Manabat Sanagustin and Co.

July 12, 2018 ITAD BIR RULING NO. 075-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-France tax treaty, as amended Manabat Sanagustin and Co. Certified Public Accountants 9th Floor, The KPMG Center 6787 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on April 27, 2012 requesting confirmation that payments made by Philippine Axa Life Insurance Corporation (" Axa Philippines ") to Axa Asia are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-trance tax treaty "). 1 FACTS Axa Asia is a foreign corporation organized and existing under the laws of France and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Direction Genral des Finances Publiques of France. The purpose of Axa Asia is the ownership, acquisition and operation of personal and real property, the direct participation and acquisition of interests in any operations, either through the creation of companies, through contributions to such companies, through mergers and alliances of companies, through the disposal or lease of properties to companies, through subscription, purchase and sale of securities of the companies, through shares and equity interests, through limited partnerships, or through advances of loans or other methods. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission. On the other hand, Axa Philippines is a domestic corporation organized and existing under the laws of the Philippines. HTcADC On March 31, 2011, a Novation Deed was entered into by and among Axa Asia , Axa Philippines and Axa Asia Pacific Holdings Ltd. (" Axa Asia Holdings ") where Axa Asia Holdings (the retiring party) transferred by novation all its rights and obligations to Axa Asia (the succeeding party). Axa Asia Holdings is a foreign corporation organized and existing under the laws of Australia. As a result of the novation, Axa Asia succeeds Axa Asia Holdings to the following agreements between Axa Philippines and Axa Asia Holdings : (1) Software License Agreement (effective April 1, 2003); (2) Software Support and Maintenance Agreement (April 1, 2003); (3) Master Agreement for Professional Services (January 1, 2003); and Master Services Agreement (August 30, 2006). The novation took effect on March 31, 2011. Software License Agreement Under this agreement, Axa Asia Holdings grants Axa Philippines a personal, non-transferable, non-assignable, and non-exclusive license to use the following licensed software: Axa Regional Agency System, Axa Regional Life System and Axa Regional General Ledger System. The use is for internal purposes only. Axa Philippines (and its employees and agents) will not make the software available or otherwise use it for the benefit of third parties (except with the prior written consent of and subject to the conditions imposed by Axa Asia Holdings ). Likewise, Axa Philippines (and its employees and agents) will not sell, assign, lease, sublicense, distribute, commercially exploit, market, or otherwise dispose of the software. In consideration, Axa Philippines will pay license fees to Axa Asia Holdings for the use of the software beginning April 2003 until May 2008. Based on a sworn statement issued by Axa Philippines , those license fees were paid by Axa Philippines as scheduled. Software Support and Maintenance Agreement Under this agreement, Axa Asia Holdings agrees to provide support and maintenance services to Axa Philippines in relation to the licensed software which consist of software updates and technical assistance. Axa Philippines (and its employees and agents) will not make the software update available or otherwise use it for the benefit of third parties (except with the prior written consent of and subject to the conditions imposed by Axa Asia Holdings ). Likewise, Axa Philippines (and its employees and agents) will not sell, assign, lease, sublicense, distribute, commercially exploit, market, or otherwise dispose of the software update. In consideration Axa Philippines will pay fees to Axa Asia . Master Agreement for Professional Services Under this agreement, Axa Asia Holdings agrees to provide technical assistance and services to Axa Philippines as described in a schedule. The schedule will be uniquely numbered to facilitate identification and, when executed by the parties, will constitute a separate agreement and, except as otherwise provided in the schedule, will incorporate therein all terms and conditions of the agreement (such as, the rate or fixed price of the services, the work location, the name of project manager, and other information, terms and conditions). Axa Philippines will be invoiced and pay for such services. Master Services Agreement Under this agreement, Axa Asia Holdings will provide services to Axa Philippines as described in a schedule. The schedule, when executed by the parties, will constitute a separate agreement and, except as otherwise provided in the schedule, will incorporate therein all terms and conditions of the agreement (such as, the fees, charges and expenses and other information, terms and conditions). The fees to be charged by Axa Asia Holdings to Axa Philippines in respect of any services provided will be negotiated at arm's length between the parties. Axa Philippines will be invoiced and pay for such services. BIR Ruling No. DA-ITAD 17-08 issued on March 7, 2008 provided relief to payments made by Axa Philippines to Axa Asia Holdings under those agreements. Following the novation, Axa Asia , the succeeding party to Axa Asia Holdings , will provide services to Axa Philippines under the Software Support and Maintenance Agreement, the Master Agreement for Professional Services and the Master Services Agreement (" remaining agreements "). Axa Philippines will not be making payments to Axa Asia under the Software License Agreement since Axa Philippines completed the payment of license fees to Axa Asia Holdings in 2008 or prior to the novation in 2011. Based on invoices issued by Axa Asia to Axa Philippines , Axa Asia charged Axa Philippines for services it performed to the latter pursuant to the remaining agreements. Based on sworn statements issued by Axa Philippines , all services were performed by Axa Asia outside the Philippines and no employee of Axa Asia performed services in the country. As of October 2012, service fees paid by Axa Philippines to Axa Asia amounted to US$__________ for non-IT services under the Master Agreement for Professional Services and Master Services Agreement and US$__________ for IT services under the Software Support and Maintenance Agreement. aScITE 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 percent, 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 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." Relative thereto, under paragraph 1, Article 7 of the Philippines-France tax treaty, profits derived by an enterprise resident of France may be taxed in the Philippines if the profits are attributable to a permanent establishment situated therein, 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." The term permanent establishment is defined in paragraphs 1 and 2, Article 5 of the treaty below: " 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) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period of more than six months; i) 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 Contracting State for a period or periods aggregating more than six months within any twelve-months period." Under Article 5, a permanent establishment means a fixed place of business in 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 premises used as a sales outlet. It includes also the furnishing of services including consultancy services by an enterprise, through employees or other personnel thereof, which continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period. Accordingly, since Axa Asia 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 Philippines for more than six months within any twelve-month period, Axa Asia is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty. As represented, the services required of Axa Asia under the above agreements were done entirely outside the Philippines. This being the case, service fees paid therefor by Axa Philippines to Axa Asia are exempt from income tax in the Philippines pursuant to paragraph 1, Article 7 of the tax treaty. HEITAD Furthermore, since the services are performed outside the Philippines, the service fees paid to Axa Asia are not subject to value-added tax (" VAT ") imposed 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 selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: 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. . ." Under the cross-border or destination principle of the VAT system, services performed in the Philippines are subject to VAT while those performed outside are not subject to VAT. 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. As amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998 . n Note from the Publisher: Copied verbatim from the official document.