ITAD BIR Ruling No. 184-12

May 3, 2012 ITAD BIR RULING NO. 184-12 Articles 7 & 5, Philippines-France tax treaty; BIR Ruling No. 068-88; BIR Ruling No. 036-90; BIR Ruling No. ITAD-047-05 Atty. Zenaida P. Alcantara, CPA Unit 4G, Pacopandana 1845 Paz M. Guanzon Street Paco, Manila Madam : This refers to your letter dated September 9, 2009, on behalf of Optodev, Inc. ("Optodev") , requesting confirmation that the services fees paid by Optodev to Essilor International (Compagnie Generale d' Optique) S. A. ("Essilor") 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 Essilor, with office address at 147, rue de Paris, 94227, Charenton Cedex, France, is a nonresident foreign corporation duly organized and existing under the laws of France per its Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated May 19, 2009; and that, on the other hand, Optodev, with principal office at Block 2, Lot 2 Star Ave. Interstar St., LIIP-SEPZ, Mamplasan, Bian, Laguna, is a corporation duly organized and existing under the laws of the Philippines registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise. It is further represented that on February 28, 2006, Essilor and Optodev entered into a Services Agreement ("Agreement") which shall be in full force and effect for a period of one-year commencing on January 1, 2006 and continuing until December 31, 2006; that the Agreement shall be automatically renewed for additional successive one-year periods unless terminated by either one of the parties; that based on the sworn certification by Optodev dated January 28, 2011, Essilor personnel rendered services in the Philippines under the Agreement for the following number of days: SAHIDc Year Number of days 2006 58 days 2007 54 days 2008 31 days 2009 33 days 2010 20 days Moreover, it is represented that the services of Essilor for Optodev under the Agreement are as follows: I. Corporate Services A. Human Resources The Department of Human Resources supports the European subsidiaries in recruiting employees with international background and helps with 'International Company Volunteers' needs and selecting participants for training organised by the group. It approves and accompanies inter-Subsidiary mobility, distributes within the group positions to be filled, organises the co-ordination of subsidiaries' human resources directors and participates in their recruitment. B. Legal The Department of Legal Affairs and Group Development are active in the negotiation and drafting of all international contracts or contracts that could have an impact on the group, carry out studies and analyses on transactions envisaged by the subsidiaries and issue their recommendations. They act beforehand with a view to preventing conflicts and the Department has an overall mission of providing legal advice to the subsidiaries. It also provides assistance in managing disputes of all types. The Taxation Department provides its expertise in all areas involving international tax management, as well as in managing tax audits. The Insurance Department assists with negotiating, creating and managing local insurance policies and fully manages group insurance policies. It also provides assistance in managing tax audits. The Real Property Department provides its expertise to the various group entities in managing their immovable property, negotiating leases and offering advice in area management. C. Management Control and Financial Advice Essilor International analyses commercial transactions and controls each Subsidiary's actual results, forecasted results and budgeted results. It issues advice and recommendations that contribute to the Subsidiary's creation of value. It provides assistance and aid in applying local accounting standards, as well as in selecting and implementing accounting tools. D. Europe and Group Management Services The Europe and Group departments define the overall strategy and participate in its implementation by supporting actions of the subsidiaries worldwide. They participate in the development of global know-how and in the exchange of best practices. They provide their aid and assistance during negotiations on acquisitions, partnerships and commercial development with the optical industry's most important players. E. Financial Services The main responsibilities of the Department of Financing and Cash Flow are the management and securing of cash flows within the group, the financing of its activity and its future developments and managing the banking relationship and market risks (currency and rates). F. Marketing Services The Strategic Marketing Department establishes the group's marketing strategy and implements it more specifically through the product plan integrating local characteristics, in order to ensure the rapid commercialisation of lines of products. It identifies new growth levers and prepares the medium-term plan consistent with the strategy. It assists the subsidiaries in managing product portfolios through recommendations of action plans over the entire marketing mix (product, price, distribution and communication positioning), and, makes available to all the subsidiaries the tools for consistent development of group brands with ophthalmology professionals, as well as to the general public. DAcaIE G. Quality and Standardisation It defines the quality level of products and services that will enable the group's subsidiaries to have a better positioning on their market. The teams ensure standardization and consistency between the qualities of the various subsidiaries worldwide. It is also responsible for disseminating to all of the subsidiaries the expertise and methodologies developed within the group, and defines the international projects that will launch new products faster by taking account of the specific characteristics of each country, thereby promoting increases in market shares. The teams in charge of this department participate in the discussions that take place within the national and international organisations in charge of standardisation, by attempting to defend the company's point of view and developing standards that contain reasonable requirements. The department also participate in actions to attain ISO certification for the various subsidiaries. And, it sees to it that the products are consistent with regulations, observes competition and makes sure that violations harmful to their business are monitored by the responsible organisations. II. Other Services A. Services & Development Develops OPSYS, EDI, MARS and EXTRANET computer tools and deploys them in the subsidiaries. Responsible for supporting the European subsidiaries in projects involving the integration of Essilor solutions with those of the partners. It also contributes to the consistency between the work of the subsidiaries and the group strategy and harmonises the work of the subsidiaries in order to optimise costs. B. Prescription IT systems SCG (Group Calculation System) is one of the ophthomological glass calculation software programs used in the Essilor group prescription laboratories. Based on the prescription provided by the ophthalmologist and the information provided by the optician (product and frame chosen by the final client) the SCG software program determines the geometry of the glass (in general, the rear diopter, as well as the relative positioning of the 2 diopters) and calculates all of the data useful to the manufacturing equipment and to controlling quality. Developed for the Windows operating systems, SCG is designed around a database describing all of the products marketed, as well as the manufacturing equipment available in the workshop. Deployed in the form of server (it therefore does not have any interface), SCG receives requests for calculation and returns the related results. Thus, in the group's subsidiaries, SCG is associated with a system for taking orders, as well as production management system. The software program is launched by the SCG deployment teams. It consists in initialising the database with the products and equipment of the laboratory and installing the application on one or more machines. Although users are offered regular updates of data and the code, their implementation is still at the client's initiative. Bugs involving the use of the SCG are prioritised, analysed and corrected in subsequent versions. C. Europe Logistics The Department of Logistical Operations provides three main functions: management of demand and supplies, Customer Service and management of Logistics optimisation projects. Its main missions are: EHACcT Management of the subsidiary relationship; Management of the production burden on Europe plants; Management, balancing and optimization of subsidiary stocks; The provision to subsidiaries of new products for all European markets, and the management of the end of life of products; The centralized updating of operational management systems making orders and products flow freely to its subsidiaries; The maintenance of Beginning and End systems guaranteeing inter-system integrity and optimal systems functioning of the benefit of their subsidiaries; The implementation of personalized logistical solutions by subsidiary. D. World Logistics The added value of Logistics is to give the participants in this transformation chain short and medium-term visibility, in order to give them the means to organize their resources at a fine level of detail by products and process. The world logistics department prepares in detail the introduction of new products and their codification administrative monitoring for the entire group. Responsible for volume forecasts, the world logistics department provides plants with specific added value, by smoothing their expenses in order to amortise variations of demands, through dynamic management of stocks and their worldwide breakdown. This avoids plants having to take risks, allocating many indirect resources for these forecasts and managing discrepancies (untimely acceleration or slow down). The smoothing carried out by world global logistics makes it possible to keep to the annual plans at the level of each site, with very small variations, on average below 5%, with 12 months in advance. Its value increases with the growth of volumes, the complexity of management and the product mix. E. International Network The department makes available a critical, secured, high availability communication infrastructure between the various units of the group via the Internet. It also makes available generic applications such as international messaging or intranets, and provides technical expertise in networks and telecommunications. F. European Prescription Technical Services The European prescription technical services are organized into three major areas: technical support for prescription subsidiaries; prescription logistics and; quality. The main missions of technical support teams to the prescription subsidiaries are: 1. The deployment of new products and new technologies in all the subsidiaries that have expressed a desire to have these new products or new technologies. 2. Re-engineering and industrial analyses The teams carry out analyses to optimise flows and may lead to reorganisations of production with a view to improving the improving the productivity of the prescription Subsidiary 3. Technical assistance Technical assistance offers many services to the subsidiaries in the various prescription areas. Among other things, it develops and shares unique know-how in terms of servicing techniques, glazing and precising techniques and hard coating, tinting and anti-reflection techniques. This know-how contributes directly to the development of the activities of the subsidiaries on their markets. And that in consideration of the foregoing services, Optodev shall pay Essilor an annual fee equal to the total cost borne by Essilor as a result of its accounting payable in four quarterly installments. It is further represented as certified by the Finance Manager of Optodev on February 3, 2012 that the accrual and payment of management fees of Optodev to Essilor were recognized as part of the operating expenses of Optodev for the year 2010 and 2011. It is finally represented that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved per the sworn certification issued by Optodev dated September 9, 2009. 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 income derived in the Philippines by a nonresident foreign corporation. It provides: aSADIC "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 . . . profits and income . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides as follows: "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 relation thereto, Articles 7 and 5 of the Philippines-France tax treaty provide as follows, viz. : "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." "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: HDTISa a. a place of management; b. a branch; c. an office; d. a factory; e. premises used as a sales outlet; f. a workshop; 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-months period. xxx xxx xxx." Based on the foregoing provisions, the profits of a corporation which is a resident of France are taxable only in France, unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. Such enterprise may be deemed to have a permanent establishment in the Philippines if it furnishes services within the Philippines through its employees or other personnel for a period or periods aggregating more than six months within any twelve-months period. 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 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 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: 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 . . ." (Underscoring 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." (Underscoring ours) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. HcTEaA Furthermore, the necessary requirement laid down in RMO 1-2000 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, this Office hereby DENIES relief on the service fees paid by Optodev to Essilor before the subject TTRA was filed on September 9, 2009 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said service fees shall be subject to income tax at the rate provided under Sections 28 (B) (1) of the Tax Code. However, for as long as the above-mentioned services are performed in the Philippines for a period not aggregating more than six (6) months within any twelve-month period, as evidenced by a Secretary's Certificate of Optodev dated January 28, 2011 and for as long as the services for the renewal of the Agreement do not exceed more than six (6) months within any twelve month period, Essilor is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed. Hence, all service fees paid by Optodev to Essilor 15 days from the date of filing of the TTRA on September 9, 2009, are not subject to income tax, pursuant to Articles 7 and 5 of the Philippines-France tax treaty. 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 having a different tax treatment, 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