Zambrano and Gruba Law Offices

October 22, 2018 ITAD BIR RULING NO. 102-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- France tax treaty Zambrano and Gruba Law Offices 27th Floor, 88 Corporate Center 141 Sedeo Street, Salcedo Village 1227 Makati City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on January 11, 2016 requesting confirmation that service fees paid by Globe Telecom, Inc. ("Globe") to Sofrecom, S.A. ("Sofrecom") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty") . 1 FACTS Sofrecom is a corporation organized and existing under the laws of France and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Direction Generale des Finances Publiques of France. Sofrecom is engaged in carrying out technical and financial studies, consultations, and operations relating to telecommunications. 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, Globe is domestic corporation engaged in the business of transmitting and receiving communications such as news, music, messages, instruction, entertainment, pictures and advertising. On February 5, 2016, Globe and Sofrecom entered into a Contract for the Performance of Services where Sofrecom agreed to provide services to Globe for the following project deliverables: HTcADC 1. Findings and recommendations on network segments (copper access network, internet protocol architecture, processes and organizations, and key performance indicators). 2. Findings and recommendations on contracts. 3. Findings and recommendations on people and skills. 4. Findings and recommendations on guidelines and best practices adopted in the telecommunication markets. In consideration, Globe will pay service fees to Sofrecom amounting to $__________ exclusive of taxes. The fees are payable in installment: 30% of the contract price as first installment, and 70% after validation and final acceptance by Globe of the final deliverables. The parties agreed that the performance of the contract shall begin retroactively on November 9, 2015. Based on a certification issued by Globe , the following personnel of Sofrecom had performed services in the Philippines under the contract: BBB (Indonesian), CCC (French) and DDD (French). They performed services on November 8-26, 2015 for a total of 19 days. Based on the Completion Certificate issued by Globe, Sofrecom has successfully performed consulting services for Globe relating to the assessment of end-to-end quality assessment of services delivered on digital subscriber line network in Manila. Based on a sworn certification issued by Sofrecom , the transaction 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 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 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 this regard, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty provide relief as follows: aScITE " 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' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period of more than six months; i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period." Under Article 7, profits derived by 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 place of management, a branch, an office, a factory, premises used as a sales outlet, and a workshop. Furnishing of services (including consultancy services) by an enterprise through employees or other personnel thereof constitutes a permanent establishment if carried in a Contracting State for a period or periods aggregating more than six months within any twelve-month period. Accordingly, since Sofrecom is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or any other fixed place of business in the Philippines, and it did not furnish services in the Philippines for more than six months within any twelve-month period, but for an aggregate of 19 days only, Sofrecom does not have a permanent establishment with respect to services it rendered to Globe , pursuant to paragraphs 1 and 2, Article 5 of the Philippines-France tax treaty. This being the case, service fees paid by Globe to Sofrecom for providing findings and recommendations on Globe 's network segments, contracts, people and skills, and guidelines and best practices in the telecommunication markets, are exempt from income tax under paragraph 1, Article 7 of the tax treaty. Finally, although exempt from income tax, the service fees paid to Sofrecom 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 Sofrecom , are subject to VAT. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 2 Globe shall withhold VAT on the service fees at the rate of 12% before remitting them to Sofrecom , 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 Globe 's claim of input VAT on the cost of services provided by Sofrecom ; otherwise, Globe 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. HEITAD Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998 , and the Protocol Amending the Agreement between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective February 1, 2013 . 2. Consolidated Value-Added Tax Regulations of 2005 , as amended. n Note from the Publisher: Copied verbatim from the official document.