ITAD BIR Ruling No. 150-12

April 4, 2012 ITAD BIR RULING NO. 150-12 Sections 23 (F) and 42 (A) (3), National Internal Revenue Code of 1997, as amended; BIR Ruling No. 464-93; BIR Ruling No. 219-88 Ramon F. Garcia & Company Certified Public Accountants 30th Floor, Burgundy Corporate Tower 252 Sen. Gil Puyat Avenue Makati City Attention: Josefino F. Garcia Partner Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 29, 2007 requesting confirmation that service fees paid by Bombardier Transportation Philippines, Inc. ("Bombardier Philippines") (formerly, Daimler Chrysler Rail Systems, Philippines, Inc., and originally, ADTranz Philippines, Inc. ) to Bombardier Transportation Sweden (Signal) AB ("Bombardier") are exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Kingdom of Sweden for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Sweden tax treaty"). Facts Bombardier is a foreign corporation organized and existing under the laws of Sweden based on the information provided by the Swedish Companies Registration Office on May 4, 2009. Bombardier is situated at rstangsvgen 29, 126 16 Stockholm, Sweden. Bombardier 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 November 3, 2008. On the other hand, Bombardier Philippines is a domestic corporation situated at Unit 504, Richmonde Plaza, corner Lourdes Street and San Miguel Avenue, Ortigas Center, Pasig City, Philippines. On August 14, 2001, Bombardier and Bombardier Philippines entered into a Service Agreement where Bombardier agreed to provide services to Bombardier Philippines relating to: CSDcTA a) Training and re-training; b) Penalty risk; c) Assistance in personnel selection before hiring; d) Training materials; e) Imported consumable items (bulbs, fuses, etc.);and f) Technical support through electronic mail, telephone conference and document transit from Sweden when necessary. That in consideration, Bombardier Philippines will pay service fees to Bombardier equivalent to the costs of providing the services based on the actual hours incurred. The fees will be paid within 13 days from the end of each month. Bombardier Philippines will also pay Bombardier of other costs incurred by the latter in providing the services. The annual service fees were US$183,831.82 for the first year of the Agreement and US$156,590.91 for the succeeding years. Under the Agreement, Bombardier shall render the services in Sweden and shall send its personnel to the Philippines only as the need arises. The Agreement was in effect on November 1, 2001 up to December 31, 2006, and will be renewed automatically thereafter for successive periods of one year. Based on the Affidavit issued by the Project Manager of Bombardier Philippines on October 4, 2010, Bombardier sent its personnel to the Philippines to perform services to Bombardier Philippines pursuant to the Agreement on the following dates: August 14-29, September 3-7 and 23-30, October 1-18, and November 4-10 and 20-26, 2001 (61 days);June 15-19, 2002 (5 days);and July 31-August 5, 2003 (6 days). Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), any availment of 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 at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: ECaSIT xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. ,payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief. .." (Emphasis ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation . In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same . The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) ESTaHC This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, since the services were rendered by Bombardier to Bombardier Philippines in 2001, 2002 and 2003, and the service fees therefor were paid in the same years, but the subject TTRA was filed on March 29, 2007, this Office hereby DENIES relief on these fees for having been filed beyond the fifteen-day period prescribed in the RMO. Accordingly, the service fees shall be subject to income tax at the rate 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%)." However, the service fees paid by Bombardier Philippines to Bombardier for services rendered by the latter outside the Philippines are exempt from income tax, under Sections 42 (A) (3) and 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, to wit: "Section 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 ;" "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation ,whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines ." (Emphasis ours) (BIR Ruling No. 464-93 dated November 19, 1993; BIR Ruling No. 219-88 dated May 27, 1988) Furthermore, the service fees paid by Bombardier Philippines to Bombardier for services rendered by the latter in the Philippines are subject to value-added tax ("VAT"), but exempt for services rendered outside the Philippines, under Section 108 (A), in relation to Section 105, of the Tax Code, 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%)... The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. .." "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. THDIaC 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 ." (Emphasis ours) Relative thereto, Bombardier Philippines shall withhold VAT on the taxable service fees at the rate of 10 percent (before February 2006) and 12 percent (beginning February 2006) before remitting them to Bombardier. Bombardier Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).If it is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Bombardier Philippines' claim of input tax on the fees. Otherwise, Bombardier Philippines may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 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 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."