ITAD BIR Ruling No. 148-13

June 13, 2013 ITAD BIR RULING NO. 148-13 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Singapore tax treaty Geco Asia Pte. Ltd. 8 Boon Lay Way 7-15, 8 @ Tradehub21 Singapore Attention: Ms. Arlene Tangkay Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on March 14, 2012 requesting confirmation that service fees paid by SAP Philippines, Inc. ("SAP Philippines") to Geco Asia Pte. Ltd. ("Geco Asia") are 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") . aAHDIc Facts Geco Asia is a foreign corporation and a resident of Singapore based on the Certificate Confirming Incorporation of Company issued by the Accounting and Corporate Regulatory of Singapore on August 11, 2011, and its Certificate of Residence issued by the Inland Revenue Authority of Singapore on February 6, 2012. Geco Asia is located at 8 Boon Lay Way, 7-15, 8 @ Tradehub21, Singapore. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on March 28, 2012. On the other hand, SAP Philippines is a domestic corporation located at 32nd Floor, Citibank Tower, 8741 Paseo de Roxas, Makati City, Philippines. On January 17, 2012, SAP Philippines and Geco Asia entered into a Statement of Work to SAP Consulting Partner Program Services Agreement where Geco Asia agreed to provide consultancy services in the implementation of the SAP Software for Zuellig Pharma Asia Pacific Ltd. Philippines ROHQ ("Zuellig Pharma ROHQ"). Zuellig Pharma ROHQ is a client of SAP Philippines located at 27th Floor, Philippine Axa Life Centre, Sen. Gil Puyat Avenue corner Tindalo Street, Makati City, Philippines. Geco Asia will perform the following services: 1. Understand the business process of Zuellig Pharma ROHQ based on blueprint (global template and BU-specific). 2. Configure, maintain, test (unit and integ), document and train users for (a) Make to order, (b) Capacity leveling, (c) Shift scheduling, and (d) PP material check availability. 3. Knowledge transfer PP, QM configuration, standard reports. 4. User acceptance testing (support and train users, project team and resolve issues). 5. Data migration pre-validation, uploading and post validation of PP/QM-related data. In consideration, SAP Philippines will pay service fees to Geco Asia as indicated in the invoice to be sent by Geco Asia to SAP Philippines every month. The fees are payable within sixty days from receipt of the invoice. CIDTcH Based on the Sworn Statement issued by Geco Asia on January 31, 2013, the services were rendered in the Philippines by the following individual: Personnel Inclusive Dates Number of Days Rajkumar Raju Jan. 24 to Mar. 16, 2012 55 days Consequently, Geco Asia sent the following invoices to SAP Philippines : Date of Invoice Invoice Number Amount of Service Fees (in US Dollars) March 29, 2012 20120043 7,200.00 March 30, 2012 20120045 13,600.00 March 31, 2012 20120048 9,600.00 March 31, 2012 20120049 8,400.00 38,800.00 ======== The service fees of US$37,500.00 (less banking charge of $25.00) or equivalent to 48,851.50 Singapore dollars were remitted to Geco Asia through telegraphic transfer on May 25, 2012 , as confirmed by the Credit Advice issued by Maybank on that date. Ruling In reply, please be informed that since the relevant TTRA was filed on March 14, 2012 , and the service fees subject of the TTRA were paid later on May 25, 2012 , such fees shall be subject to relief (exemption from income tax or reduction of tax) pursuant to 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") , which provides: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. 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 ." (Emphasis ours) Relative thereto, the service fees paid by SAP Philippines to Geco Asia are subject to relief under Article 7 of the Philippines-Singapore tax treaty, which 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." cADSCT Under Article 7, profits derived by an enterprise of Singapore from sources in the Philippines may be taxed in the Philippines if attributable to a permanent establishment which the enterprise has in the Philippines. In relation thereto, Article 5 of the treaty defines a permanent establishment as follows: "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." As defined, a 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. It also includes the furnishing of services, including consultancy services, by an enterprise of a Contracting State (through employees or other personnel thereof), where such activities continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. caIEAD Accordingly, since Geco Asia is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is necessary, and since it did not furnish services in the Philippines for more than 183 days, but for a period of 55 days only to provide consultancy services in the implementation of the SAP Software for Zuellig Pharma ROHQ, Geco Asia shall not be deemed to have a permanent establishment in the Philippines under these circumstances, pursuant to paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. This being the case, the service fees paid by SAP Philippines to Geco Asia for said services shall be exempt from income tax, pursuant to paragraph 1, Article 7 of the treaty. Furthermore, on the classification of the service fees as business profits (which are exempt from income tax if not attributable to a permanent establishment) and not as payments for know-how or royalties (which are subject to reduced rate of income tax), the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) mention that: "11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. 11.3 The need to distinguish these two types of payments, i.e. , payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services." (Pages 225-226) TCAHES Based on the commentaries, in a contract for the supply of know-how, there would generally be very little more which needs to be done by the supplier other than to supply existing information or reproduce existing material. On the other hand, in a contract for the performance of services, this involves, in a majority of cases, a very much greater level of expenditure by the supplier in order to perform his contractual obligations to the other party, such as salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to subcontractors for the performance of similar services. Accordingly, since the Agreement did not require Geco Asia to supply existing information or reproduce existing material to SAP Philippines , but to provide consultancy services in the implementation of the SAP Software for Zuellig Pharma ROHQ , particularly, by understanding the business process of Zuellig Pharma ROHQ based on blueprint, and configuring, maintaining, testing, documenting and training users for this software, among others, the Agreement in question is clearly a contract for the performance of services and not for the supply of know-how or other royalty-bearing property. Moreover, by reason that the services are rendered for a considerable period of 38 days by a designated personnel of Geco Asia , it is certain that a greater level of expenditure (such as salaries and other remuneration of this personnel) is incurred by Geco Asia to fulfil its contractual obligations to SAP Philippines . This being the case, the service fees paid by SAP Philippines to Geco Asia constitute clearly as business profits and not royalties . Finally, under Section 108 (A) in relation to Section 105 of the National Internal Revenue Code of 1997, as amended, the service fees paid to Geco Asia , a nonresident foreign person, for services it rendered in the Philippines are subject to value-added tax ("VAT"), to wit: "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, 1 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. ScTCIE 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 (irreSGS Testingtive 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, SAP Philippines shall withhold VAT on the service fees at the rate of 12 percent before remitting them to Geco Asia . SAP Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for SAP Philippines 's claim of input tax on the fees; otherwise, if it is not a VAT-registered taxpayer, SAP Philippines may treat the 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. 2 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. 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. 2. 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 corporation, individuals, estates and trust, 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."