ITAD BIR Ruling No. 040-17

November 9, 2017 ITAD BIR RULING NO. 040-17 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Israel tax treaty Mendoza Antero and Associates 2310 Prestige Tower F. Ortigas Avenue Ortigas Center 1605 Pasig City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on December 14, 2016 requesting confirmation that service fees paid by Globe Telecom, Inc. ("Globe") to Cyberint Technologies Ltd. ("Cyberint") are exempt from income tax pursuant to The Convention between the Government of the Republic of the Philippines and the Government of the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Israel tax treaty") . HTcADC FACTS Cyberint is a foreign corporation organized and existing under the laws of Israel and a resident thereof based on its amended and restated Articles of Association and Certificate of Fiscal Residence issued by the Israel Tax Authority. Cyberint provides services relating to computer or cyber protection, particularly, cyber threat intelligence, cyber posture management, digital brand protection, internet presence protection, cyber fraud protection, supply chain impact, and VIP digital protection. 1 Cyberint is not registered as a corporation or partnership in the Philippines based on a Certification of Non-registration of Company issued by the Securities and Exchange Commission. On the other hand, Globe is domestic corporation. Based on its amended Articles of Incorporation, Globe is engaged in the business of transmitting and receiving communications of every kind, news, music, messages, instruction, entertainment, pictures, advertising, light, and energy in any form, by means of electricity, electromagnetic waves, or any other kind of energy, force, vibrations or impulses, whether conveyed by wires, radiated through space, or transmitted through any other medium; to supply facilities for such purposes; and to charge and receive compensation therefor by tolls and charges. On January 26, 2016, 2 Globe and Cyberint entered into a Frame Agreement for Consultancy Services where Globe contracted Cyberint (and the latter agreed) to provide consultancy services to Globe during the term of the Frame Agreement from August 1, 2015 to December 31, 2019, unless earlier terminated by the parties. The Frame Agreement contains the general terms and conditions of the relationship between Globe and Cyberint , in case Globe engages Cyberint to perform particular services for Globe during the term of the Agreement. To engage Cyberint , Globe will execute a supplemental agreement with or issue a purchase order to Cyberint containing the project name and description; contract price and other payment terms; term of the supplemental agreement or purchase order; bond and insurance requirements; dispute resolution levels; addresses of the parties for the purpose of giving and receiving notices; and reference to the Frame Agreement as to the terms and conditions of the supplemental agreement or purchase order. On January 26, 2016, 3 Globe and Cyberint entered into a Supplemental Agreement for the Cyber Security Governance Review and Workshop for Globe Senior Executives ("project") . The project is divided into several phases: Phase 1: Cybersecurity program assessment and alignment This method will help Globe to identify their risks, determine its cybersecurity maturity, and align its cybersecurity program according to its business needs. The goal is to leverage cybersecurity risk framework to identify opportunities to strengthen Globe and communicate to its top management the potential cybersecurity risks while aligning the framework with industry practices. Phase 2: Determine target risk Globe 's top management workshop By reviewing both Globe 's inherent risk profile and maturity levels across its domains, Globe will receive a view of the current state of its cybersecurity program and be able to determine its target risk level. The main goal of the workshop is to get Globe 's top management reaction to the initial cybersecurity risk map and define Globe 's cybersecurity program directions. During the workshop, Cyberint will present its findings and initial conclusions from the program assessment it performed in Phase 1. Phase 3: Globe 's cybersecurity strategy and policy To counter the evolving cyber threat facing organizations today, business leaders must ensure they have an integrated approach to cybersecurity, which is tailored to their particular business and risk profile addressing not only the technical aspects of their defense, but also the people and organizational elements. Cyberint 's professionals will assist Globe in developing the cybersecurity policy consisting of high-level direction on cybersecurity. Phase 4: Globe 's cybersecurity strategy approval Cyberint will lead a workshop for this phase the goals of which are to present Globe 's cybersecurity strategy and policy; present main countermeasures that should be taken in order for Globe to turn cybersecurity into a business enabler; and to discuss the influence of implementing countermeasures on business and users experience. The timeline of the project is September 1, 2015 to January 31, 2016. In consideration, Globe will pay service fees to Cyberint amounting to $__________ payable upon completion of the following milestones: aScITE Milestone 1: 20% upon completion of the cyber strategy kick-off and initial discussion. Milestone 2: 30% upon completion of the senior management workshop. Milestone 3: 30% upon submission and presentation of Globe 's cyber strategy. Milestone 4: 20% upon Globe 's approval of the cyber strategy. Based on the Certificate of Completion and Accomplishment issued by Globe , it confirmed that Cyberint has delivered services under the Supplemental Agreement in accordance with the agreed scope of works. The milestones have been delivered to Globe and made available and operational as required and provided for in the Supplemental Agreement. Globe recommended the payment of service fees to Cyberint as indicated in the invoice issued by the latter to Globe . Based on the Certifications on Duration of Service issued by Globe , it confirmed the rendition of services in the Philippines by two Cyberint 's employees BBB and CCC, both nationals of Israel. Based on their passports, they were in the Philippines (either individually or jointly) on the following dates: (1) September 29-October 1, 2015 (3 days); (2) November 23-26, 2015 (4 days); and (3) January 24-27, 2016 (4 days), for a total of 11 days. Based on a sworn certification issued by Cyberint , the transaction 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") , profits derived by a foreign corporation not engaged in trade or business in the Philippines are 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, the profits are 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." In this connection, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Israel 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 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 through which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a place of exploration of natural resources; h) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; i) an assembly or installation project which exists for more than six months; j) the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within a State for a period or periods aggregating more than six months within any twelve-month period"; 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 enterprise carries on business therein in that State through a permanent establishment situated therein. 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 place of management, a branch, an office, a factory and a workshop. It includes also the furnishing of services, including consultancy services, by an enterprise through employees or other personnel which continues within a Contracting State (for the same or a connected project) for a period or periods aggregating more than six months within any twelve-month period. aDSIHc Accordingly, since Cyberint 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 six months within any twelve-month period, it does not have a permanent establishment in the Philippines pursuant to paragraphs 1 and 2, Article 5 of the Philippines-Israel tax treaty with respect carrying out the cyber security review and workshop project. As mentioned, Cyberint completed this project for an aggregate of 11 days only during the timeline of the project. This being the case, service fees paid therefor by Globe to Cyberint are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. However, since the services are performed in the Philippines, the service fees paid to Cyberint 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. . ." (Emphasis ours) Relative thereto, Globe shall withhold VAT on the service fees at the rate of 12% before remitting them to Cyberint . Globe shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and the accompanying proof of payment shall serve as documentary substantiation for Globe 's claim of input VAT on the fees. Otherwise, Globe may treat the VAT 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. 4 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.cyberint.com/ . 2. Date of notary of the Frame Agreement. 3. Date of notary of the Supplemental Agreement. 4. Pursuant to Section 4.112-2 of 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) , which provides: " SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense,' whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." n Note from the Publisher: Copied verbatim from the official document.