ITAD BIR Ruling No. 076-13

March 21, 2013 ITAD BIR RULING NO. 076-13 Articles 5 (Permanent Establishment) and 8 (Business Profits); Philippines-United States of America tax treaty Caguioa and Gatmaytan Attorneys-at-Law 3rd Floor, La Paz Centre Salcedo corner Rufino Streets Legaspi Village, Makati City Attention: Atty. Ben Dominic R. Yap Atty. Anthony Mark A. Gutierrez Atty. Lyra Miragrace C. Flores Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 19, 2011 requesting confirmation that service fee paid by Caguioa and Gatmaytan ("Caguioa and Gatmaytan") to Kiefner and Associates, Inc. ("Kiefner") is exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . CcHDaA Facts Kiefner is a foreign corporation and a resident of the United States based on its Amended and Restated Articles of Incorporation and its Certificate of Residence issued by the Internal Revenue Service of the United States on June 29, 2011. Kiefner is located at 585 Scherers Court, Worthington, Ohio, United States. Kiefner is not registered as corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on May 9, 2011. On the other hand, Caguioa and Gatmaytan is a domestic and general professional partnership located at 3rd Floor, La Paz Centre, Salcedo corner Rufino Streets, Legaspi Village, Makati City, Philippines. On April 28, 2011, Caguioa and Gatmaytan and Kiefner entered into an Agreement where Kiefner agreed to conduct a two-day course/workshop in the Philippines on pipeline regulations and standards in the United States, to be attended by members of Caguioa and Gatmaytan and its invited guests. The venue of this event will be provided by Caguioa and Gatmaytan and requires adequate facilities for audio-visual presentation. Based on the Sworn Statement issued by Caguioa and Gatmaytan , the course/workshop was actually held for three days on May 24 to 26, 2011 in the Philippines. Mr. John F. Kiefner, Senior Advisor, and Ms. Carolyn E. Kolovich, Senior Pipeline Engineer, both of Kiefner , conducted the course/workshop. They were in the Philippines on May 23-27, 2011. Based on the Client Receipt issued by Kiefner , the service fee for the course/workshop was $24,000 under Invoice No. 13056 issued on July 20, 2011 and which was paid to Kiefner on September 2, 2011. 1 Ruling In reply, please be informed that the service fee paid to Kiefner is exempt from income tax if it is not attributable to a permanent establishment which Kiefner has in the Philippines, under paragraph 1, Article 8 of the Philippines-United States tax treaty, to wit: IAaCST "Article 8 Business Profits 1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." In relation thereto, paragraphs 1 and 2, Article 5 of the treaty define 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 through which a resident of one of the Contracting States engages in a trade or business. 2. The term 'fixed place of business' includes 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; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and SDEHCc 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." 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 seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. A permanent establishment includes also the furnishing of services, including consultancy services, by a resident of the United States (through employees or other personnel thereof), where such activities continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Accordingly, since Kiefner 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 since it did not furnish services in the Philippines for more than an aggregate period of 183 days, but only for a period of three days, Kiefner is not deemed to have a permanent establishment in the Philippines, under paragraph 2, Article 5 of the Philippines-United States tax treaty. This being the case, the service fee paid by Caguioa and Gatmaytan to Kiefner for the conduct of the subject course/workshop in the Philippines on pipeline regulations and standards in the United States shall be exempt from income tax, pursuant to paragraph 1, Article 8 of the treaty. However, under Section 108 (A) in relation to Section 105 of the National Internal Revenue Code of 1997, as amended, the service fee paid to Kiefner , a nonresident foreign person, is subject to value-added tax ("VAT"), 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, 2 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. EAaHTI 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." Relative thereto, Caguioa and Gatmaytan shall withhold VAT on the service fee at the rate of 12 percent before it remits such fee to Kiefner . Caguioa and Gatmaytan shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Caguioa and Gatmaytan 's claim of input VAT on the fee; otherwise, if it is not a VAT-registered taxpayer, Caguioa and Gatmaytan shall treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 3 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. CHEIcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Since the TTRA was filed on May 19, 2011 and the service fee subject thereof was paid later on September 2, 2011 , such fee shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) , which provides: " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Form Nos. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO." (Emphasis ours) 2. The VAT rate was increased to 12 percent beginning February 1, 2006 , in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 3. Pursuant to Section 4.112-2 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 non-residents; 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."