Zambrano & Gruba Law Offices

March 8, 2018 ITAD BIR RULING NO. 027-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-France tax treaty, as amended Zambrano & Gruba Law Offices 27th Floor, 88 Corporate Center 141 Sedeo Street, Salcedo Village Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on September 9, 2015 requesting confirmation that service fees paid by Radius Telecoms, Inc. ( "Radius" ) to Sofrecom, S.A. ( "Sofrecom" ) are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty") , as amended. 1 ITCcAD FACTS Sofrecom is a foreign corporation organized and existing under the laws of France and a resident thereof based on its Articles of Association and Certificate of Residence for Tax Purposes issued by the Direction Generale des Finances Publiques. The primary purpose of Sofrecom is the accomplishment of any technical or financial studies, consultations and operations relating to questions and problems in the field of telecommunications in any country. 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, Radius is a domestic corporation organized and existing under the laws of the Philippines. Its primary purpose is to provide world-class data connectivity solutions over its dense fiber optic network, with access nodes strategically located within business districts, industrial and IT parks, data centers and main thoroughfares. On June 11, 2015, Radius and Sofrecom entered into a Contract for the Performance of Services where Sofrecom agreed to provide support services to Radius in the establishment of a growth strategy and actionable ramp-up plan definition to address opportunities in business-to-business market as a first priority, while looking at business-to-customers and international partnerships. The services to be provided are as follows: 1. Provision of a comprehensive picture of connectivity and broadband services potential in business-to-business and business-to-customers: service types, actors and positioning growth areas; 2. Understanding Radius' assets, strengths and opportunities in order to leverage assets and best target new investment; 3. Identifying key success factors: technology, footprint, product catalog, services, sales model; and 4. Looking at key partnership opportunities. The services will be performed inside and outside the Philippines. The contract price of the project is US$ ___________ inclusive of value-added tax. The service fees will be paid in installments for every project milestone: down payment (15%); analysis (15%); diagnostics (15%); design (15%); planning (40%). The contract took effect on the date of its execution. Based on the certification issued by Radius and the attached passports of its personnel, the following provided services in the Philippines for the project: Personnel Dates Number of Days in Month BBB June 22-30 June: 9 days CCC June 23-26, 28-30 DDD June 23-26 EEE June 24-26 BBB July 1-2 July: 11 days CCC July 1 DDD July 7-10 FFF July 7-12, 22-24 GGG July 22-24 BBB August 10-20 August: 15 days HHH August 19-21, 27-29 BBB September 9-11, 16-18 September: 6 days HHH September 9-11 HHH October 5-6 October: 2 days Total 43 days The project was completed within a period of 15 weeks from June 22 to October 6, 2015 where services were rendered within and outside the Philippines. RULING 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 in the Philippines by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: aHECST " 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 on 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." In this regard, paragraph 1, Article 7 of the Philippines-France tax treaty provide relief to business profits derived by an enterprise resident of France from sources in the Philippines, to wit: " Article 7 BUSINESS PROFITS 1. T he 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 7, such profits may be taxed in the Philippines if attributable to a permanent establishment which the enterprise has in the Philippines. Relative thereto, Article 5 of the treaty defines a permanent establishment as follows: ADTEaI " 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' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period of more than six months; i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-months period." Under Article 5, a permanent establishment means a fixed place of business in 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, premises used as a sales outlet, and a workshop. It includes also the furnishing of services (including consultancy services) by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period. Accordingly, since Sofrecom is not engaged in trade or business in the Philippines to which a fixed place of business like an office or a branch is necessary, and it did not furnish services in the Philippines for more than six months within any twelve-month period, but for an aggregate of 43 days only, Sofrecom is not deemed to have a permanent establishment in the Philippines pursuant to paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty. This being the case, service fees paid by Radius to Sofrecom for providing support services to Radius in the establishment of a growth strategy and actionable ramp-up plan to address further business opportunities and international partnerships are exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. Finally, although exempt from income tax, but since the services are performed by Sofrecom in the Philippines, such service fees paid to it are subject to value-added tax ( "VAT" ) at the rate of 12% under Sections 108 (A) and 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, 2 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, 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." Relative thereto, Radius shall withhold VAT on the service fees at the rate of 12% before remitting them to Sofrecom by using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation for Radius' claim of input VAT on the fees; otherwise, Radius may treat the 'passed-on' VAT 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. 3 acADIT 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. As amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998 . 2. The VAT rate was increased to 12 percent beginning 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. Pursuant to Section 4.112-2 of 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) , which 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: xxx xxx xxx ( 3) 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. 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 'asset' or 'expense,' 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." n Note from the Publisher: Copied verbatim from the official document.