United Coconut Planters Bank

October 22, 2018 ITAD BIR RULING NO. 101-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- United Kingdom of Great Britain and Northern Ireland tax treaty United Coconut Planters Bank UCPB Corporate Offices 7909 Makati Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on November 25, 2013 requesting confirmation that service fees paid by United Coconut Planters Bank ("UCPB") to Standard Chartered Bank ("Standard Chartered") 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") . It is represented that Standard Chartered is a corporation organized and existing under the laws of the United Kingdom and a resident thereof based on its Charter, By-Laws and Rules and its Certificate of Residence issued by Her Majesty's Revenue and Customs of the United Kingdom; that the object of Standard Chartered is to carry on banking businesses in the United Kingdom and other parts of the world through banks and bank branches; that Standard Chartered is licensed to engage in business in the Philippines based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission; that, on the other hand, UCPB is a domestic corporation and a universal bank; and that UCPB provides financial products and services to corporations, private and government institutions, middle market companies, small- and medium-sized businesses, and individuals in the Philippines. 1 ATICcS It is also represented that on March 12, 2013, UCPB and Standard Chartered (though Standard Chartered Bank Singapore Branch ) entered into an Agreement where Standard Chartered agreed to provide financial advisory services to UCPB relating to fundraising transactions and merger transactions ("project") ; that fundraising transactions means the raising of funds through equity, or equity-like capital, or hybrid capital from other persons and entities; that merging transactions means the transfer of UCPB 's business, assets or voting securities, or right or a portion of its revenues or income to other persons and entities; that Standard Chartered will perform the following services to UCPB : a) Work with UCPB in the selection of external experts (accountants, expert appraisers, and legal counsels) needed for a transaction; b) Assist and advise UCPB in the preparation of information and disclosures for external experts to determine the fair value of UCPB 's latest balance sheet and its perspectives on implied capital requirements; c) Produce a valuation report containing recommendations on appropriate valuation methodologies and valuation conclusions; and d) Assist and advise UCPB on the form and structure of any proposed transaction. And that in consideration, UCPB will pay service fees to Standard Chartered consisting of the following: a) Fixed fee . A fee of $__________ payable upon submission of a valuation report of any proposed transaction, and an additional fee of $__________ payable upon completion of the restructuring phase of the transaction; b) Success fee . For any fundraising transaction, a fee of equal to 0.90% of any aggregate consideration payable upon the completion of any proposed transaction. For any merger transaction, a fee of $__________ payable upon completion of the transaction; c) Contingent fee . A monthly fee of $__________ accruing from March 1, 2014 until signing of the definitive documentation in relation to the subscription of all outside capital, payable only upon successful completion of any proposed transaction; and d) Discretionary fee . A fee equal to 0.10% of any aggregate consideration payable upon completion of any proposed transaction and entirely at the full discretion of UCPB . It is further represented that based on the Workplan and Progress of the project, the project has a timetable of 31 months from March 2013 to September 2015; that Standard Chartered will provide services through Singapore-based personnel and local-based personnel; that Singapore personnel are BBB, CCC, DDD, EEE, FFF, GGG, HHH, III and JJJ; that local personnel are KKK, LLL and MMM; and that local personnel will provide services in May to August 2013, April to December 2014, and January to March and May to September 2015. It is further represented that based on the sworn statement issued by UCPB on November 25, 2013, the Singapore-based personnel who rendered services in the Philippines in 2013 are BBB, GGG, CCC, NNN, HHH and OOO; and that the services are rendered for 42 days (January 22, 23; February 15, 28; March 1, 12, 13; April 17, 18, 23-24; May 16; June 4, 5, 9-13, 19, 23; July 10, 11, 22, 25, 26; August 1, 2, 13-16, and September 1-3, 11-17, 20). It is finally represented that based on another sworn statement issued by UCPB on November 21, 2013, 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. 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%)." TIADCc 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, 2 and 3, Article 5 of the Philippines-United Kingdom tax treaty provide: " 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 the other 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, for a period exceeding in the aggregate 183 days within any twelve-month period. In the instant case, since the provision of financial advisory services by Standard Chartered (through Standard Chartered Bank Singapore Branch ) has a timetable of 31 months, where local-based personnel alone of Standard Chartered will render services for nine months (270 days) in 2014 (April to December) and eight months (240 days) in 2015 January to March and May to September 2015, the whole project constitutes a permanent establishment for Standard Chartered under paragraph 3 (b), Article 5 of the Philippines-United Kingdom tax treaty. Accordingly, service fees paid by UCPB to Standard Chartered for the whole project are subject to income tax in the Philippines pursuant to paragraph 1, Article 7 of the tax treaty. The income tax rate is 30% under Section 28 (B) (1) of the Tax Code. AIDSTE Finally, 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%). . ." Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 2 UCPB shall withhold VAT on the fees at the rate of 12% before remitting them to Standard Chartered . UCPB shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation for UCPB 's claim of input VAT on the fees; otherwise, UCPB may treat the passed-on VAT as part of the cost of the services and treat the same 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. https://www.ucpb.com/about/history/ . 2. Entitled 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) . n Note from the Publisher: Copied verbatim from the official document.