Puyat Jacinto and Santos Law Office

March 8, 2018 ITAD BIR RULING NO. 029-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty Puyat Jacinto and Santos Law Office 10th Floor, 8 Rockwell Hidalgo corner Plaza Drive Rockwell Center 1200 Makati City Attention: AAA BBB CCC Gentlemen : This refers to your tax treaty relief application filed on October 25, 2011 requesting confirmation that service fees paid by Hewlett-Packard Philippines Corporation (" HP Philippines ") to Sierra Solutions Pte. Ltd. (" Sierra Solutions ") are 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" ). HTcADC FACTS Sierra Solutions is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. Sierra Solutions provides management consulting, outsourcing and technology services. Sierra Solutions provides solutions for systems applications and products ( "SAP" ) cloud computing, enterprise security and identity management, global deployments, mobility, business consulting, application management services, systems integration and radiology information system/picture archiving and communication system. It is not registered as a corporation or partnership in the Philippines based on Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, HP Philippines is a domestic corporation which operates as a regional sales and marketing subsidiary of its foreign parent in the United States of America, Hewlett-Packard Company. HP Philippines provides a wide selection of technology and office automation equipment to customers in the consumer, corporate, small business, and government sectors. Its products include personal computers, printing and imaging devices, servers, and enterprise software, and consumable supplies (ink, laser toners, paper, and other supplies for computer printers). HP Philippines also offers information technology services, including consulting, maintenance, product integration, and software customization. 1 On August 2, 2011, Sierra Solutions and Hewlett-Packard entered into a Statement of Work for Subcontracting of Solutions and Principles in support of the SAP Enterprise Resource Planning Implementation Project of the National Grid Corporation of the Philippines ( "NGCP" ). HP Philippines is the general contractor engaged by NGCP to implement phase 1 of the project covering SAP modules: Financial and Controlling, Materials Management, Project System, Customer Billing, Enterprise Asset Management, and Adobe Forms. In turn, HP Philippines subcontracted the project to Sierra Solutions. NGCP is a domestic corporation that holds a franchise to operate and maintain the electricity transmission network in the Philippines. Sierra Solutions' deliverables to the project were as follows: Consulting, implementation and support services for the above SAP modules; Installation and configuration of the SAP modules; Integration to customer billing and settlement; Integration of existing metering and handheld data collection device to customer billing; Functional one-on-one training of SAP modules; User classroom training for customer competence team; Blueprint and training plan documentation; Change management, business continuity, and data migration strategy consulting for the SAP modules; and Conduct of system walkthrough and demonstration of the SAP system to revenue officers and computer system evaluation team of the Bureau of Internal Revenue. Sierra Solutions will provide services for approximately twelve months beginning September 23, 2011 to implement phase 1 of the project. In consideration, HP Philippines will pay service fees to Sierra Solutions amounting to (a) $409,036.00 for acting as principal consultant to NGCP for a period of 7.25 months on SAP Utilities and Financial and Controlling Contract Accounting; and (b) $289,821.00 for acting as principal consultant to NGCP for a period of 7.25 months on Plant Maintenance and Enterprise Asset Management. Based on certification issued by HP Philippines in October 2011, there were two employees assigned by Sierra Solutions to render consultancy work in the Philippines: DDD, an _____ national, and EEE, a ______. 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: " 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%)." aScITE However, under Section 32 (B) (5) of the Tax Code, income is exempt or partially 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." For this purpose, you invoke paragraph 1, Article 7 of the Philippines-Singapore tax treaty, which provides: " 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." Under Article 7, profits derived by an enterprise of a Contracting State in the other Contracting State may be taxed in the other State if the profits are attributable to a permanent establishment situated therein. In relation to a permanent establishment, paragraphs 1 and 2, Article 5 of the treaty provides: " 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; 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." Under Article 5, a permanent establishment means a fixed place of business through 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. It includes also the furnishing of services by an enterprise of a Contracting State in the other Contracting State (through employees or other personnel thereof) for a period or period aggregating more than 183 days. Accordingly, since Sierra Solutions , as subcontractor to the SAP Enterprise Resource Planning Implementation Project of the NGCP , will provide services to the project for twelve months (365 days), which is more than 183 days, and by reason that a Filipino will render consultancy work on behalf of Sierra Solutions , makes it likely that the services are done in the Philippines throughout the period. This being so, Sierra Solutions is deemed to have a permanent establishment in the Philippines under paragraph 2 (j), Article 5 of the Philippines-Singapore tax treaty for consultancy work done on the SAP modules of the project. Therefore, service fees paid by HP Philippines to Sierra Solutions are subject to income tax in the Philippines under paragraph 1, Article 7 of the treaty, at the rate of 30% under Section 28 (B) (1) of the Tax Code. HEITAD Moreover, the service fees are subject to value-added tax (" 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%). . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 2 HP Philippines shall withhold VAT on the service fees at the rate of 12% before remitting them to Sierra Solutions. HP Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and accompanying proof of payment shall serve as documentary substantiation for HP Philippines' claim of input VAT on the fees; otherwise, if HP Philippines is not a VAT-registered taxpayer, the passed-on VAT shall form part of the cost of purchased services and treated either as an 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. http://www.hoovers.com/company-information/cs/company-profile.hewlett-packard_philippines_corporation.d2940842c89155c7.html 2. 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.