ITAD BIR Ruling No. 113-15

April 30, 2015 ITAD BIR RULING NO. 113-15 Article 5 (Permanent Establishment) and Article 7 (Business Profits) Philippines-Netherlands tax treaty STMicroelectronics, Inc. Light Industry & Science Park Of the Philippines II No. 9, Mountain Drive, Real St. Brgy. La Mesa, Calamba City Laguna Attention: Ms. Virginia Melba A. Cuhayon General Manager Gentlemen : This refers to your tax treaty relief application filed on June 7, 2013 requesting confirmation that service fees paid by STMicroelectronics, Inc. ("STMI") to STMicroelectronics N.V. ("STNV") are exempt from income tax pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . Facts STNV is a foreign corporation and a resident of the Netherlands based on its amended Articles of Association and Declaration of Residence issued by the Tax Administration of Rivierenland in the Netherlands on March 15, 2013. STNV is located at Schiphol Boulevard 265, 1118 BH Luchthaven, Schiphol, Netherlands. STNV is a company with an authorized capital of 1,809,600 euros and divided into 1,200,000,000 ordinary shares and 540,000,000 cumulative preference shares, each share with a par value of 1.04 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on June 5, 2013. On the other hand, STMI is a domestic corporation located at Light Industry & Science Park of the Philippines-II, No. 9, Mountain Drive, Real Street, La Mesa, Calamba City, Laguna, Philippines. On May 1, 2013, STNV and STMI entered into an Agreement which shall be effective on the same date, for an initial period of one year and shall be renewed for successive periods of one year unless terminated by either party with at least a three month prior written notice expiring at the end of the initial term or any subsequent term. Under the Agreement , STNV will provide assistance to STMI in finance and accounting services, legal and patent services, personal and social matters, data processing and general management. In consideration of the assistance provided by STNV pursuant to the Agreement , STMI shall pay STNV a provisional amount determined at the beginning of each year using an amount corresponding to the ratio for each calendar year between the budgeted cost of services to be provided by STNV and the budgeted Net Sales 1 or Added Value 2 of all companies belonging to the Group 3 and a final amount corresponding to the ratio between the actual cost of services provided by STNV to all companies belonging to the Group who are able to benefit from such services and the Added Value of all companies belonging to the Group for each calendar and applied to the actual amount of STMI's Added Value during each year before applying any taxes. The amounts provided shall be payable on a quarterly basis on receipt of STNV's invoice by STMI. According to the Certification issued by STMI on December 23, 2013, all services by STNV were rendered outside the Philippines and that since May 1, 2013, no employee of STNV travelled to the Philippines to perform any services as specified in the Agreement . Based on the Certification issued by STMI on July 15, 2013, the issue or transaction subject of the above request for ruling is not under investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. Based on the Certification issued by Citibank, N.A. Manila 4 on November 6, 2013, STMI made payments to STNV on as follows: Date of Remittance Gross Amount (inclusive of charges) Net Amount October 23, 2013 US$1,687,010.65 US$1,687,000.00 Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, applies, in general, to income received by nonresident foreign corporation. It provides: "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, as amended, provides: "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 particular case, Article 7 (1), in relation to Article 5, of the Philippines-Netherlands tax treaty provides: " Article 7 Business Profits 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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 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 especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. xxx xxx xxx " Based on the aforequoted provisions, a corporation which is a resident of the Netherlands and does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a corporation which is a resident of the Netherlands may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees or other personnel continue for a same or a connected project within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Since the services rendered by STNV are performed outside the Philippines, the compensation for such services constitutes as income from sources without the Philippines and not subject to Philippine income tax pursuant to Section 42 (A) (3) of the Tax Code, as amended, which states that: "SEC. 42. Income from Sources Within the Philippines . (A) Gross Income from Sources Within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services . Compensation for labor or personal services performed in the Philippines." Similarly, the service fees are not subject to ten percent (10%) [now 12%] value added tax (VAT) imposed under Section 108 (A) of the Tax Code, as amended: "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: . . . The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration. . ." Section 108 (A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, as long as the subject services will be done outside the Philippines, the service fees to be paid by STMI to STNV are therefore exempt from VAT. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Net Sales" means all sales by STMI before taxes and excluding inter-company transfers. 2. "Added Value" means the sum of STMI's net sales and purchases of products and/or dice to third parties, as well as to other companies of the Group in a calendar year, decreased by the sum of STMI's purchases of products and/or dice from other companies of the Group during the same period as well as the value of the services rendered to third parties, as well as to other companies of the Group in a calendar year. 3. "Group" means STNV and its subsidiaries. 4. Located at 8741 Paseo de Roxas, Makati City. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.