Sycip Gorres Velayo and Co.

September 29, 2021 ITAD BIR RULING NO. 043-21 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 Services Gentlemen : This refers to your tax treaty relief application filed on October 19, 2016 requesting confirmation that the service fee paid by Loc&Stor 24/7, Inc. (Loc&Stor) to Alpine Pte. Ltd. (Alpine) is 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 Alpine is a foreign corporation organized and existing under the laws of Singapore based on its Memorandum and Articles of Association and Business Profile issued by the Accounting and Corporate Regulatory Authority of Singapore. As certified by the Inland Revenue Authority of Singapore, it is a resident of the said jurisdiction for assessment year 2017 for the purpose of claiming benefit under the Philippines-Singapore Tax Treaty. Alpine 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, Loc&Stor is a domestic corporation engaged in operating secure storage facilities. On April 1, 2014, Loc&Stor and Alpine entered into a Design, Construction and Management Agreement (the Agreement) whereby the latter agreed to provide the following services in Singapore and, if necessary, in the Philippines beginning May 1, 2014 until December 31, 2014: 1. Design and setup advisory for self-storage facility; 2. Construction and commissioning consultation; and 3. Operational practice consultation. In turn, Loc&Stor shall pay Alpine a service fee amounting to ___________ Singapore Dollars or its equivalent in US Dollars. CAIHTE Based on the Affidavit executed by Mr. S______ B______ P______ (Mr. P_______) on February 22, 2019, he admitted that he was assigned to render consultancy services to Loc&Stor in the Philippines on separate dates starting from May 1, 2014 until December 28, 2014, and that after the conclusion of the contract on December 31, 2014, no Alpine personnel or consultant was assigned to render consultancy and management services for Loc&Stor in the Philippines. A careful examination of the records reveals that Mr. P________ is the sole shareholder and director of Alpine, 1 was the President/Chairman of Loc&Stor as of April 17, 2017 2 and the Managing Director of Loc&Stor as of February 15, 2019. 3 Moreover, based on his passport, he was in the Philippines on the following dates: Year Date of arrival Date of departure Number of days 2014 January 2 January 24 23 February 3 February 6 4 February 10 February 15 6 March 5 March 17 13 April 6 April 18 13 April 28 May 9 12 May 19, 2014 June 5, 2014 18 July 4, 2014 July 18, 2014 15 July 27, 2014 August 7, 2014 12 August 19, 2014 August 30, 2014 12 September 8, 2014 September 20, 2014 13 October 5, 2014 October 10, 2014 6 October 11, 2014 October 19, 2014 9 October 27, 2014 November 6, 2014 11 November 12, 2014 November 19, 2014 8 December 1, 2014 December 28, 2014 28 Total 203 days 2015 January 5, 2015 January 16, 2015 12 January 26, 2015 February 6, 2015 12 February 10, 2015 February 18, 2015 9 February 23, 2015 March 8, 2015 14 March 16, 2015 March 20, 2015 5 March 30, 2015 April 2, 2015 4 April 6, 2015 April 17, 2015 12 April 27, 2015 May 10, 2015 14 May 18, 2015 May 28, 2015 11 June 9, 2015 June 13, 2015 5 July 26, 2015 August 10, 2015 16 August 27, 2015 October 23, 2015 58 October 25, 2015 October 31, 2015 7 November 1, 2015 November 26, 2015 26 November 29, 2015 December 28, 2015 30 Total 235 days 2016 January 11, 2016 March 10, 2016 60 March 13, 2016 April 5, 2016 24 April 7, 2016 May 10, 2016 34 May 14, 2016 June 10, 2016 28 June 12, 2016 July 1, 2016 20 July 3, 2016 July 10, 2016 8 August 1, 2016 October 9, 2016 70 October 11, 2016 November 27, 2016 48 November 29, 2016 December 30, 2016 32 Total 324 days 2017 January 1, 2017 February 2, 2017 33 February 5, 2017 February 17, 2017 13 April 27, 2017 May 16, 2017 20 May 18, 2017 June 15, 2017 29 June 16, 2017 June 20, 2017 5 October 15, 2017 November 19, 2017 36 Total 136 days 2018 January 2, 2018 February 1, 2018 31 February 4, 2018 February 9, 2018 6 February 11, 2018 March 9, 2018 27 March 10, 2018 April 12, 2018 34 July 7, 2018 July 14, 2018 8 July 16, 2018 August 24, 2018 40 Total 146 days RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, income derived by a nonresident foreign corporation is subject to income tax at the rate of 30%: " 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: 4 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: " 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: DETACa 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. xxx xxx xxx" Believing that it is entitled to treaty benefits, Alpine invoked paragraph 1, Article 7, and paragraphs 1 and 2, Article 5 of the Philippines-Singapore Tax Treaty, which 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." xxx xxx xxx " 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 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. xxx xxx xxx" 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 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. aDSIHc Article 5, on the other hand, 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, 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. After evaluating the documents submitted, this Office believes, and so holds, that the service fees derived by Alpine from the Philippines are subject to the regular income tax rate of 30% as provided under Section 28 (B) (1) of the Tax Code. The tax treaty does not apply to a person who is not resident of one of both of the contracting states The Tax Residency Certificate (TRC) duly issued by the tax authority of Singapore clearly states that Alpine is a resident of Singapore for assessment year 2017. Alpine did not present, however, a TRC duly issued by the taxing authority of Singapore stating that it is likewise a resident of such country for assessment years 2014 to 2016 for purposes of the tax treaty being invoked. In other words, Alpine was a resident of Singapore in 2017 but not in 2014, 2015 and 2016 when the services were provided or the service fees were derived, or in 2016 when such fees were paid. Article 1 (Personal Scope) of the Philippines-Singapore Tax Treaty provides that the Convention shall apply to persons who are residents of one or both of the Contracting States. In this case, Alpine is neither a resident of Singapore nor the Philippines in 2014 to 2016; therefore, it cannot claim any of the benefits provided under the Singapore-Philippines Tax Treaty for such taxable years. The furnishing of services in the Philippines for more than 183 days created a permanent establishment Even assuming for the sake of argument that Alpine was a resident of Singapore for taxable years 2014, 2015 and 2016, still its claim that the service fees are exempt from income tax under of Article 7 of the Philippines-Singapore Tax Treaty cannot stand. Under Article 5 of the treaty, a permanent establishment means 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. In the commentary of the Organisation for Economic Cooperation and Development (OECD) on paragraph 1, Article 5 of its Model Tax Convention on Income and on Capital, 5 it emphasized the following conditions that must be satisfied before a foreign enterprise may be deemed to have a permanent establishment in the other contracting state: " Paragraph 1 6. Paragraph 1 gives a general definition of the term 'permanent establishment' which brings out its essential characteristics of a permanent establishment in the sense of the Convention, i.e. ,a distinct 'situs,' a 'fixed place of business.' The paragraph defines the term 'permanent establishment' as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: ETHIDa the existence of a 'place of business,' i.e. ,a facility such as premises or, in certain instances, machinery or equipment; this place of business must be 'fixed,' i.e. ,it must be established at a distinct place with a certain degree of permanence; the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. " xxx xxx xxx 10. The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal .It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot ( e.g. ,for the storage of dutiable goods). Again, the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise .(Underscoring supplied) The foregoing commentaries mentioned the characteristics of a permanent establishment, namely: a) a place of business; b) such place of business must be fixed or with a certain degree of permanence; and c) the business of the enterprise must be partially or wholly carried on through such fixed place of business. The place of business covers any premises used for carrying on the business of the enterprise. Where no premises exist, the enterprise must at least have a certain amount of space at its disposal. In this case, while Mr. P___________ is the sole shareholder, director and employee of Alpine, he also appears to be a high-ranking employee of Loc&Stor as evidenced by the Statements of Management's Responsibility for Financial Statements dated April 17, 2017 and February 15, 2019, which he signed in his capacity as President/Chairman and Managing Director of Loc&Stor, respectively. Certainly, the office of Loc&Stor which he occupies as the President or Managing Director may likewise be said to be at the disposal of Mr. P___________ where he could freely carry on the business of Alpine. Again, Alpine was contracted by Loc&Stor to provide the necessary services for the start-up storage business of Loc&Stor. Under the circumstances, it is safe to assume that he rendered the said services in the premises of Loc&Stor. Moreover, although Alpine may not have a fixed place of business in the Philippines, it, nonetheless, created a permanent establishment when it furnished services in the Philippines through its employee, Mr. P__________, for a period or periods aggregating more than 153 days. To reiterate, Mr. P__________ was in the Philippines for 203 days in 2014, 235 days in 2015, and 324 days in 2016. It is evident, therefore, that the parties intended the contract to continue beyond its original term (May 1, 2014 until December 31, 2014) and that Alpine wanted to continue its business in the Philippines for such periods of time through Loc&Stor. Moreover, the length of stay of Mr. P__________ in the Philippines and the fact that he is the President or Managing Director of Loc&Stor lead to no other conclusion than that the companies are one and the same or that Loc&Stor was dependent on Alpine. cSEDTC In view of the foregoing, this Office hereby rules that the service fees paid by Loc&Stor to Alpine under the Agreement are subject to income tax at the regular rate of 30% under Section 28 (B) (1) of the Tax Code. Finally, the gross receipts derived from the sale of services are also subject to value-added tax (VAT) at the rate 12% under Section 108 (A), in relation to Section 105, 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%) ..." " SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests),or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 6 Loc&Stor shall withhold VAT on the service fee at the rate of 12% percent before remitting it to Alpine. Loc&Stor shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) and shall remit the VAT withheld 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 it will be disclosed upon investigation that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. SDAaTC Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Based on the Memorandum of Association of Alpine Pte. Ltd. 2. Based on the Statement of Management's Responsibility for Financial Statements dated April 17, 2017. 3. Based on the Statement of Management's Responsibility for Financial Statements dated February 15, 2019. 4. The income tax rate for nonresident foreign corporations was reduced to 25% under Republic Act (RA) No. 11534, otherwise known as An Act Reforming the Corporate Income Tax and Incentives System, Amending for the Purpose Sections 20, 22, 25, 27, 28, 29, 34, 40, 57, 109, 116, 204 and 290 of the National Internal Revenue Code of 1997, as Amended, and Creating Therein New Title XIII, and for Other Purposes" or the CREATE Law. 5. Model Tax Convention on Income and Capital as published by the OECD on November 21, 2017. 6. 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).