ITAD BIR Ruling No. 085-16

April 12, 2016 ITAD BIR RULING NO. 085-16 Article 14, Philippines-Australia tax treaty Center for International Trade Expositions and Missions Golden Shell Pavilion, ITC Complex Roxas Boulevard corner Gil Puyat Avenue Pasay City Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 22, 2012 on behalf of Mr. Michael Ronald Cleghorn ("Mr. Cleghorn") , requesting confirmation that the service fees paid by the Department of Trade and Industry ("DTI") Center for International Trade Expositions and Missions ("CITEM") to Mr. Cleghorn are not subject to Philippine income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Australia tax treaty") . It is represented that Mr. Cleghorn , with address at PO Box R1762 Royal Exchange NSW 1225, Australia, is a resident of Australia within the meaning of the Philippines-Australia tax treaty as evidenced by the Certificate of Residency issued by the Australian Taxation Office on August 31, 2011; that Mr. Cleghorn does not own or operate any business in the Philippines as shown in the Certification issued by the Department of Trade and Industry dated August 1, 2012; and that, on the other hand, CITEM, with office address at Golden Shell Pavilion, ITC Complex, Roxas Boulevard corner Gil Puyat Avenue, Pasay City, is the export promotion agency of the DTI mandated to promote the Philippines as a reliable source of high quality products and services through the organization of trade fairs, special exhibits, in-store promotion, trade mission and other promotional activities here and abroad. It is further represented that on June 16, 2011, Mr. Cleghorn and CITEM entered into a Memorandum of Agreement ("Agreement") to enhance the Manila FAME International Show beginning October 2011 onwards which shall be valid and effective for a consultancy period of 133 days with a minimum of 49 engagement days beginning the date agreed upon by Mr. Cleghorn and CITEM unless sooner revoked or cancelled by mutual agreement; that the services of Mr. Cleghorn covered the development of international consumer markets with focus on brand and product development, as well as with extensive marketing and communications, retail operations management, project management and customer service; that the duration of services of Mr. Cleghorn rendered in the Philippines was from June 16 to October 19, 2011 or an aggregate period of 133 days; and that in consideration of the foregoing services, CITEM shall pay Mr. Cleghorn Seventy Thousand Australian Dollars (AU$70,000.00) as professional fee and an additional Fifteen Thousand Six Hundred Australian Dollar (AU$15,600.00) for travelling expenses. It is finally represented that the issue or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved per the sworn certification issued by DTI dated November 15, 2011. In reply, please be informed that Section 25 (B) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident alien individual. It provides: "SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24". AScHCD However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides as follows: "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." In accordance with the foregoing, Article 14 of the Philippines-Australia tax treaty provides: "Article 14 Independent Personal Services 1. Income derived by an individual who is a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character shall be taxable only in that State. However, if such an individual a) has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; or b) in a year of income or taxable year, as the case may be, stays in the other Contracting State for a period or periods aggregating 183 days for the purpose of performing his activities; or c) derives, in a year of income or taxable year, as the case may be, from residents of the other Contracting State gross remuneration in that State exceeding ten thousand Australian dollars or its equivalent in Philippine pesos from performing his activities. so much of the income derived by him as is attributable to activities so performed may be taxed in the other State. 2. The Treasurer of Australia and the Minister of Finance of the Philippines may agree in letters exchanged for the purpose to variations in the amount specified in sub-paragraph (c) of paragraph 1 and any variations so agreed shall have effect according to the tenor of the letters. 3. The term "professional services" includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities, as well as in the exercise of independent activities of physicians, lawyers, engineers, architects, dentists and accountants." Based on the foregoing provisions, the income of a resident of Australia is taxable in the Philippines if he has fixed base in the Philippines regularly available to him for the purpose of performing his activities; if he stays in the Philippines for a period or periods aggregating 183 days in a year; or he derives in gross remuneration in the Philippines exceeding Ten Thousand Australian Dollars (AU$10,000.00) or its equivalent in Philippine Pesos from performing his activities. Considering that CITEM shall pay Mr. Cleghorn Seventy Thousand Australian Dollars (AU$70,000.00) as professional fee and an additional Fifteen Thousand Six Hundred Australian Dollars (AU$15,600.00) for travelling expenses, which is more than the threshold of Ten Thousand Australian Dollars (AU$10,000.00), this Office is of the opinion and so holds that the service income shall be subject to income tax at the rate of 25 percent as provided under Section 25 (B) of the Tax Code of 1997. Moreover, as provided under Section 108 of the Tax Code of 1997 as amended, the services performed by Mr. Cleghorn are 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%) 1 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%), after any of the following conditions has been satisfied: xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . ." (Emphasis supplied) With regard to the procedure for the withholding and the payment of the VAT, CITEM, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to Mr. Cleghorn . In remitting the VAT withheld, Mr. Cleghorn shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from CITEM if it is VAT-registered. In case CITEM is not VAT-registered, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, CITEM is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Mr. Cleghorn and the fourth copy for CITEM. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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 having a different tax treatment, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12% on 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.