Innity Philippines, Inc.

June 8, 2021 ITAD BIR RULING NO. 026-21 Articles 14 (Personal Services) and 15 (Directors' Fees) Philippines-Malaysia tax treaty Innity Philippines, Inc. Unit 1104, Jaka Building 6780 Ayala Avenue 1226 Makati City Attention: ______________ Gentlemen : This refers to your tax treaty relief applications filed on October 16 and November 13, 2015 requesting confirmation that the consultancy fees paid to _____________ and the director's fees paid to ______________________ by Innity Philippines, Inc. ("IPI") 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 Income ("Philippines-Malaysia tax treaty") . HEITAD FACTS ____________ and ______________ are individuals who are nationals and residents of Malaysia based on their respective passports and Certificates of Residence issued by the Inland Revenue Board of Malaysia. They do not have an existing business name registration in the Philippines based on the respective certifications issued by the Department of Trade and Industry. On the other hand, IPI is a domestic corporation engaged in advertising. 1 On January 1, 2015, IPI and ______________________ entered into a Service Agreement whereby ______________ was hired as a consultant of the former. His duties and responsibilities included the following: a) Training and guiding IPI 's sales team to achieve company goals; b) Motivating company employees to perform well in their respective functions; c) Developing new businesses; and d) Visiting the company's office for not more than ten (10) days in a month. In consideration, IPI will pay consultancy fees amounting to 10,900 Malaysian ringgit every month, and a profit share of 10% based on IPI 's profit before tax as reflected in its Audited Financial Statements. The Agreement took effect on January 1, 2015 and continued to be in effect for a period of three (3) years or until December 31, 2017. Also, on January 1, 2015, IPI and _________ entered into a Service Agreement whereby _________________ was appointed as the Chief Executive Officer and one of the directors of IPI .______________'s duties starting January 1, 2015 until December 31, 2019 included the following: a) Determining IPI 's strategic objectives and policies; b) Monitoring the company's progress in achieving its objectives and policies; c) Appointing the company's senior management; d) Accounting for the company's activities to relevant parties; e) Signing of documents relative to the company's business operations; and f) Visiting the company's office for not more than thirty (30) days in a year. In consideration, IPI will pay director's fees to _________ amounting to US$2,750 every month. Based on the sworn statements issued by IPI ,__________ stayed in the Philippines in 2016 and 2015 for 90 days and 103 days, respectively; whereas, ________ stayed in the Philippines in 2016, 2015 and 2014 for 20 days, 15 days and 2 days, respectively. IPI certified that the consultancy and director's fees subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING In reply, please be informed that under Section 25 (B) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, a nonresident alien individual not engaged in trade or business in the Philippines is subject to income tax at the rate of 25%,to wit: aDSIHc " 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." However, under Section 32 (B) (5) of the Tax Code, income derived from sources within the Philippines 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, Articles 14 and 15 of the Philippines-Malaysia tax treaty provide as follows: " Article 14 PERSONAL SERVICES 1. Subject to the provisions of Articles 15, 17, 18, 19 and 20, salaries, wages and similar remuneration or income derived by a resident of a Contracting State in respect of professional services or other activities of a similar character, shall be taxable only in that State unless the services or activities are exercised or performed in the other Contracting State .If the employment, services or activities are so exercised or performed, such remuneration or income as is derived therefrom may be taxed in the other State . xxx xxx xxx " (Emphasis supplied) " Article 15 DIRECTORS' FEES 1. Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State, may be taxed in that other State ." xxx xxx xxx" (Emphasis supplied) Based on the foregoing provisions, the State of source, the Philippines in this case, may tax the remuneration paid in respect of professional services performed in the Philippines and director's fees paid by a company which is a resident of the Philippines. In the case of consultancy fees and profit share paid to ___________, paragraph 1 of Article 14 states that salaries, wages and similar remuneration or income derived by a resident of Malaysia in respect of professional services or other activities of a similar character are generally taxable in Malaysia; however, if said services or activities are exercised or performed in the Philippines, such remuneration or income derived therefrom may be taxed in the Philippines. Considering that _____________ exercised or performed the agreed services in the Philippines for 90 days and 103 days in 2016 and 2015, respectively, the consultancy fees and profit share he derived therefrom are, therefore, taxable in the Philippines at the rate of 25%, the tax rate imposed under Section 25 (B) of the Tax Code. Similarly, in the case of director's fees paid to __________, paragraph 1 of Article 15 provides that directors' fees and other similar payments derived by a resident of Malaysia in his capacity as a member of the board of directors of a company which is a resident of the Philippines may be taxed in the Philippines. Since ____________ is a member of the board of directors of IPI ,a domestic corporation and a resident of the Philippines, the director's fees paid to him by the latter are likewise subject to income tax in the Philippines at the rate of 25%. Finally, the consultancy fees and profit share derived by __________ from the sale of services in the Philippines, as well as the director's fees derived by __________ from the performance of services for and on behalf of IPI are subject to value-added tax ("VAT") in the Philippines at the rate of 12% 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' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration ..." 2 ETHIDa Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 3 IPI shall withhold VAT on the income payments at the rate of 12% before remitting them to _____________ and ___________. IPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) and shall remit the VAT withheld within ten (10) days following the end of the month the withholding was made. The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation for IPI claim of input VAT. This ruling is issued on the basis of the facts as represented. However, if it shall 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. https://www.infobel.com/en/philippines/innity_philippines_inc/makati_city/PH100244652-0276250315/businessdetails.aspx 2. Under Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (hereinafter referred to as the TRAIN Law), which took effect on January 1, 2018, Section 108 (A) is amended and now reads: " 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration ..." 3. 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).