R.G. Manabat and Co.

March 11, 2020 ITAD BIR RULING NO. 026-20 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Singapore tax treaty R.G. Manabat and Co. 9th Floor, The KPMG Center 6787 Ayala Avenue 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to the tax treaty relief application filed on January 8, 2016 requesting confirmation that income derived by Dassault Systemes Singapore Pte. Ltd. ("Dassault Singapore") (formerly Solidworks Singapore Pte. Ltd. ) from the sale of its software in the Philippines through MDCGroup, Inc. ("MDCGroup") is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . FACTS: Dassault Singapore is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its amended Memorandum of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. It is engaged in developing, marketing and promoting Window-based computer-aided design software and software integration, and in acting as importer, exporter, distributor, and agent for software, systems and services. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, MDCGroup is a domestic corporation wholly-owned by Filipino shareholders based on its Audited Financial Statements as of December 31, 2015, and General Information Sheet as of February 5, 2015. It is engaged in trading goods like software and hardware, importing goods, and in rendering after sales services and support to customers. On November 20, 2014, Dassault Systemes K.K. ("Dassault Japan") , a foreign corporation organized and existing under the laws of Japan, and MDCGroup entered into a Distribution Agreement where Dassault Japan appointed MDCGroup as a non-exclusive distributor of DS Offerings and Support Services in the Philippines. DS Offerings means Dassault Systemes Group software or other product or service including its documentation, which MDCGroup is authorized to market and distribute. Support Services means services with respect to DS Offerings. MDCGroup shall market and distribute DS Offerings and Support Services to prospects and customers for their internal business use. Any Dassault Systemes Group company may market and distribute DS Offerings and Support Services or other Dassault Systemes Group products and services directly or indirectly (including via the appointment of other distributors) to prospects and customers within or outside the Philippines. MDCGroup shall promote the licensing and use of DS Offerings and Support Services in the Philippines and shall, among others, conduct demonstrations of such offerings and services; solicit orders therefor; promote the use of the latest available versions and releases of the offerings, and distribute advertising and market literature supplied by Dassault Japan ; and shall use its best commercial efforts to achieve its quarterly sales target set by Dassault Japan . Customer's use of DS Offerings and Support Services is subject to the terms of the Customer Agreement. MDCGroup shall invoice and collect any customer fee due by the customer in connection with each order of the offerings and services accepted by Dassault Japan . MDCGroup shall have the sole right to set customer fee for DS Offerings and Support Services and renewal thereof. MDCGroup shall order DS Offerings and Support Services by submitting the current customer order form, and shall send such order to Dassault Japan or other Dassault company that Dassault Japan may designate from time to time. Dassault Japan may accept or reject any order, in whole or in part, in its sole discretion and shall make commercially reasonable efforts to inform MDCGroup of its decision within five business days from receipt of the order. MDCGroup is not granted express or implied authority to enter into written or oral contracts of any nature on behalf of Dassault Japan . In case of delivery of the DS Offerings to MDCGroup 's premises, the latter shall promptly deliver the items to the customer. In case of delivery of the DS Offerings to the customer, shipment will be made by Dassault Japan on behalf of MDCGroup in accordance with the delivery terms set forth in the Agreement. The Agreement shall take effect on November 20, 2014 and shall remain in effect indefinitely. SDAaTC The following software are considered DS Offerings: 3DExperience Collaborative Prerequisites; 3DExperience Open; Design/Engineering; Governance/Lifecycle; Manufacturing/Production; Simulation; 3DVIA Composer; CATIA V6; DELMIA V6; ENOVIA V6, among others. In a letter dated December 1, 2014, Dassault Japan informed MDCGroup that, as a result of the Dassault Systemes Group of Companies' reorganization of their business operations in Asia, Dassault Japan is transferring its commitments to MDCGroup under the Distribution Agreement to its affiliate, Dassault Singapore . The assignment shall take effect on January 1, 2015. As a result, all rights and obligations of Dassault Japan relating to software license, distribution, and support, will become the rights and obligations of Dassault Singapore , and the management of contractual and business relationships with customers will be handled continuously by MDCGroup , but all purchase orders after January 1, 2015 should be placed with Dassault Singapore . Based on a sworn statement issued by MDCGroup , since 2015, it has existing software distribution agreements with Dassault Singapore , MyGrow Tech, Cimco, PTC Corporation, and other entities. In 2015, MDCGroup has revenues amounting to Php __________ , where 80.40%, i.e. , Php7 __________ , are attributable to software licensed by Dassault Singapore and distributed by MDCGroup . Based on a sworn statement issued by Dassault Singapore , 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 proceedings, or judicial appeal. RULING: Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , income derived by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, paragraph 1, Article 8 and paragraphs 1, 2 and 5, Article 5 of the Philippines-Singapore tax treaty provide as follows: " Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes specially but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; EcTCAD h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx 5. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the enterprise were not made under arm's length conditions." 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 or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. Under Article 5, a permanent establishment means a fixed place in which the business of an enterprise is wholly or partly carried on, and includes especially, a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop (paragraphs 1 and 2) . With respect to a broker, general commission agent, or any other agent of an independent status, an enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in the other Contracting State through such person. However, when the activities of that person are devoted wholly or almost wholly on behalf of the enterprise, he shall no longer be considered independent thereby becoming a permanent establishment of that enterprise (paragraph 5) . In this case, Dassault Singapore 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, therefore, it shall not be deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. Moreover, Dassault Singapore is not deemed to have a permanent establishment when it carries on business in the Philippines through its distributor, MDCGroup , where the latter is considered an agent of independent status, under paragraph 5, Article 5 of the Philippines-Singapore tax treaty. Based on its Audited Financial Statements, MDCGroup was established to engage in trading goods like software and hardware, importing goods, and in rendering after sales services and support to customers, without reference to a particular principal or principals . Moreover, MDCGroup is not a member of the Dassault Systemes Group of Companies. With respect to MDCGroup acting in the ordinary course of its business when acting for Dassault Singapore , it has entered into similar distributorship agreements for software with other principals aside from Dassault Singapore since 2015. Being a distributor of software, it is expected that MDCGroup will use its customary skills and bear certain risks, which are expected of it when acting for other principals. HSAcaE With respect to MDCGroup 's activities being devoted wholly or almost wholly on behalf of Dassault Singapore , this is not the case since MDCGroup has several principals aside from Dassault Singapore , and the percentage of revenue for Dassault Singapore from licensing software and providing related services is only 80.40%. Since Dassault Singapore does not have a permanent establishment in the Philippines, payments received by Dassault Singapore from MDCGroup for the licensing of the former's software in the Philippines and providing related services therefor by MDCGroup are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Singapore tax treaty. Value-Added Tax Finally, such payments to Dassault Singapore , being payments for the lease of intangible property in the Philippines, are 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, raise the rate of value-added tax to twelve percent (12%) . . . . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright , patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;" (Underscoring supplied) Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 1 MDCGroup shall withhold VAT on those payments to Dassault Singapore at the rate of 12% before remitting them to MDCGroup . MDCGroup 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 MDCGroup 's claim of input VAT on the payment; otherwise, if it is not a VAT-registered taxpayer, MDCGroup may treat the passed-on VAT as part of the cost of the lease of property and treat the same as asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 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. HESIcT 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.