Sycip Gorres Velayo and Co.

July 15, 2020 ITAD BIR RULING NO. 057-20 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Malaysia tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on December 19, 2014, on behalf of TETRA PAK (MALAYSIA) SDN. BHD. ("Tetra Malaysia") (originally BRIK SERVICES (MALAYSIA) SDN. BHD. ) requesting confirmation that service fees paid by TETRA PAK PHILIPPINES, INC. ("Tetra Philippine") to Tetra Malaysia are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income ("Philippines-Malaysia tax treaty") . It is represented that Tetra Malaysia is a corporation organized and existing under the laws of Malaysia and a resident thereof based on its amended Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Board Malaysia; that the objects for which Tetra Malaysia is established are, among others, to carry on the business of manufacturers, buyers, sellers, and distributing agents of and dealers in all kinds of food packaging materials, compounds, preparations, articles, plant equipment and machinery; that Tetra Malaysia is not a registered corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission; that, on the other hand, Tetra Philippines is a corporation organized and existing under the laws of the Philippines; and that based on its Audited Financial Statements as of December 31, 2017, Tetra Philippines is engaged in importing and distributing Tetra Pak filling and packaging equipment and materials that are exclusively manufactured by the Tetra Pak Group of Companies. It is further represented that on November 10, 2014, Tetra Philippines and Tetra Malaysia entered into a Services Agreement where Tetra Malaysia agreed to provide services to Tetra Philippines without the latter assuming or acquiring any entrepreneurial interest in any products, systems, processes, procedures or other intangible property developed pursuant to the Agreement; that the services are described below: 1. General management and administration; 2. Business planning and coordination; CAIHTE 3. Technical support and maintenance; 4. Marketing control and sales promotion; and 5. Supplier management-procurements of components, finished products and services. That the services will be performed by personnel of Tetra Malaysia in Malaysia and the Philippines; that services rendered in the Philippines will represent 30% of the total services to be performed by Tetra Malaysia to Tetra Philippines , and the duration of the services will not exceed 180 days in any given twelve-month period; that in consideration, Tetra Philippines will pay Tetra Malaysia service fees equal to the aggregate amount of cost of services ( i.e. , staff cost, travelling and accommodation) plus mark-up of 5%; that, in addition, Tetra Philippines will pay an annual service fee to Tetra Malaysia for communication expenses amounting to __________ Malaysian Ringgit; that payment therefor will be made within 30 days upon receipt of the invoice/s; and that the Agreement will cover services rendered by Tetra Malaysia to Tetra Philippines beginning January 1, 2009 and onwards. Based on the Certification on Duration of Service issued by Tetra Philippines, Tetra Malaysia rendered services in the Philippines in 2014 relating to sales promotion, business planning, control and coordination, technical support, marketing control, supplier management, procurement, general management and administration, technical management and support, supply chain management and the following personnel of Tetra Malaysia provided the services: 1. BBB; 2. CCC; 3. DDD; 4. EEE; 5. FFF; 6. GGG; and 7. HHH. Moreover, the said services were rendered for 129 days on the following dates: 1. ____________ (4 days); 2. ____________ (5 days); 3. ____________ (8 days); 4. ____________ (7 days); 5. ____________ (8 days); 6. ____________ (10 days); 7. ____________ (23 days); 8. ____________ (18 days); 9. ____________ (7 days); 10. ____________ (18 days); 11. ____________ (13 days); and 12. ____________ (8 days). DETACa It is finally represented that 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 proceedings, or judicial appeal based on the Sworn Statement issued by Tetra Philippines . 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 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 is exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: HEITAD " 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Relative thereto, paragraph 1, Article 7, and paragraphs 1, 2 and 6, Article 5 of the Philippines-Malaysia 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 thereof as is attributable to that permanent establishment." " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, 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' shall include 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 other place of extraction of natural resources including timber or other forest produce; g) a farm or plantation; h) a building site or construction, installation or assembly project which exists for more than 6 months. xxx xxx xxx 4. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State; or b) substantial equipment is in that other State being used or installed by, for or under contract with, the enterprise." 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 business as such, its profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. Under Article 5, a permanent establishment means a fixed place 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 (paragraphs 1 and 2) . For furnishing of services, an enterprise is deemed to have a permanent establishment only if it carries on supervisory activities in the other Contracting State for more than six (6) months in connection with a construction, installation or assembly project undertaken in that State; or substantial equipment was used or installed in that other State, by, for or under contract with, the enterprise (paragraph 4) . ATICcS Accordingly, since Tetra Malaysia 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 country, and it did not render services in the Philippines for more than six months in connection with a construction, installation or assembly project or with the use or installation of substantial equipment, Tetra Malaysia is not deemed to have a permanent establishment in the Philippines under paragraphs 1, 2 and 4, Article 5 of the Philippines-Malaysia tax treaty. While Tetra Malaysia rendered onshore services in 2014, these services were in the nature of general management and administration; business planning and coordination; technical support and maintenance; marketing control and sales promotion; and supplier management and procurement of components, finished products and services, which are not covered by paragraph 4 of Article 5. This being the case, service fees paid by Tetra Philippines to Tetra Malaysia under the Agreement for offshore and onshore services rendered are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Malaysia tax treaty. Finally, the service fees for onshore services rendered by Tetra Malaysia is subject to value-added tax ("VAT") at the rate of 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 onto 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, 1 Tetra Philippines shall withhold VAT on the service fees at the rate of 12% before remitting them to Tetra Malaysia . Tetra Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for Tetra Philippines ' claim of input VAT on the fees; otherwise, if it is not a VAT-registered taxpayer, Tetra Philippines may treat the passed-on VAT as part of the cost of the services and treat the same as asset or expense, whichever is applicable. VAT withheld shall be remitted within ten 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 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. TIADCc Very truly yours, (SGD.) CAESAR R. DULA Commissioner of Internal Revenue Footnotes 1. Entitled 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). n Note from the Publisher: Copied verbatim from the official document.