Sycip Gorres Velayo and Co.

July 7, 2021 ITAD BIR RULING NO. 035-21 Articles 5 (Permanent Establishment) and 7 (Business Profits); Philippines-Singapore tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: ________________________ Principal _____________ Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty relief application filed on December 23, 2013 requesting confirmation that the service fees paid by Miascor Catering Services Corporation ("Miascor") and Miascor Clark Catering Services Corporation ("Miascor Clark") to Gate Gourmet Singapore Pte. Ltd. ("Gate Gourmet") 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 Gate Gourmet 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. The objects for which the company is established are, among others, to carry on business as a regional liaison and coordination center and to provide management and other services to subsidiaries, associates, related companies of the Gate Gourmet Group and to take part in the formation, administration, supervision, financial management and control of the business or operations of the Group and to appoint suitably qualified personnel to carry out such activities. Gate Gourmet 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, Miascor and Miascor Clark are domestic corporations which offer full aviation services including ground handling, cargo handling, warehousing, and in-flight catering. Miascor and Miascor Clark are operating airline catering facilities at the Ninoy Aquino International Airport and Clark International Airport, respectively. The parties are associated companies belonging to the Gate Gourmet Group. The Group maintains 100% ownership in Gate Gourmet and 30% ownership in Miascor and Miascor Clark . On November 15, 2013, Miascor and Miascor Clark ,on one hand, and Gate Gourmet ,on the other hand, entered into a Service Agreement whereby the latter agreed to provide the following services: 1. Support with marketing and sales activities - Analysis of market and market needs for airline catering clients including provision of available data on costs and operating structures of various players in the industry. cSaATC - Devising specific sales strategies for global clients. 2. Support with efficient and cost effective operation and production - Providing advice through email, video, teleconference call or facsimile on the catering management of operations and support in the administration of the catering operation and analysis of general operating requirements to achieve cost leadership in production. - Advice based on Gate Gourmet 's business processes. 3. Support with recruitment and training of manpower - Advice in the area of human resources management including career path development, training, preparation of manuals and procedures for training of personnel. Assist in the formulation of staff development programs and staff training. Establish and implement training and motivational programs for employees. - Advice on recruitment and assignment of personnel for optimization in operations. Recommend the hiring and replacement of key operations personnel including expatriates who have the expertise, qualifications and competence to perform such personnel's responsibilities and assigned tasks. 4. Support with corporate management (corporate guidelines, hotline, benchmarking, etc.) - Assist in the preparation of financial forecasting and budgeting procedures, providing information and support in the areas of financial analysis, cost control, fiscal matters, internal reporting and feasibility studies. - Analytical support ( e.g. ,spend analysis, pricing payment terms, benefits tracking, etc.) Based on the Service Agreement, all services shall be rendered in Singapore and should Gate Gourmet be required to render services in the Philippines, these services will be for short duration only and will not exceed six months during the term of the Agreement. Miascor and Miascor Clark corroborated such fact and thus issued on January 21, 2014 a certification stating that for the entire duration of the Service Agreement, no employee of Gate Gourmet was sent to the Philippines. In consideration, Miascor and Miascor Clark agreed to pay an annual service fee to Gate Gourmet amounting to Php__________. The fee is payable quarterly and will be paid within sixty (60) days upon submission by Gate Gourmet of the relevant invoice to Miascor and Miascor Clark .The Service Agreement retroactively took effect on February 1, 2013, and was in force for an initial term of one (1) year or until January 1, 2014, subject to renewal if agreed upon by the parties. According to Miascor and Miascor Clark ,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 proceedings, 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: cHDAIS " 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 provide as follows: " 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 sites, project or activity continues for a period 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, the profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. ISHCcT Relative thereto, Article 5 defines a permanent establishment as a fixed place 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 also includes the furnishing of services, including consultancy services, by a resident of a Contracting State, through employees or other personnel thereof, where such activities continue in the other Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Gate Gourmet is not engaged in trade or business in the Philippines, does not have a branch, an office, or other fixed place of business in the Philippines, and did not render such services in the Philippines for more than 183 days, Gate Gourmet is not deemed to have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. Thus, the service fees paid by Miascor and Miascor Clark to Gate Gourmet are, therefore, exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. Finally, the service fee is also exempt from value-added tax ("VAT") imposed under Section 108 (A) of the Tax Code, which provides: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . 1 (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%) ..." xxx xxx xxx 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 the cross border doctrine or destination principle of the VAT system in Section 108 (A),services performed in the Philippines are taxable, while those performed outside the Philippines are exempt. Since Gate Gourmet will perform the services in Singapore during the term of the Service Agreement, the sale of services is, therefore, exempt from 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. Republic Act No. 10963, otherwise known as the TRAIN (Tax Reform for Acceleration and Inclusion) Law, which took effect January 1, 2018, amends Section 108 (A) as follows: " 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 ..." n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.