ITAD BIR Ruling No. 098-16

June 20, 2016 ITAD BIR RULING NO. 098-16 Article 14, Philippines-Belgium tax treaty Universal Robina Corporation 110 E. Rodriguez, Jr. Avenue Bagumbayan, Quezon City Attention: Atty. Betty Salvador Gentlemen : This refers to your tax treaty relief application filed on March 15, 2010, requesting confirmation of your opinion that consultancy fees paid by UNIVERSAL ROBINA CORPORATION (URC) to MR. PAUL COELIS (MR. COELIS) under the Consultancy Agreement (Agreement) are exempt from Philippine income tax pursuant to Article 14 of the Agreement between the Republic of the Philippines and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Belgium tax treaty). It is represented that MR. COELIS is a resident of Belgium as evidenced by the Certificate of Residence issued by the Direct Tax Administration on October 30, 2013; that MR. COELIS is presently residing at 05-04-1986 9030 Kantstraat, 13 Belgium; that he is not engaged in trade or business in the Philippines as evidenced by the Certification issued by the Department of Trade and Industry on July 16, 2010; and that, on the other hand, URC is a domestic corporation engage in agro-industrial business and is situated at 110 E. Rodriguez Avenue, Bagumbayan, Quezon City. It is further represented that URC and MR. COELIS entered into a Consultancy Agreement engaging MR. COELIS as an independent contractor whose consultancy services shall include the following: HTcADC 1. Feeds formulation for the most cost-effective/cost efficient feeds mix for the Philippine market; 2. Continuing hog genetics research in Europe and introduction of breeds best suited to Philippine farms; 3. Through farm visits, continuing evaluation of the effectiveness of the animal diet used to ensure that all sows are always performing at their best; 4. Such other related tasks as may be agreed upon between the parties. In the performance of the foregoing services, MR. COELIS stayed in the Philippines for an aggregate period of not more than 100 days in every calendar year as stipulated in the duly notarized Certification issued by the President and CEO of URC on January 28, 2010. In consideration thereof, URC agrees to pay MR. COELIS a fixed monthly service fee of EUR12,000.00, net of applicable Philippine taxes, to be remitted to Belgium on a quarterly basis, which shall be payable before the end of the month following the end of the quarter. Certification issued by the President and CEO of URC on March 14, 2014, summarizes the number of stays in the Philippines of MR. COELIS for the years 2010, 2011, 2012 and 2013, as shown below: Year Arrival Date Departure Date Number of Days 2010 January 26 February 5 11 March 24 March 30 7 June 2 June 11 10 July 14 July 20 7 October 2 October 10 9 November 9 November 17 9 Total 53 === 2011 January 18 January 26 9 March 15 March 25 11 May 24 June 3 10 July 19 July 27 9 September 15 September 19 5 September 24 October 1 8 November 15 December 2 18 Total 70 === 2012 February 8 February 17 10 March 21 April 1 12 May 2 May 11 10 July 4 July 14 11 September 26 October 7 12 November 26 December 7 12 Total 67 === 2013 February 14 February 24 11 February 27 March 15 17 April 10 April 19 10 May 21 May 31 11 July 31 August 8 9 October 4 October 12 9 November 20 November 28 9 Total 76 === It is lastly represented that the fees subject of the above request for a ruling are 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. In reply, please be informed that Section 25 (B) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "Section 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. xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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. xxx xxx xxx" In accordance with the foregoing, Article 14 (1) of the Philippines-Belgium tax treaty provides: aScITE "Article 14 Professional Services 1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State. However, such income may be taxed in the other Contracting State: a) if the recipient has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or b) if the recipient is present in the other Contracting State for a period or periods amounting to an exceeding in the aggregate 120 days in the calendar year. 2. The term 'professional services' includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." Based on the foregoing, the income derived by a resident of Belgium in respect of professional services or other independent activities of similar character shall be taxable only in Belgium. However, such income may be taxed in the Philippines if such individual has a fix base regularly available to him for the purpose of performing his activities or if the income recipient is present in the Philippines for a period or periods exceeding 120 days in the calendar days. Inasmuch as it is represented that MR. COELIS is not engaged in trade or business in the Philippines as shown in the Certification issued by the DTI and his stay in the Philippines does not exceed the 120 days threshold period under Article 14 paragraph 1 (b) of the Philippines-Belgium tax treaty in any calendar year from 2010 until 2013 in performing his independent professional services as shown in the Certification issued by the URC, the income derived by MR. COELIS in the Philippines is not subject to Philippine income tax and, consequently, to withholding tax. Furthermore, under Section 108 (A) of the Tax Code, the service fees in question, being payments for the provision of services in the Philippines by a nonresident foreign person, are subject to value-added tax ("VAT"), thus: "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 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, URC shall withhold VAT on the consultancy fee at the rate of 12 percent before remitting them to MR. COELIS. URC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If URC is VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for its claim of input tax on these payment. Otherwise, URC may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. HEITAD 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue