Punongbayan and Araullo

March 15, 2018 ITAD BIR RULING NO. 036-18 Articles 5 (Permanent Establishment) and 8 (Business Profits) Philippines- United States of America tax treaty Punongbayan and Araullo 19th and 20th Floors, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on January 12, 2012 requesting confirmation that service fees paid by Accor Advantage Plus Philippines, Inc. (" Accor Philippines ") to Allegiance Marketing Singapore Pte. Ltd. (" Allegiance Singapore ") 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 Allegiance 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 primary objects of Allegiance are to market, promote and sell and administer the loyalty programs of Accor Asia Pacific Hotel Group and, in connection therewith, to provide administrative, data processing, secretarial and other office services, communication liaison services and all kinds and descriptions of supporting services. 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, Accor is a domestic corporation organized and existing under the laws of the Philippines. The primary objects of Accor are to carry on the business of telemarketing, sales promotions, public relations, sales and marketing of the business of hotels and resorts by hiring the services of experts, professionals, employees, agents and other representatives; to devise, formulate and conduct business research, studies, surveys and tests; to create, install and utilize business systems, methods, controls, layouts and plans for the business of hotels and resorts; and to handle publicity and public relations through media, marketing and telemarketing of materials. TAIaHE Allegiance and Accor are related entities. Based on Accor's General Information Sheet in 2014, it is a wholly-owned subsidiary of Allegiance Marketing Pty. Ltd. of Australia. The ultimate parent of these entities is Accor SA of France, a company listed in the French stock exchange and a worldwide leader in travel, tourism and corporate services. The Accor Group of Companies operate hotels under the Accor brand and co-branded with other names like Sofitel, Grand Mercure, Novotel, All Seasons, Ibis and Formule 1. The Accor Group promotes the Accor Advantage Plus program, a member's privilege program. On December 1, 2011, Accor and Allegiance entered into a Project Management Service Agreement (" Agreement ") where Allegiance agreed to provide services to Accor for the smooth implementation of the Accor Advantage Plus Membership Card and A/Club Membership Card, or the One Card Integration Project. The services will be performed entirely outside the Philippines, and include: - Communication/correspondence with Accor SA's office in Paris, France; - Negotiation and communication with foreign suppliers on logo and logistics; and - Overall management of the One Card Rollout Project. Allegiance will charge Accor for the cost of services rendered on the basis of membership of the client. The Agreement took effect on January 1, 2011, and expired on December 31, 2012. Based on the sworn certification issued by Accor 1. The One Card Integration Project was undertaken to merge the global loyalty program A/Club (a points based program) with the regional subscription program of Accor in one loyalty card. 2. The undertaking of the project where Allegiance was appointed project manager consisted of IT systems and operational processes for the database linked with the Paris program infrastructure that will be used by member companies utilizing the one loyalty card. 3. The project was undertaken from January 1, 2011, initially launched on July 1, 2011, and ended on December 31, 2012. 4. The overall cost of the project was 1 million Australian dollars shouldered accordingly by Accor member entities. 5. Allegiance assigned two personnel for the project, an Operations Manager in Asia and a Systems Administrator Programmer who performed work in Singapore and Australia. 6. All services for the project were performed by Allegiance outside the Philippines; hence, no employees or personnel of Allegiance were sent to the Philippines. 7. In consideration, Accor paid lump sum service fees to Allegiance in 2014 amounting to __________ Singapore dollars, remitted through telegraphic transfer. Based on the Certificate of Completion issued by Allegiance , it has satisfactorily completed the work required of it under the project, and it has received in full all charges for services in accordance with the terms of the Agreement. Based on the Certificate of Acceptance issued by Accor , it confirmed Allegiance 's declaration that such work has been satisfactorily completed by Allegiance and successfully turned over to Accor . RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), profits derived in the Philippines by a foreign corporation not engaged in trade or business are subject to income tax at the rate of 30 percent, 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, those profits are exempt to the extent required by 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 resident of Singapore may be taxed in the Philippines if it carries on business in the Philippines through a permanent establishment therein. cDHAES In relation thereto, paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty defines a permanent establishment as follows: " 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, including consultancy services, by a resident of a Contracting State through employees or other personnel, where such activities continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Allegiance 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 183 days, it does not have a permanent establishment with respect to works performed in the implementation of the One Card Integration Project, under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. As represented, those works were carried out by Allegiance outside the Philippines, particularly, Singapore and Australia. This being the case, service fees paid by Accor to Allegiance for such works are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. Finally, the service fees are likewise not subject to value-added tax (" VAT ") imposed under Section 108 (A) of the Tax Code, which reads: " 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 . . ." Under the cross-border or destination principle of the VAT system, services performed in the Philippines are subject to VAT while those done abroad are not subject to VAT. 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 n Note from the Publisher: Copied verbatim from the official document.