Diaz Murillo Dalupan and Company

March 9, 2018 ITAD BIR RULING NO. 034-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty Diaz Murillo Dalupan and Company Certified Public Accountants 7th and 8th Floor, Don Jacinto Building Dela Rosa corner Salcedo Streets Legaspi Village 1200 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on November 5, 2015 requesting confirmation that service fees paid by Philippine Transmarine Carriers, Inc. (" Philippine Transmarine ") to Northern Marine Manning Services Pte. Ltd. (" Northern Marine ") 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 Northern Marine is a corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association, the Certificate Confirming Incorporation of Company issued by the Accounting and Corporate Regulatory Authority of Singapore, and the Certificate of Residence issued by the Inland Revenue Authority of Singapore. Northern Marine is engaged in recruitment, training and deployment of marine officers, engineers, and offshore and project staff, and in administering multinational seafarers on behalf of clients. 1 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, based on Philippine Transmarine 's Audited Financial Statements as of December 31, 2016, it is a domestic corporation which provides marine services as principal or agent to ship owners, ship operators and managers, and to persons, associations, firms and corporations engaged in marine and maritime business such as full and partial crewing of vessels, and acting as ship chandler and ship broker, and trading in marine supplies and equipment. Philippine Transmarine and Northern Marine are not related parties. On January 1, 2015, Philippine Transmarine and Northern Marine entered into a Consultancy Services Agreement where Northern Marine agreed to provide consultancy services to Philippine Transmarine for the following accounts: Northern Marine Manning Services Pte. Ltd., Northern Marine Manning Services Pte. Ltd. (for Chevron), Stena Marine Management AB, and Stena Marine Management Pte. Ltd. In consideration, Philippine Transmarine will pay service fees to Northern Marine amounting to US$__________ per quarter, payable within two weeks from receipt of invoice. EcTCAD Based on a sworn statement issued by Philippine Transmarine on August 16, 2017, Northern Marine deployed BBB, _______________ of Northern Marine , to provide the following services to Philippine Transmarine : a) Advice on recruitment of sea and shore staff pursuant to smooth and effective manning of Philippine Transmarine 's vessels; b) Advice on negotiation of wage scales; c) Advice and coordination of medical services and medical claims for Philippine Transmarine 's seafarers, and monthly review and advice of their key performance indicators; d) Advice on welfare and discipline issues of Philippine Transmarine 's seafarers; e) Coordination of annual seasonal social events for crews and their families, and office personnel; f) Coordination and advice on charitable ventures of Philippine Transmarine 's principals; and g) Acting as point of contact for all day-to-day crew matters that need to be relayed to Philippine Transmarine . Those services were provided for accounts identified in the Consultancy Services Agreement. Services rendered in the Philippines aggregate 43 days: (a) 25 days in 2015 (January 20-25; April 12-15; July 6-7; September 14-19; November 10-13; December 10-12); (b) 13 days in 2016 (February 16-19; November 14-17; December 14-18); and (c) 5 days in 2017 (February 13-17). The services provide economic benefits to Philippine Transmarine in terms of reduced time and operational costs as a result of the decrease in procedures in the processing of crew applications; smoother communication with principals regarding their needs and expectations from seafarers; reduced or avoided penalties, interests, and other costs as a result of having a more efficient manner in addressing the social security benefits of seafarers. Based on another sworn statement issued by Philippine Transmarine on December 3, 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 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 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, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty 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." " 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, 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, 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 (through employees or other personnel thereof) for a period or period aggregating more than 183 days. HSAcaE Accordingly, since Northern Marine 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 Philippines for more than an aggregate of 183 days, but for 43 days only, Northern Marine does not have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being so, service fees paid by Philippine Transmarine to Northern Marine for providing advice on the effective recruitment and management by Philippine Transmarine of its seafarers, among others, are exempt from income tax in the Philippines pursuant to paragraph 1, Article 7 of the treaty. However, since the services are rendered in the Philippines, 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 Philippine Transmarine shall withhold VAT on the fees at the rate of 12% before remitting them to Northern Marine . Philippine Transmarine 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 Philippine Transmarine 's claim of input VAT on the fees; otherwise, if Philippine Transmarine is not a VAT-registered taxpayer, the passed-on VAT shall form part of the cost of purchased services and treated as 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://maritime-union.com/company/northern-marine-manning-services-pte-ltd-nmms . 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.