Leynes Lozada-Marquez Law Offices

April 3, 2018 ITAD BIR RULING NO. 059-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) of the Philippines- United Kingdom of Great Britain and Northern Ireland Tax Treaty Leynes Lozada-Marquez Law Offices 7th Floor, State Condominium I, 186 Salcedo Street 1229 Makati City Attention: AAA BBB CCC DDD Gentlemen : This refers to your tax treaty relief application filed on September 1, 2014 requesting confirmation that payments made to Television Systems Ltd. (" TSL ") by TV5 Network, Inc. (" TV5 ") are not subject to Philippine income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (" Philippines-United Kingdom tax treaty "). ACcDEa It is represented that TSL is a corporation organized and existing under the laws of the United Kingdom and is a resident thereof for tax purposes based on the Certificate issued by the Registrar of Companies for England and Wales, and its Certificate of Residency issued by Her Majesty's Revenue and Customs; that TSL is engaged in the design, manufacture and installation of professional broadcasting facilities; that it is not registered as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission; and that, on the other hand, TV5 is a corporation organized and existing under the laws of the Philippines, and is a television network broadcasting company. It is also represented that on February 12, 2014, TV5 and TSL entered into an Agreement for the Sale and Purchase of Equipment for TV5 's Broadcast Media Center Project; that TSL will supply and deliver to TV5 the following equipment: camera heads and accessories, camera lenses and controllers, studio camera cables, camera tripods and dollies, integrated pan-tilt-zoom cameras and mounting hardware, closed circuit television cameras, studio prompter system, monitor displays, wireless microphone antenna system, in-ear monitoring antenna combing system, speaker system, stage monitors, and studio main wallboxes, among others; that these equipment will be installed at TV5 's premises in the Philippines, particularly, studios, open areas, production control rooms, audio control rooms, patching facilities, core facilities, station control and network management system, newscaster's booths, among others; that in consideration, TV5 will pay TSL the price for those equipment in accordance with the following schedule: __% upon TSL 's presentation of shipping documents evidencing dispatch of equipment; __% upon arrival of all equipment listed in the shipping documents; __% upon delivery of all equipment and receipt by TV5 of the billing documents; and __% upon expiration of the warranty period for such equipment; that payment of prices for the equipment are quoted and fixed in US dollars and payable in that currency via wireless transfer to TSL 's designated bank account; that storage of the equipment will be the responsibility of TV5 upon delivery at Manila port; and that title to the equipment will pass to TV5 upon delivery of the equipment by TSL to the first carrier for shipment. It is further represented that on February 12, 2014, TV5 and TSL entered into a Service Agreement for the Installation, Commissioning and Integration Testing for TV5 's Broadcast Media Center Project; that TSL will perform the following activities for the equipment at TV5 's premises in the Philippines: preparatory acts including conduct of jobsite survey and preparatory interviews with personnel of TV5 , and installation, testing and commissioning of the equipment; TSL will provide experienced installation and test personnel with knowledge and skill in the installation of the equipment during the installation and commissioning period; that the installation shall include but not be limited to mechanical installation of the equipment, and interconnection of the equipment and internal cabling; that TSL will provide training services and deliver training and maintenance manuals for the equipment and system; and that in consideration, TV5 will pay service fees to TSL amounting to US$ ________ , in accordance with the following schedule: US$________ upon execution of the Service Agreement; US$ ________ upon arrival of TSL 's technical team at the jobsite; US$ ________ upon clearance to install all equipment; US$ ________ upon TSL 's handover of the project to TV5 ; US$ ________ upon acceptance of the project on March 21, 2014; and US$ ________ after one year of such acceptance. It is further represented that based on a certification issued by TSL , the following personnel were sent to the Philippines by TSL to provide services to TV5 : Arrival Departure EEE __________ __________ __________ __________ __________ __________ FFF __________ __________ __________ __________ GGG __________ __________ __________ __________ __________ __________ __________ __________ HHH __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ III __________ __________ and that they rendered services for a total of 144 days: 43 days in 2013 and 101 days in 2014. It is finally represented that per sworn statement issued by TSL , the income subject of this request for 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. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), payments made to TSL are subject to income tax at the rate of 30%, thus: EHCcIT " Section 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 interest, 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): 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 payments to TSL are exempt to the extent required by any treaty obligation with the Philippine government, viz .: " Section 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." With respect to the treaty, paragraph 1, Article 7 of the Philippines-United Kingdom tax treaty 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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment." Under Article 7, the profits of an enterprise of the United Kingdom shall be taxable only in the United Kingdom, unless it carries on business in the Philippines through a permanent establishment situated therein. If the enterprise carries on business as such, the profits may be taxed in the Philippines to the extent that profits are attributable to that permanent establishment. For purposes of determining the existence of a permanent establishment, Article 5 of the tax treaty provides: " 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' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. 3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period." As defined, 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. With respect to furnishing of services, an enterprise is deemed to have a permanent establishment if it undertakes this activity for more than an aggregate period 183 days within any twelve-month period. CADacT Accordingly, since TSL is not engaged in trade or business in the Philippines to which a fixed place of business such as an office or a branch is necessary, and it did not furnish services in the Philippines for more than an aggregate of 183 days within any twelve-month period, but for 144 days only, TSL is not deemed to have a permanent establishment under paragraphs 1, 2 and 3, Article 5 of the Philippines-United Kingdom tax treaty. This being the case, payments made by TV5 to TSL for the purchase and delivery of the equipment and for the installation, commissioning and integration testing of these equipment at TV5 's premises in the Philippines are exempt from income tax, pursuant to paragraph 1 of Article 7 of the tax treaty. Finally, however, the importation of the equipment and the provision of services relating to the installation, testing and commissioning of the equipment are subject to value-added tax (" VAT ") at the rate of 12% under Sections 107 (A) and 108 (A) of the Tax Code, thus: " SEC 107. Value-Added Tax on Importation of Goods. (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of the value-added tax to twelve percent (12%) . . ." " 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%) . . ." With respect to VAT on the importation of the equipment, they shall be paid by TV5 , being the importer, prior to their release from the Bureau of Customs. With respect to VAT on services, TV5 , being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT. In remitting the VAT withheld, TV5 shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and its accompanying proof of payment thereof shall serve as documentary substantiation for TV5 's claim of input VAT upon filing its own VAT return. In case TV5 is a non-VAT registered taxpayer, the passed-on VAT shall form part of the cost of purchased services which may be treated as "expense" or "asset," whichever is applicable. This ruling is issued on the basis of the foregoing 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