ITAD BIR Ruling No. 105-11

April 7, 2011 ITAD BIR RULING NO. 105-11 Articles 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-042-00; BIR Ruling No. DA-ITAD-061-00; BIR Ruling No. DA-ITAD-062-00; BIR Ruling No. DA-ITAD-066-00; BIR Ruling No. DA-ITAD-027-05 Team Energy Corporation CTC Building 2232 Roxas Boulevard Pasay City 1300 Philippines Attention: Mr. Kazunobu Takijima VP-Controller Gentlemen : This refers to your letter dated October 3, 2007, requesting confirmation that the income payments by your company to AVIATION MANAGEMENT SYSTEMS PTE. LTD. (hereinafter referred to as "AMS") are not subject to Philippine income tax, pursuant to Article 7 of 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 (hereinafter referred to as the "Philippines-Singapore tax treaty" ). ECTIcS It is represented that AMS is a corporation duly organized and existing under the laws of Singapore per the duly authenticated certified true copy of the Certificate of Incorporation of Private Company of AMS dated June 11, 1993, with principal business address at 50 Raffles Place #34-02A, Singapore Land Tower, Singapore; that it is not registered either as a partnership or a corporation in the Philippines pursuant to a Certification of Non-registration issued by the Philippine Securities and Exchange Commission (SEC) dated August 21, 2007; that, on the other hand, TEAM ENERGY CORPORATION (hereinafter referred to as "TEC") is a corporation duly organized and existing under the laws of the Philippines with principal place of business at Ibabang Polo, Grande Island, Pagbilao, Quezon Province; that there was also MIRANT (PHILIPPINES) CORPORATION (hereinafter referred to as "MPC"), a corporation duly organized and existing under the laws of the Philippines with principal place of business at 5/F CTC Building, 2232 Roxas Boulevard, Pasay City; that pursuant to a four-company merger involving TEC, MPC and two other affiliate domestic corporations, TEC became the surviving company and MPC became one of the absorbed corporations and as such, all the rights, privileges, immunities and franchises of MPC were transferred to TEC, per the Certificate of Filing of the Articles and Plan of Merger issued by the SEC dated August 24, 2007. It is further represented that on July 1, 2006, a Contract for Aviation Consultancy Services was entered into by and between MPC and AMS whereby the latter entity agreed to provide MPC a Quality Safety Continuous Surveillance (CS) Program on MPC's facilities at Pagbilao and Sual and the aircraft operated by Inaec Aviation Corporation and Hinatuan Mining Corporation for a period of twelve (12) months commencing on July 1, 2006; that the CS Program consists of: (i) an initial detailed Technical and Operations Quality and Safety Standards Validation Audit, and (ii) a Quality and Safety Assurance program through the regular follow-on Quality and Safety Verification Audits; that the aim of the Audit is, in the main, threefold, namely, to verify that the subject company conducts its aviation business in accordance with established 'good industry practice' with regard to Quality and Safety, that they are in compliance with FAA/JAA (to choice) regulatory criteria as well as national regulatory requirements (where to a higher standard) and to verify the effectiveness of operator's documented Quality Systems and their implementation in practice; that, as to fees and charges, AMS's standard charge rates for single adhoc audits are US$950 per consultant mandays and US$500 per travel day; that for the Quality and Safety CS Program, the remuneration will be based on a quarterly retainer of US$2,500 (US Dollars Two Thousand Five Hundred Only) payable after each audit, and that the fixed fee shall cover the following services: Technical Quality Verification Four (4) per annum Operational Safety Verification One (1) per annum Verification of Ground Support Facilities One (1) per annum Helipad/Helideck Safety Inspection One (1) per annum That either Party may terminate the Contract for its sole convenience by giving the other Party thirty (30) days prior written notice. It is finally represented that the issue or transaction subject of the above request for ruling is 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 per the Affidavit executed by the Corporate Secretary of TEC dated February 1, 2008. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended by Republic Act No. 9337 , provides, viz. : aIDHET "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 . . . profits and income , . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Emphasis supplied) xxx xxx xxx" However, Section 32 (B) (5) of the same Code provides, viz. : "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: 1 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." Accordingly, Article 7 (1), and in relation thereto, Article 5 of the Philippines-Singapore tax treaty provide, viz. : "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. xxx xxx xxx" "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 specially 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; HTCISE 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 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." xxx xxx xxx" Based on the foregoing, the service fees of TEC to AMS shall not be subject to Philippine income tax if AMS, being a resident of the Singapore, does not have a fixed place of business in the Philippines; or if it has such a fixed place, said fees are not attributable to such fixed place. However, if the employees of AMS shall be required to render services in the Philippines and such furnishing of services continue within the Philippines for a period of more than 183 days within any twelve-month period, such shall be deemed to constitute as a permanent establishment of AMS in the Philippines. Accordingly, such service fees shall be subject to Philippine income tax. Considering that AMS does not have a fixed place of business in the Philippines, and that the duration of stay of AMS's personnel in the Philippines in the rendition of services to TEC pursuant to the abovementioned Contract for Aviation Consultancy Services is less than 183 days, per the Certification executed by the Corporate Secretary and Legal Counsel of TEC dated February 13, 2008, then AMS is not deemed to have a permanent establishment in the Philippines to which the subject service fees may be attributed. In view thereof, this Office is of the opinion and so holds that income from services by TEC to AMS under the subject contract shall not be subject to Philippine income tax pursuant to Article 7, in relation to Article 5, of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-042-00 dated February 10, 2000; BIR Ruling No. ITAD-061-00 dated March 21, 2000; BIR Ruling No. DA-ITAD-062-00 dated March 21, 2000; BIR Ruling No. DA-ITAD-066-00 dated April 6, 2000; BIR Ruling No. DA-ITAD-027-05 dated April 6, 2005) However, Section 108 of the Tax Code of 1997, as amended, provides that the above fees for such services rendered in the Philippines are subject to value-added tax (VAT): "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%), 2 after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . ." (Emphasis supplied) With regard to the procedures for withholding and paying the VAT, TEC, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to AMS. In remitting the VAT withheld, TEC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from TEC if a VAT-registered taxpayer. In case TEC is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, TEC is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for AMS and the fourth copy for TEC as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) EIcSTD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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 Footnotes 1. TITLE II TAX ON INCOME. 2. The VAT rate was increased to 12% on February 1, 2006 , in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.