Punongbayan and Araullo

October 22, 2018 ITAD BIR RULING NO. 099-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty Punongbayan and Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on November 27, 2015 requesting confirmation that software payments made by Del Monte Philippines, Inc. ("Del Monte") to Workflow Management and Document Consulting Asia Pte. Ltd. ("Workflow") are exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . CDHSac FACTS Workflow is a corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association, and Business Profile issued by the Accounting and Corporate Regulatory Authority of Singapore, and Certificate of Residence issued by the Inland Revenue Authority of Singapore. Workflow is engaged in software development and programming activities and in providing related consultancy services. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Del Monte is a domestic corporation engaged in processing, manufacturing, and packing pineapple and tomato products (pineapple solids, aseptic juices, pineapple crush, and concentrates, and tomato products and low-acid bean products). 1 On August 14, 2015, Del Monte and Workflow entered into a Software Maintenance Agreement where Workflow agreed to provide maintenance to Del Monte for the following software developed by Workflow : 1. WMD xFlow Base License 2. WMD xFlow Capture 3. WMD xFlow Invoice Solution 4. WMD xFlow Interface 5. WMD xFlow Interface Mail 6. WMD xFlow Scan-Client 1st 7. WMD xFlow Scan-Client 2nd 8. WMD xFlow Content Server 9. WMD xFlow Solution Designer 10. WMD xFlow Interface Late Archiving 11. WMD xFlow SD Orders Solution Maintenance includes licensing of the latest released program version of the software in the form of service releases and updates; software documentation updates; elimination of errors in the program code and documentation; and consulting services in writing and by phone in the event of errors. Phone consulting services are available on weekdays from 8 A.M. to 6 P.M. Singapore time. In consideration, Del Monte will pay Workflow an annual software maintenance fee amounting to $ __________ . The Agreement is initially concluded for a fixed term of two years from the time of its execution and subject to automatic renewal thereafter. Based on Certifications of Duration of Services issued by Del Monte , the following personnel of Workflow had performed services in the Philippines under the agreement: BBB (Indian) as Project Manager and CCC (Indian) as Capture Expert. They performed services in 2015 on April 6-8 and October 13-17, 20-24, and in 2016 on January 11-16, for a total of 18 days. Based on Certification of No Pending Claim issued by Del Monte , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, 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 foreign corporation not engaged in trade or business 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 s ources 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." For this purpose, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty provide relief as follows: ITESAc " 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." " 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' includes especially 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, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and 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." 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 which the enterprise has therein. 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 seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. Furnishing of services (including consultancy services) by an enterprise through employees or other personnel thereof constitutes a permanent establishment if carried out in a Contracting State for a period or periods aggregating more than 183 days. SACEca Accordingly, since Workflow 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, so far, furnish services in the Philippines for more than 183 days, but for an aggregate of 18 days only, Workflow does not have a permanent establishment with respect to services it rendered to Del Monte , pursuant to paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being the case, payments made by Del Monte to Workflow for providing software maintenance to Del Monte , in the form of service releases and updates, software documentation updates, elimination of program code and documentation errors, and consulting services, are exempt from income tax under paragraph 1, Article 7 of the tax treaty. Finally, although exempt from income tax, payments made to Workflow for services rendered in the Philippines are subject to value-added tax ("VAT") at the rate of 12% under Sections 108 (A) and 105 of the Tax Code, 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." Under the VAT system, services rendered in the Philippines, even if by a nonresident and non-VAT registered foreign person like Workflow , are subject to VAT. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 2 Del Monte shall withhold VAT on the payments at the rate of 12% before remitting them to Workflow , 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 Del Monte 's claim of input VAT on the cost of services rendered by Workflow in the Philippines; otherwise, Del Monte may treat the 'passed-on' VAT as asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 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. https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=5583158 . 2. Consolidated Value-Added Tax Regulations of 2005 , as amended. n Note from the Publisher: Copied verbatim from the official document.