Play Innovations, Inc.

March 27, 2018 ITAD BIR RULING NO. 053-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty Play Innovations, Inc. Kidzania Manila Park Triangle 3245 North 11th Avenue Bonifacio Global City Taguig City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on September 22, 2016 requesting confirmation that service fees paid by Play Innovations, Inc. (" Play Innovations ") to Service Quality Centre Pte. Ltd. (" Quality Centre ") 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 "). EDATSI FACTS Quality Centre is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Business Profile issued by the Accounting and Corporate Regulatory Authority of Singapore and Certificate of Residence issued by the Inland Revenue Authority of Singapore. Quality Centre is engaged in training education and consultancy in service and quality. 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, Play Innovations is a domestic corporation organized and existing under the laws of the Philippines. Based on its General Information Sheet for 2016 and Audited Financial Statements as of December 31, 2015, Play Innovations is engaged in developing and operating educational theme parks under the franchise license of Kidzania brand in the Philippines. Play Innovations is registered with the Board of Investments as a new operator of tourism entertainment complex, particularly, an educational theme park called Kidzania Manila. Play Innovations and Quality Centre are not related entities. On April 12, 2016, Play Innovations issued a Letter of Acceptance to Quality Centre regarding the latter's proposal to provide consultancy and training services to Play Innovations for the project called Delivering a Signature Customer Experience, the KIDZANIA Way! (" Kidzania project " or " project "). This project is a series of highly impactful interventions that would provide the foundation for the development of excellent people and service processes that have implications to customer experience, and transform culture of service excellence within the organization. The purpose of the project is for Play Innovations to be able to create its signature experience by consistently delivering excellent products through excellent processes, systems and people. The framework of Quality Centre in relation to the project focuses on nurturing a quality and customer-focused mindset within the organization. Specifically, the framework addresses five factors critical to an organization's ability to deliver sustained service quality and experience to its customers, namely, leadership, strategy, process, people and measurement and results. The framework will help to identify relevant competencies within the organization and translate them into learnable curriculum. The Kidzania project is divided into following phases commencing on April 13 to July 1, 2016: Phase 1. Stock take (internal and external perspectives) 1.1 Customer expectations and satisfactions (2 days) 1.2 Focus group study and analysis (2 days) 1.3 Scan (14 days) Phase 2. Align and develop Kidzania Experience 2.1 Strategic service leadership roundtable (1 day) 2.2 Built-to-last strategic customer experience consulting (1 day) Phase 3. Blueprint and standardize Kidzania Experience 3.1 Signature experience blueprinting (1.5 months) Phase 4. Develop the curriculum 4.1 Curriculum design and development (6 days) Phase 5. Align and develop Kidzania Experience 5.1 Managing signature experience (2 days) 5.2 Empowered coaching (2 days) 5.3 Train-the-trainer (3 days) 5.4 Delivering signature experience (2 days) 5.5 Delighting skills program (2 days) Phase 6. Track and sustain Kidzania Experience 6.1 Sustenance mechanisms (1 month and 0.5 day) Based on the affidavit issued by Play Innovations , the Kidzania project is not yet completed. The training is on-going, all services are rendered in the Philippines, and Quality Centre has provided services for an aggregate of 39 days. The personnel who provide the services BBB, CCC, DDD and EEE are Singapore nationals and holders of Singapore passports. Play Innovations paid service fees to Quality Centre amounting __________ Singapore dollars for phases 1 to 5 of the project. The project is now in its last phase. TaDSCA 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 in the Philippines by a foreign corporation not engaged in trade or business in the Philippines 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 may be exempt to the extent required by any treaty obligation binding upon 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 of the Philippines-Singapore tax treaty provides relief to income derived by an enterprise of Singapore, to wit: " 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 this article, such income may be taxed in the Philippines but only so much of the income as is attributable to a permanent establishment which the enterprise has in the Philippines. Article 5 of the 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 EADSIa 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 also includes the furnishing of services by an enterprise of a Contracting State (through employees or other personnel thereof) which continues in the other Contracting State for an aggregate period of 183 days. Accordingly, since Quality Centre is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is necessary, and it did not provide services in the Philippines for more than an aggregate of 183 days, it is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. To date, Quality Centre has completed phases 1 to 5 of the Kidzania project which lasted an aggregate of 39 days. For the last phase of the project, this will run for one month or 30 days making the entire duration of the project an estimated 49 days only. This being the case, service fees paid by Play Innovations to Quality Centre for providing services to the project are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Singapore tax treaty. Finally, under Section 108 (A) of the Tax Code, services rendered by Quality Center in the Philippines are subject to value-added tax (" VAT ") at the rate of 12%, 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%) 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 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) Under Section 105 of the Tax Code, although VAT is imposed on persons performing regular trade or business in the Philippines, services performed in the Philippines by a nonresident foreign person like Quality Center are considered rendered in the course of trade or business for purposes of VAT, to wit: " 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. xxx xxx xxx 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. " (Emphasis Ours) Relative thereto, Play Innovations shall withhold the 12% VAT on service fees payable to Quality Centre before remitting those fees to the latter. Play Innovations shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). This form together with the relevant proof of payment shall serve as documentary substantiation for Play Innovations ' claim of input VAT on those fees. On the other hand, if Play Innovations is not a VAT-registered taxpayer, the passed-on VAT shall form part of the cost of the service and may be treated as asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding is made. 1 SEDICa 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. Pursuant to Section 4.114-2 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 nonresidents; 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.