M. Ng & T. Lopez Partnership

June 8, 2021 ITAD BIR RULING NO. 025-21 Article 14 (Personal Services) PH-Singapore Tax Treaty M. Ng & T. Lopez Partnership 265 McArthur Highway Diamond Subdivision Balibago, Angeles City 2009 Pampanga Attention: _____________ Gentlemen : This refers to your tax treaty relief application that was filed on March 13, 2020 requesting confirmation that the remuneration or income for personal services paid by MetroJet Engineering (Clark) Limited Branch office (MetroJet Philippines) to _________________________ is exempt from Philippine income tax pursuant to Article 14 (Personal Services) of 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) . HTcADC FACTS ______________________ is a citizen of Singapore and a resident thereof based on the Certification of Singapore Tax Residence issued by the Inland Revenue Authority of Singapore. He is not engaged in trade or business in the Philippines based on his registration with the Bureau of Internal Revenue and on the Negative Certification issued by the Department of Industry stating that there is no existing business registration under the name of _________________. MetroJet Engineering (Clark) Limited (MetroJet Hong Kong), on the other hand, is a foreign company organized and existing under the laws of Hong Kong that was granted by the Securities and Exchange Commission a license to establish its branch office in the Philippines, MetroJet Philippines, with principal office address at Hangar N7269, Civil Aviation Complex, Clark Freeport Zone, Pampanga, for the purpose of undertaking a business related to the repair and maintenance of aircraft without, however, engaging in the practice of engineering. On September 26, 2019, _________________ was hired as the general manager of MetroJet Philippines in consideration of a monthly remuneration of ________________________ and other benefits, or an annual salary of ____________________ inclusive of 13th month pay. His employment commenced, however, on November 11, 2019 based on the Certification issued by the Human Resource Manager of MetroJet Philippines on October 19, 2020. ___________________ believes that the remuneration paid by MetroJet Philippines for personal services performed in the Philippines is exempt from income tax; hence, this application. 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 based on the sworn statement issued by ___________________ on February 10, 2020. RULING Section 25 (B) of the National Internal Revenue Code of 1997 (Tax Code), as amended, reads as follows: SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. xxx xxx xxx Based on the said provision, a nonresident alien individual, though not engaged in trade or business (NRANETB) in the Philippines, is subject to income tax on his/her income received from all sources within the Philippines at the rate of 25% of such income. In this case, a determination must be made whether the remuneration derived by _______________ is considered an income derived from sources within the Philippines and is, therefore, subject to Philippines income tax. In determining the source of such remuneration for personal services, resort must be had to Section 42 (A) (3) of the Tax Code, to wit: SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services. Compensation for labor or personal services performed in the Philippines; xxx xxx xxx It is clear from the foregoing provision that the place where the services were actually rendered, not the residence of the income recipient, determines the source of income for personal services. In Commissioner of Internal Revenue v. Juliane Baier-Nickel , 1 the Court reiterated the ruling of the Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation 2 that the "source of income" relates to the property, activity or service that produced the income. It further held that with respect to rendition of labor or personal service, it is the place where the labor or service was performed that determines the source of the income. CAIHTE However, in cases where the income earner is a resident of a country with which the Philippines has an existing and effective tax treaty, the relevant provisions of the said tax treaty governs the taxability of income derived by a resident of one or both of the contracting states pursuant to the principle of pacta sunt servanda , which requires the parties to a treaty to keep their agreement therein in good faith. In this case, ____________________ is a tax resident of Singapore; therefore, the provisions of the Philippines-Singapore tax treaty shall prevail over the Tax Code. With respect to the remuneration derived by ______________ for personal services performed in the Philippines, Article 14 of the Philippines-Singapore tax treaty fixes which of the contracting states has the right to tax such income, thus: Article 14 PERSONAL SERVICES 1. Subject to the provisions of Articles 15, 17, 18, and 19, salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. If the services are so performed, such remuneration or income as is derived therefrom may be taxed in that other Contracting State. 2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State for personal (including professional) services performed in the other Contracting State shall be taxable only in the first-mentioned Contracting State if a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 90 days in the case of professional services and 183 days in other cases, in the calendar year concerned; and b) the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned Contracting State; and c) the remuneration or income is not borne directly by a permanent establishment which that person has in the other Contracting State. xxx xxx xxx Under the foregoing treaty provision, the state of residence (Singapore in this case) generally has the exclusive right to tax the remuneration or income for services derived by its residents, unless the services are performed in the state of source (Philippines in this case). However, although the services are performed in the state of source, the state of residence would still maintain its taxing rights over the remuneration or income for personal services derived by its resident, provided all of the following conditions are satisfied: 1. the recipient is present in the state of source for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; 2. the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned state; and 3. the remuneration or income is not borne directly by a permanent establishment which that person has in the state of source. The first condition states that the exemption from tax in the state of source is limited to the 183-day period in the calendar year concerned. In the instant case, the first condition was met since _______________ was present in the Philippines for a total of fifty (50) days only in 2019, the details which are as follows: Date of Arrival Date of Departure No. of days in the Philippines August 6, 2019 August 7, 2019 2 October 8, 2019 October 10, 2019 3 October 28, 2019 November 2, 2019 6 November 9, 2019 December 1, 2019 23 December 4, 2019 December 13, 2019 10 December 26, 2019 December 31, 2019 6 Total 50 The second condition, which requires that the employer paying the remuneration must not be a resident of the State in which the employment is exercised, is wanting in this case. The employer of _________________ is MetroJet Philippines, a foreign corporation engaged in trade or business within the Philippines; therefore, the remuneration is not paid by, or on behalf of, a person who is a resident of Singapore. Finally, under the third condition, if the employer has a permanent establishment in the State in which the employment is exercised, the exemption from tax in the state of source is given on condition that the remuneration is not borne by that permanent establishment. Since the employer of ________________ in this case is not a resident of Singapore, a discussion of this third condition is, therefore, immaterial. In view of the foregoing, this Office hereby holds that the remuneration or income for personal services, including all benefits, paid by MetroJet Philippines to _____________, a resident of Singapore, is subject to Philippine income tax at the rate of 25% pursuant to paragraph 2, Article 14 of the Philippines-Singapore tax treaty, in relation to Section 25 (B) of the Tax Code. This ruling shall apply to all income payments made or to be made by MetroJet Philippines in favor of _____________ in subsequent year/s, provided that the latter remains to be a resident of Singapore and the former a resident of the Philippines. DETACa This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. G.R. No. 153793, August 29, 2006. 2. G.R. No. L-65773-74, April 30, 1987.