Ortiz and Dela Cruz Law Offices

October 22, 2018 ITAD BIR RULING NO. 098-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- United Kingdom of Great Britain and Northern Ireland tax treaty Ortiz and Dela Cruz Law Offices Unit 506, Taipan Place F. Ortigas Jr. Road Ortigas Center 1605 Pasig City Attention: AAA BBB CCC Gentlemen : This refers to your tax treaty relief application filed on October 6, 2017 requesting confirmation that service fees paid by Occidental Data Corporation ("Occidental") to Aperta Ltd. ("Aperta") (formerly Macrocom (181) Ltd. ) are exempt from 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") . HCDAcE FACTS Aperta is a corporation organized and existing under the laws of the United Kingdom and a resident thereof based on its amended Articles of Association, and Certificate of Incorporation of a Private Limited Company issued by the Registrar of Companies of Scotland, and Certificate of Residence issued by Her Majesty's Revenue and Customs of the United Kingdom. The primary object of Aperta is to carry on the business of computer consultants, operators, statisticians and engineers, compilers of computer programs and data programs, mathematicians, electricians, electronics engineers, computer programmers, and agents. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Occidental is a domestic corporation engaged in the business of procurement, marketing and maintenance of computer software. On August 1, 2014, Occidental and Aperta entered into a Distributor Agreement where Aperta granted Occidental a non-exclusive license in the Philippines to market and provide support to software products developed and owned by Aperta . The end-users of these products consist of financial institutions in the Philippines. As licensor, Aperta will provide the following services to Occidental : a) Support and maintenance services. Fees for these services are payable annually in advance; b) Technical and support training to Occidental 's support engineers at a time and location specified by Aperta ; and c) Product customization and installation training. Title to all software products will remain with Aperta , and Occidental acquires no right to any software, except as an end-user. The agreement took effect on August 1, 2014 and will be in effect indefinitely unless terminated by either party. Based on the Summary of Contents of Passport of DDD, an Indian, he rendered services in the Philippines pursuant to the agreement for a total of 48 days in 2015 (March 18-25, June 16-20, September 6-October 10); 45 days in 2016 (April 18-May 19, October 2-14); and 21 days in 2017 (January 2-22). Based on a sworn statement issued by Occidental , the income subject of this ruling is not under administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings, or judicial appeal. 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 by a nonresident foreign corporation is subject to income tax at the rate of 30%, 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 Incom e . 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." For this purpose, paragraph 1, Article 7 and paragraphs 1, 2 and 3, Article 5 of the Philippines-United Kingdom tax treaty provide: IcTaAH " 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." " 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." Under Article 7, profits derived by an enterprise of a Contracting State in the other Contracting State may be taxed in the other State if the profits are attributable to a permanent establishment situated in that State. Under Article 5, the term 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. A permanent establishment includes the furnishing of services by an enterprise, through employees or other personnel thereof, which continues in a Contracting State for a period exceeding in the aggregate 183 days within any twelve-month period. In the instant case, since Aperta 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 an aggregate 183 days within any twelve-month period, Aperta does not have a permanent establishment with respect to services it rendered to Occidental , pursuant to paragraphs 1, 2 and 3, Article 5 of the Philippines-United Kingdom tax treaty. This being the case, payments made by Occidental to Aperta under the agreement for providing software support and maintenance services, technical and support training, and product customization and installation training, are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. Finally, although exempt from income tax, the service fees are subject to value-added tax ("VAT") 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: 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." ISTCHE Under the VAT system, services rendered in the Philippines, even if done by a nonresident and non-VAT registered foreign person like Aperta , are subject to VAT. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 1 Occidental shall withhold VAT on the payments at the rate of 12% before remitting them to Aperta , and file BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation for Occidental 's claim of input VAT on the cost of services rendered by Aperta in the Philippines; otherwise, Occidental may treat the 'passed-on' VAT as asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 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. Consolidated Value-Added Tax Regulations of 2005 , as amended. n Note from the Publisher: Copied verbatim from the official document.