; December 5, 12 2014 January 23; April 4; June 23; July 17: August 29; November 25, 27; December 13, 31 2015 April 19; May 2, 22; July 14; August 15; November 3, 29 b) EEE Nature of work Dates of physical presence Provided guidance in understanding retailer profiles in connection with Demo Power 's accounting strategies. Supervised and gave direction on the company's management and review of retailer contracts. 2011 January 17; February 21-23; June 14-15; July 7-8; October 19-21 2012 April 26-27; July 3-4; August 21-24; December 3-5, 27-28 2013 January 28-31; February 1-28; March 25-27; November 4-8 2014 October 10-11 2015 May 23-24 Based on another sworn statement issued by Demo Power , 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. HSAcaE RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, income derived by a nonresident foreign corporation in the Philippines is subject to income tax at the rate of 30 percent, 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 binding upon the Philippine government, 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." Relative thereto, paragraph 1, Article 7, and paragraphs 1, 2 and 6, Article 5 of the Philippines-Malaysia 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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much thereof as is attributable to that permanent establishment." " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce; g) a farm or plantation; h) a building site or construction, installation or assembly project which exists for more than 6 months. xxx xxx xxx 4. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State; or b) substantial equipment is in that other State being used or installed by, for or under contract with, the enterprise." Under Article 7, 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 such, its profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. HESIcT Under Article 5, a permanent establishment means a fixed place through 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 (paragraphs 1 and 2) . For furnishing of services, an enterprise is deemed to have a permanent establishment only if it carries on supervisory activities in a Contracting State for more than six months in connection with a construction, installation or assembly project undertaken in that State; or substantial equipment was used or installed in that State, by, for or under contract with the enterprise (paragraph 4) . Accordingly, since OMG Asia is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or other fixed place of business in the country, and it did not render services in the Philippines for more than six months in connection with a construction, installation or assembly project or with the use or installation of substantial equipment, OMG Asia is not deemed to have a permanent establishment in the Philippines under paragraphs 1, 2 and 4, Article 5 of the Philippines-Malaysia tax treaty. While OMG Asia rendered onshore services in 2011 to 2015, these services were in the nature of management services to improve Demo Power 's in-store marketing business in the Philippines, and not in the nature of activities described in paragraph 4 of Article 5. This being so, such commission and service fee paid by Demo Power to OMG Asia under the Agreement for such offshore and onshore services rendered are exempt from income tax in the Philippines pursuant to paragraph 1, Article 7 of the Philippines-Malaysia tax treaty. Finally, the services rendered by OMG Asia in the Philippines are subject to value-added tax (" VAT ") at the rate of 12 percent under Section 108 (A), in relation to Section 105 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, 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, non-profit 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." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 1 Demo Power shall withhold VAT on the commission and service fee at the rate of 12 percent before remitting them to OMG Asia . Demo Power shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for Demo Power 's claim of input VAT on the commission and service fee; otherwise, if it is not a VAT-registered taxpayer, Demo Power may treat the passed-on VAT as part of the cost of the services and treat the same as asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 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 Footnotes 1. Entitled 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). n Note from the Publisher: Copied verbatim from the official document.