ITAD BIR Ruling No. 148-12

April 3, 2012 ITAD BIR RULING NO. 148-12 Articles 7 and 5, Philippines-France tax treaty; BIR Ruling No. ITAD 47-05 Du-Baladad and Associates Law Office 20th Floor, Chatham House Herrera cor. Valero Streets 1227 Makati City, Philippines Attention: Benedicta Du-Baladad Managing Partner Gentlemen : This refers to your Tax Treaty Relief Application filed on September 3, 2010, on behalf of your client, TOTAL (PHILIPPINES) CORPORATION ("TPC"),requesting confirmation that the payments made by TPC to TOTAL RAFFINAGE MARKETING S.A. ("TRM") under the General Assistance Agreement are not subject to Philippine 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"). It is represented that TRM is a nonresident foreign corporation organized and existing under the laws of France with registered office address at 24 Cours Michelet-92800 Puteaux, France per Certificate of Residence issued by the Direction Des Grandes Enterprises dated May 21, 2010; that TRM's main line of business is providing support services in the refining and marketing businesses of the member companies of the Total Group; 1 that TPC is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated July 12, 2010; and that, on the other hand, TPC is a domestic corporation with office address at Penthouse, PhilPlans Corporate Center, 1012 Triangle Drive, North Bonifacio, Bonifacio Global City, Taguig. It is also represented that on May 10, 2010, a General Assistance Agreement ("Agreement") was concluded by TPC and TRM providing for the following terms: 1. TRM shall provide TPC 'Indirect Services' which includes: a. Health, Safety and Environment Providing support in the improvement and implementation of programmes aiming to improve Health, Safety and Environment performance. CSTDEH b. Corporate Affairs b.1. Purchasing function Advice and support in relation with purchasing function by methodically managing purchasing activities and systematically seeking purchasing synergies within the Total Group's Refining and Marketing business ("R&M Business") [business trainings, providing appropriate tools, globalised negotiation, launching on global tenders, development of e-platforms. ..]. b.2. Legal function Support and legal advice: managing litigation, taking part in negotiations, contract drafting, legal optimization of the operations, circulation of regulations affecting R&M Entities activities, in the different areas of law. b.3. Organization and Methods Support in business project management on all globalized information system within the R&M Business. b.4. Quality, Innovation, Safety and Sustainable Development Drawing up policies relating to Quality, Innovation, Security and Sustainable Development and support in the implementation of these guidelines within the R&M Entities. b.5. Finance Monitoring R&M Entities finance. Managing credit, price and foreign exchange risk management, financing, investment, informing the R&M Entities on national and international accounting standards (training and help in implementation),optimization of R&M Entities and participations structures. CTEacH Support and advice in matters relating to taxation within the framework of some activities performed out of France. Support and advice in customs-related issues within the framework of some activities performed out of France. c. Marketing fuels c.1. Marketing Europe (HQ) Management and organization of the Marketing subsidiaries across Europe, coordination of the following activities: logistics, marketing development, cards development and motorsports division. c.2. Logistics In charge of strengthening industrial and transport risk control, improving the competitiveness of the logistics chain, and ensuring that the R&M branch has, in its logistics businesses, the necessary human skills to achieve its operational targets. c.3. Marketing Development Defines marketing strategies and steer development, ensures the consistency of business communication, assists subsidiaries in achieving their business objectives by providing them with marketing tools (concepts, template plans, standards, methods, systems and training). c.4. Training Center In charge of structuring the training programs and designing the modules and deployment in order to optimize the efficiency of training sessions within the R&M Entities. acIASE c.5. Cards Development In charge of piloting the "fuel cards" business development as well as making available the Cards information system and operating the related logistics. c.6. Motorsport Negotiation and management of sponsorship agreements with manufacturers, in order to maximize and capitalize on the events. d. Specialties d.1. Specialties Division (HQ) In charge of all R&M activities within its scope of operation. d.2. Lubricants As support provider for R&M Entities, portion of costs borne by the General Management, HSEQ Management, strategy and international partners, purchasing and operations. Provide to commercial team: services, constructors recommendations and technical support, necessary to their enhancement. Defines communication channels with external stakeholders. Share of costs related to recommendation agreement with car manufacturers. Build development of new partners and nurture relationship with car manufacturers on a day to day basis. d.3. Bitumen Ensuring the development and profitability of bitumen activity within the R&M Business. Thus, defines the commercial strategy, marketing strategy and optimization on the supply chain. e. Business Units/ Zone Division (HQ) e.1. Refining Division Management of refining operations as well as the functional supporting activities required for a smooth running of operations relating to these operations. e.2. Asia Pacific Division Ensuring the management and the development of the R&M Business of the Asian area. e.3. Latin America and Caribbean Division Ensuring the management and the development of the R&M Business on the "Latin America-Caribbean" area. e.4. Northern, Central and Eastern Europe Division Ensuring the management and the development of the R&M Business on the northern, central, and eastern Europe area. 2. The Indirect Services will not, save in exceptional circumstances, be provided within the Philippines; 3. The consideration for the services rendered shall be determined on the basis of the actual cost 2 borne by TRM for the performance of the Indirect Services, plus a mark-up 3 applied on part of these costs, in compliance with the "cost plus method" customarily applied in such type of transaction; and DSCIEa 4. The Agreement shall be effective from January 1, 2010 and shall remain in force until December 31, 2010, subject to renewal for subsequent terms of one (1) year, unless terminated by either TRM or TPC. It is likewise represented that the Indirect Services would be performed in the Philippines only in exceptional circumstances and only when necessary, thus the same will in no case exceed six months within any twelve-month period; and lastly, per Sworn Statement of TPC dated July 15, 2010, the services fees paid to TRM are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to profits and income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: cDTSHE "Section 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. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-France tax treaty, which, in its Article 7, provides: "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" Based on the foregoing, the profits of a French enterprise shall be taxable only in France unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the French enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by TRM for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the Philippines-France tax treaty provides: "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; CDHcaS 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. xxx xxx xxx" Based on the Certification of Non-Registration of Corporation/Partnership dated July 12, 2010, issued by the Securities and Exchange Commission that TRM is not registered either as a corporation or as a partnership in the Philippines, it is deemed that TRM does not have a branch or an office, and, consequently, a permanent establishment, in the Philippines at least as of the date of the Certification on July 12, 2010. Further, inasmuch as it is represented that the Agreement shall continue until terminated by either party, the whole of such Agreement, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of six months within any twelve-month period. In other words, the six-month period shall be counted based on the total number of days the services are rendered in the Philippines within any twelve-month period upon the effectivity of the subject Agreement, including all periods resulting from its automatic renewal. Accordingly, for as long as the employees or agents of TRM do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to TPC for the "same or connected project", then TRM is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed. Consequently, such payments made to TRM are exempt from Philippine income tax, pursuant to Article 7 (1), in relation to Article 5, of the Philippines-France tax treaty. (BIR Ruling No. ITAD 47-05 dated May 31, 2005) cIADTC 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. Both TPC and TRM are active in the Total Group's Refining and Marketing business. 2. The costs basis used as basis for calculating the remuneration of TRM shall include the following components: a) Internal costs: in particular, personnel cost, indirect personnel charges; and, b) External costs: in particular, costs of any external service provider specifically hired with the aim of rendering Indirect Services to TPC [ e.g., fees and external allowances, office rent, data processing costs and etc.].No cost which is not relevant to the Indirect Services provided by TRM to TPC is included in the cost basis of the Indirect Services. No cost is charged several times to the Company. 3. A mark-up of 5% of the amount of the Internal Costs allocated to TPC is added to the share of costs allocated. No mark-up is applied to External Costs. The mark-up rate is based on an international survey of comparables.