Sycip Gorres Velayo and Co.

March 11, 2020 ITAD BIR RULING NO. 032-20 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Singapore tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA _____________________ Gentlemen : This refers to your tax treaty relief application filed on September 16, 2015 requesting confirmation that service fees paid by Primary Realty Corporation ("Primary Realty") and Adriatico Consortium, Inc. ("Adriatico") to Pan Pacific Marketing Services Pte. Ltd. ("Pan Pacific Singapore") , formerly PPHR Marketing Services Pte. Ltd. , 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") . FACTS: Pan Pacific Singapore is a 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. It is engaged in reservation service activities ( e.g. , timeshare, on-line hotel reservation services, reservation of tickets for performances) and business and management consultancy services. It also provides marketing services such as advertising, public relations and promotional 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, Primary Realty and Adriatico are domestic corporations whose primary purpose is to acquire, develop, improve, cultivate, and lease lands, in the case of Primary Realty , and to engage in real property leasing and hotel business and to acquire, develop, improve, cultivate, and lease lands, in the case of Adriatico , based on their respective Audited Financial Statements ("AFS") as of December 31, 2015. Primary Realty and Adriatico are owners of the Pan Pacific Manila Hotel ("Hotel") . 1 Based on the Hotel's AFS as of December 31, 2015, the Hotel is a division of Adriatico , and located in Ermita, Manila, Philippines. On May 1, 2015, Primary Realty and Adriatico (collectively, "Owner" ) and Pan Pacific Singapore entered into a Marketing Services Agreement where the Owner engaged Pan Pacific Singapore to provide services to the Hotel for the period May 1, 2015 to December 31, 2018. Based on Schedule 1 of the Agreement, the services to be rendered are as follows: 1. Corporate marketing services Pan Pacific Singapore will provide advertising, public relations and promotional services to promote the Hotel's name and facilities throughout the world as a hotel within the Pan Pacific Chain, and to maintain the Hotel's identity among the Pan Pacific Chain. Pan Pacific Singapore will plan the Hotel's advertising and public relations programs, select and provide guidance to the Hotel's advertising agency and public relations personnel, and review and advise on news releases relating to the Hotel prepared by advertising consultants and agencies. TAacHE 2. Communication and reservation services Pan Pacific Singapore will provide the Hotel communication access to all other hotels in the Pan Pacific Chain and to their sales and booking offices throughout the world. The access will be provided through an international communication network and a computerized reservation facility. 3. Other related services Pan Pacific Singapore will provide the Hotel other services to include the same in Pan Pacific Singapore 's corporate communications and marketing programs with respect to the Pan Pacific Chain, and in Pan Pacific Singapore 's corporate identity and advertising programs, and will coordinate the Hotel's communication program with that of Pan Pacific Singapore . In consideration, the Owner will pay service fees to Pan Pacific Singapore consisting of (a) a marketing fee equivalent to _____% of the gross rooms revenue for each fiscal year; (b) a reservation fee equivalent to _____% of the gross rooms revenue, and US$_____ per available room per month; and (c) a loyalty contribution amounting to US$____ per stay, or equivalent to _____%, _____%, or _____% of generated qualified revenue, based on room occupancy by members of or participants to the Pan Pacific Chain's guest loyalty or frequent flyer programs. The Agreement took effect on May 1, 2015 and will expire on December 31, 2018. The marketing services will be provided outside the Philippines. However, at the Hotel's request, Pan Pacific Singapore may assign its officers and personnel to provide consultancy services to the Hotel, other than marketing services. In such event, the Hotel will pay for such consultancy services on a cost basis. These officers and personnel may be required to be in the Philippines to inspect the Hotel, review its records and books, and meet and conduct discussion with its staff and consultants. The services to be provided will not exceed an aggregate of 183 days. Based on sworn statements respectively issued by Primary Realty and Adriatico on December 21, 2017, for the period May 1, 2015 to date, Pan Pacific Singapore had sent the following personnel to the Philippines to provide services to the Hotel, namely: Name Position Nature of work Dates of Physical Presence BBB __________ Conducted review of the Hotel __________ (4 days) CCC __________ Conducted brand audit review of the Hotel __________ (2 days) DDD __________ Conducted site inspection and attended meetings with the Hotel's General Manager, Director for Sales and Marketing, and Sales Team __________ (2 days) Total 8 days The total number of days for onshore services is 8 days. On the other hand, most services are rendered by Pan Pacific Singapore offshore in Singapore. Communication between personnel of Pan Pacific Singapore and the Hotel were done through email and telephone calls. The Hotel benefits from advertising, public relations and promotional activities performed by Pan Pacific Singapore . Based on sworn statements respectively issued by Primary Realty and Adriatico on March 1, 2019, pursuant to the Marketing Services Agreement, Pan Pacific Singapore will render services in relation to the marketing and promotion of the Hotel. These services include those enumerated in Schedule 1 of the Agreement, which include Corporate Marketing Services (advertising, public relations, and promotional services), Communication and Reservation Services, and other related services. In addition, the Owner may request Pan Pacific Singapore from time to time to render consultancy services. Based on sworn statements respectively issued by Primary Realty and Adriatico on September 1, 2015, 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. 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 by a nonresident foreign corporation 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: HcDSaT " 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, paragraph 1, Article 7, and paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty provide: " 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; 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 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 such, such profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. 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 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, including consultancy services, by an enterprise (through employees or other personnel thereof), which continue within a Contracting State for an aggregate period of more than 183 days. ASTcaE Accordingly, since Pan Pacific 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 Philippines, and it did not furnish services in the country for more than 183 days, but for 8 days only during the term of the Marketing Services Agreement, it does not have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being so, service fees collectively paid by Primary Realty and Adriatico to Pan Pacific Singapore under the Agreement are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Singapore tax treaty. However, since a portion of the services are performed in the Philippines, the service fees therefor 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%) . . . 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 . . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 2 Primary Realty and Adriatico , as the Owner, shall collectively withhold VAT on the service fees at the rate of 12% before remitting them to Pan Pacific Singapore . The Owner 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 the Owner's claim of input VAT on the fees; otherwise, if the Owner is not a VAT-registered taxpayer, it may treat the passed-on VAT as part of the cost of the services 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.panpacific.com/en/hotels-resorts/philippines/manila.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.