IdeasXMachina Advertising, Inc.

October 23, 2018 ITAD BIR RULING NO. 111-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Singapore tax treaty IdeasXMachina Advertising, Inc. Ground Floor, Frankfurt Building 146 Pasig Boulevard 1600 Pasig City Attention: AAA Gentlemen : This refers to your tax treaty relief application filed on June 30, 2016 requesting confirmation that commission paid by IdeasXMachina Advertising, Inc. ("IdeasXMachina") to Delphys Hakuhodo International Pte. Ltd. ("Delphys") is 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") . FACTS Delphys is a corporation organized and existing under the laws of Singapore and a resident thereof based on its Memorandum and Articles of Association and Certificate of Residence issued by the Inland Revenue Authority of Singapore. Delphys is engaged in advertising activities. 1 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, IdeasXMachina is a domestic corporation engaged in creative engineering. 2 CAIHTE On December 1, 2015, IdeasXMachina and Delphys entered into a Master Service Agreement where Delphys agreed to provide strategic support, regional brand information, and market intelligence involving projects with Toyota Motor Philippines ("TMP") . Delphys will assist IdeasXMachina in following-up receivables from TMP , and ensure the accuracy, timeliness, and delivery of those receivables. All profits, including media commission, agency supervision fee, final art fee, production fee, event/project management fee, less Philippine taxes, shall be split equally between IdeasXMachina and Delphys . Delphys will invoice IdeasXMachina of its commission, and IdeasXMachina will remit the commission to Delphys through bank transfer. The Agreement took effect on December 1, 2015, and remained in effect until December 31, 2016. Based on the Certification as to the Duration of Service issued by IdeasXMachina , the following personnel of Delphys were sent to the Philippines to render services under the Agreement: BBB (Japanese); CCC (Japanese); DDD (Indonesian); and EEE (Singaporean). The aggregate number of days they performed services is 43 days. Based on a sworn statement issued by IdeasXMachina , 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 proceedings, or judicial appeal of the taxpayers involved. 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." For this purpose, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty provide as follows: DETACa " 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 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; 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. In relation to furnishing of services (including consultancy services), this constitutes a permanent establishment if the enterprise, through employees or other personnel thereof, carry out this activity in a Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Delphys 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 does not furnish services in the Philippines for more than 183 days, but for 43 days only, Delphys does not have a permanent establishment with respect to services it renders for the TMP projects, pursuant to paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being so, commission paid by IdeasXMachina to Delphys for those projects is exempt from income tax under paragraph 1, Article 7 of the tax treaty. Finally, although exempt from income tax, the commission paid to Delphys is 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 by a nonresident and non-VAT registered foreign person like Delphys , are subject to VAT. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 3 IdeasXMachina shall withhold VAT on the commission at the rate of 12% before remitting it to Delphys , and IdeasXMachina shall 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 IdeasXMachina 's claim of input VAT on services rendered by Delphys in the Philippines; otherwise, IdeasXMachina 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. aDSIHc Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.sgpbusiness.com/company/Delphys-Hakuhodo-International-Pte-Ltd . 2. http://ideasxmachina.com/pages/about.php . 3. Consolidated Value-Added Tax Regulations of 2005 , as amended. n Note from the Publisher: Copied verbatim from the official document.