ITAD BIR Ruling No. 146-12

March 30, 2012 ITAD BIR RULING NO. 146-12 Articles 5 (Permanent Establishment), 7 (Business Profits), 12 (Royalties) and 23 (Non-discrimination); Philippines-Singapore tax treaty Willimson, Inc. Waltermart Building 8001A EDSA, Veterans Village Quezon City Attention: Ms. Florence D. Sacramed Vice President for Finance Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 10, 2010 requesting confirmation that service fees and royalties paid by Willimson, Inc. ("Willimson") to Ascott International Management (2001) Pte. Ltd. ("Ascott") (originally Liang Court Hospitality (Singapore) Pte. Ltd., then Somerset International Management (Asia Pacific) Pte. Ltd.) are subject to preferential taxation 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 Ascott is a corporation organized and existing under the laws of Singapore and is a resident thereof based on its Certificate of Incorporation, as amended, issued by the Registrar of Companies and Business in Singapore on July 12, 1993, and on its Certificate of Residence issued by the Inland Revenue Authority of Singapore on August 20, 2010. Ascott is situated at 8 Shenton Way, Singapore. Ascott is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 23, 2010. On the other hand, Willimson is a domestic corporation situated at Waltermart Building, 8001A EDSA, Veterans Village, Quezon City, Philippines. On June 21, 2010, Willimson and Ascott entered into a Technical Advisory Agreement where Ascott agreed to provide Technical Advisory Services to Willimson relating to the Property. Property means that part of the land located at Fort Bonifacio, Taguig City, Philippines, comprising the buildings erected or to be erected thereon which shall include serviced residences, corporate leasing, commercial spaces and all facilities, appurtenances and equipment in or servicing or relating to that part of the land, including the heating system, air-conditioning chillers, cooling towers, air-conditioning system, utilities, plumbing and electrical equipment, walk-in freezers, cold rooms, air-handling units, water tanks, storage tanks, hot water boilers, steam generators, outdoor and indoor signs and glass and service elevators. Technical Advisory Services means HIAESC 1. Services rendered for planning, design, engineering and construction of the Property, which include, among others: Concept design review Space planning Interior design review Structure cabling review (date, voice, broadband) Furniture, fittings and equipment requirements review 2. Services rendered for the pre-opening of the Property, which include, among others: Provide guidelines on pre-opening systems, processes and requirements for operational set up Assistance in preparation and review of detailed pre-opening expenses Provide guidelines and review of human resources and administration Provide guidelines and review of operations policies and procedures on guest service housekeeping, Engineering, and security crisis management Provide guidelines and review on the procurement of cleaning services, laundry services, pest control, and landscaping 3. Services relating to sales and distribution, which include, among others: market and competitor analysis demand and supply study identifying of market segments distribution program set up and launch rate structure pricing strategies by channels third party commissions 4. Services relating to brand and marketing communications strategy, which include, among others: Objective and key communication parameters Marketing communication plan Media plan Public relation plan 5. Services relating to information technology systems, which include, among others: Local servers and backup system ScTIAH Computers, printers and other hardware peripherals Telephony system Guest high speed internet access system 6. Services relating to finance such review of financial policies, practices and internal controls. Ascott-Singapore will provide the Technical Advisory Services during the Pre-Opening Term of the Agreement, which commences on the date of signing the Agreement on June 21, 2010, up to the Project Handover Date on July 1, 2014. In consideration, Willimson will pay service fees to Ascott equivalent to US$280,000.00, payable as follows: Claim in Cumulative percentage percentage (i) Initial down payment of the service 20 percent 20 percent fees upon the execution of the Agreement or the first technical meeting between Ascott and Willimson, whichever is earlier. (ii) Upon review of the conceptual 20 percent 40 percent design by Ascott. (iii) Upon completion of mock-up 20 percent 60 percent serviced residence unit. (iv) The balance of 40 percent will be 10 percent x 4 100 percent paid in four equal installments of 10 percent each at regular intervals in the interim period commencing on the completion of mock-up serviced residence unit and ending on the Project Handover Date on July 1, 2014. The fourth installment will be paid within 14 days from that date. Willimson has the right to develop, construct and operate the Property and the exclusive and unconditional rights to the Property pursuant to an Agreement dated June 21, 2010 between Willimson and WJGlobal, a domestic corporation which owns the land where the Property will be constructed. Willimson intends that the Property be operated as an 'Ascott' serviced residence and corporate leasing. Based on the Certification issued by the Vice President for Finance of Willimson on March 18, 2011, Ascott appointed Mr. Ong Kian Tiong Alfred to render the Technical Advisory Services to Willimson under the Agreement. Mr. Alfred was in the Philippines on September 14 to 17, 2010 to monitor, observe, make recommendations, attend meetings and discussions, render technical assistance and other services related to the Project. Based on the letter issued by the Vice President for Finance of Ascott on October 6, 2011, Ascott, to date, has not received any payment from Willimson under the Agreement. On June 21, 2010, Willimson and Ascott entered into a License Agreement where Ascott granted Willimson a non-exclusive and non-transferable license to use the Trade Marks at Fort Bonifacio, Taguig City, Philippines, where the Property (as described above) is located, solely for the purpose of the Business. Trade Marks means those registered and unregistered trademarks belonging to Ascott. Business means operating, managing, promoting, marketing and maintaining the serviced residences in the Property known as 'Ascott on Fifth' or such other derivative trade names as may be selected and approved by Ascott. In consideration, Willimson will pay royalties to Ascott equivalent to 0.5 percent (for the first three years) and 1 percent (for the fourth year and onwards) of the Total Revenue derived by Willimson from the Business. STaCIA Total Revenue means, in relation to the Property and to any fiscal year (or part thereof),all income accruing or resulting from the operation of the Property for that fiscal year (or part thereof) calculated in accordance with the generally accepted accounting practices in the Philippines and with the Uniform System of Accounts for the Lodging Industry, 9th Revised Edition, or any subsequent revisions thereto. The royalties will computed based on the Total Revenue of Willimson every month and paid within 14 days after the end of the month and accompanied by a royalty statement. The Agreement will remain in effect indefinitely unless terminated. Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010"), effective November 4, 2010, any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau before the first taxable event subject of the TTRA, thus: " Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under the RMO. " (Emphasis ours) In view of the foregoing, since the Technical Advisory Agreement and the License Agreement were signed on June 21, 2010, which thereafter give rise to the payment of service fees and royalties by Willimson to Ascott, but since the subject TTRA was filed only on December 10, 2010, this Office hereby DENIES relief on those service fees and royalties (if any) paid on and before such date of filing on December 10, 2010, pursuant to Section 14 of RMO 72-2010. Accordingly, these payments shall be subject to income tax at the rate of 30 percent of the gross amount thereof under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, 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: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." On the other hand, the taxation of service fees and royalties paid by Willimson to Ascott on December 11, 2010 and thereafter will be decided if Ascott has a permanent establishment in the Philippines to which such payments are attributable or effectively connected. Paragraph 1, Article 7, and paragraph 4, Article 12, of the Philippines-Singapore 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 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. " AETcSa "Article 12 ROYALTIES xxx xxx xxx 4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the recipient of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14 of this Agreement, as the case may be, shall apply ." (Emphasis ours) In relation to a permanent establishment, paragraphs 1 and 2, Article 5 of the treaty mention: "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 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." With respect to the provision of technical advisory services by Ascott to Willimson on the planning, design, engineering and construction of buildings in the Philippines for serviced residences, corporate leasing, and commercial spaces ("Project"), under subparagraph (i) above, Ascott will be deemed to have a permanent establishment if it undertakes this activity or activities for more than 183 days. HCITcA Relative thereto, since the Project will be completed by Willimson within 48 months, from June 21, 2010 to July 1, 2014 ("Project Handover Date"), and Ascott, as contracted by Willimson, will supervise all activities on the Project (planning, design, engineering, construction, operation, etc.) throughout the entire period where it had already appointed its personnel, Mr. Ong Kian Tiong Alfred, for this purpose, Ascott is deemed to have a permanent establishment in the Philippines with respect to such supervisory activities, under paragraph 2 (i), Article 5 of the Philippines-Singapore treaty. Concerning the time when such a permanent establishment begins to exist, the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 2010) mention that Ascott begins to have a permanent establishment from the date it begins its work in the Philippines, including any preparatory work where the construction is to be established, until it completed such works or permanently abandoned them, to wit: "19. A site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established, e.g.,if he installs a planning office for the construction. In general, it continues to exist until the work is completed or permanently abandoned. A site should not be regarded as ceasing to exist when work is temporarily discontinued. Seasonal or other temporary interruptions should be included in determining the life of a site. Seasonal interruptions include interruptions due to bad weather. Temporary interruption could be caused, for example, by shortage of material or labour difficulties . Thus, for example, if a contractor started work on a road on 1 May, stopped on 1 November because of bad weather conditions or a lack of materials but resumed work on 1 February the following year, completing the road on 1 June, his construction project should be regarded as a permanent establishment because thirteen months elapsed between the date he first commenced work (1 May) and the date he finally finished (1 June of the following year).If an enterprise (general contractor) which has undertaken the performance of a comprehensive project subcontracts parts of such a project to other enterprises (subcontractors),the period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project. The subcontractor himself has a permanent establishment at the site if his activities there last more than twelve months." (Page 100) (Emphasis ours) Moreover, as stated in the commentaries, Ascott is not deemed to cease to have a permanent establishment by reason of seasonal or other temporary interruptions such as bad weather, shortage of material, or labour difficulties. Considered to have a permanent establishment, the service fees and royalties paid by Willimson to Ascott on December 11, 2010 and thereafter shall be subject to income tax at the rate of 30 percent based on the taxable amount 1 thereof under Section 28 (B) (1) of the Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." This treatment is in accordance with paragraph 3, Article 7, and paragraph 2, Article 23, of the Philippines-Singapore tax treaty, where Ascott, as having a permanent establishment in the Philippines, shall be allowed to deduct certain expenses on the service fees and royalties it receives from Willimson and connected to the Project, and where such allowance is available to domestic corporations in the Philippines carrying on the same activities, to wit: "Article 7 BUSINESS PROFITS xxx xxx xxx 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether included in the State in which the permanent establishment is situated or elsewhere." IcHEaA "Article 23 NON-DISCRIMINATION xxx xxx xxx 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities." Finally, under Section 108 (A) of the Tax Code, as amended, the service fees and royalties in question, being payments for the supply of services and the lease of intangible property ( 'Ascott' related trademarks) in the Philippines, are subject to value-added tax ("VAT"),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, 2 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." Relative thereto, Willimson shall withhold VAT on the payments at the rate of 12 percent before remitting them to Ascott. Willimson shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).If Willimson is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Willimson's claim of input tax on the payments; otherwise, it may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 3 Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "SEC. 31. Taxable Income Defined. The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws." 2. The VAT rate was increased to 12 percent beginning 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. 3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (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), which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600),which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense',whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made."