ITAD BIR Ruling No. 198-14

September 23, 2014 ITAD BIR RULING NO. 198-14 Articles 7 & 5, Philippines-Canada Tax Treaty Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Mr. Zayber B. Protacio Ms. Roselle K. Yu Authorized Representatives Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on November 9, 2011, on behalf of TVI Pacific, Inc. ("TVI"), requesting confirmation that its income from TVI Resource Development (Philippines), Inc. ("TVRD") is exempt from Philippine income tax pursuant to the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Canada tax treaty"). It is represented that TVI is a nonresident foreign corporation organized and existing under the laws of Canada, with principal office address at 2000-736 6th Avenue, SW, Calgary AB, T2P 3T7, as evidenced by the certification issued by the Taxpayer Services Division of the Canada Revenue Agency on June 10, 2011; that TVI is not registered either as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on September 20, 2011; and that TVRD is a domestic corporation duly organized and existing under the laws of the Philippines, with registered office address at 22nd Floor, Equitable Bank Tower, 8751 Paseo de Roxas, Salcedo Village, Makati City, Philippines. It is further represented that on July 25, 2011, TVI and TVRD entered into a Service Agreement ("Agreement") whereby TVRD engaged the following services of TVI from January 1, 2011 to December 31, 2011, automatically renewable annually unless either party gives written notice of non-renewal at least 30 days prior to the expiration of the current term: 1. Facilitation of sourcing of purchases of equipment and supplies needed by TVRD from suppliers outside of the Philippines, to include assistance in canvassing, and processing, and delivery of such purchases to TVRD; DaIAcC 2. Market intelligence services which shall include the active and continuing survey on and gathering of information on new equipment, materials and technologies available in the foreign market that may be useful to TVRD's operational planning, the implementation of TVRD's mining projects, and improvement of its operations; 3. Consultancy services on treasury, mining accounting and other financial matters; 4. Study of and preparation of reports, and assistance in evaluation of mining and other data which may be provided by TVRD; and 5. Assistance in the preparation of feasibility studies as may be required by TVRD. That in consideration of the services rendered by TVI, TVRD shall pay TVI an amount as may be advised by TVI and approved or accepted by TVRD prior to the performance of the relevant services; that per certification issued by TVRD dated February 6, 2012, TVI rendered services in the Philippines for a total of 84 days; that as of September 20, 2013, TVRD has not yet remitted any payment to TVI for the services rendered to TVRD per Sworn Statement issued by TVRD on September 20, 2013; and 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 taxpayers involved per Certification issued by TVRD dated June 30, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code ") of 1997, as amended, provides that income derived from the rendition of services within the Philippines by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 35 percent before January 1, 2009, and 30 percent beginning January 1, 2009, thus: EcDSTI "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 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 subparagraphs (C) and (d): n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). AIDTSE xxx xxx xxx" As far as income from the performance of services is concerned, Section 42 (A) (3) of the Tax Code treats such income as derived from sources within the Philippines if the services are performed therein, thus: "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; xxx xxx xxx" In the instant case which involves income derived within the Philippines by a resident of Canada, the Philippines-Canada tax treaty, appropriately applies. Hence, Article 7 (1) of the Philippines-Canada tax treaty provides: "Article VII 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: a) that permanent establishment; or xxx xxx xxx" In relation thereto, Article 5 of the same tax treaty defines a permanent establishment, as follows: DCcAIS "Article V 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; xxx xxx xxx" Based on the above, business profits arising in the Philippines and derived by an enterprise of Canada shall be subject to Philippine income tax if they are attributable to a permanent establishment which the enterprise has in the Philippines; otherwise such profits are exempt. The term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes, for example, a place of management, a branch, and an office. Considering that TVI does not have a fixed place of business in the Philippines, as confirmed by Certification from the SEC, then the services fee to be paid by TVRD to TVI shall be exempt from Philippine income tax pursuant to the Philippines-Canada tax treaty. This conclusion is even buttressed by the fact that, unlike the majority of other Philippine tax treaties, the Philippines-Canada tax treaty (particularly the Permanent Establishment article thereof), does not have a provision on the furnishing of services as constituting a permanent establishment for the foreign enterprise undertaking it in a situs country for a sufficient duration like 183 days. However, as provided in Section 108 of the NIRC of 1997, the said service fees are subject to value-added tax (VAT): "SEC. 108. 1 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%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. cAaDCE The phrase 'sale or exchange of services' means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, . . ." As to the procedure for the withholding and the payment of VAT, TVRD, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such service fees before making any payment to TVI. In remitting the VAT withheld, TVRD shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from TVRD if it is a VAT-registered taxpayer. In case TVRD is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, TVRD is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for TVI and the fourth copy for TVRD as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002] 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. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "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, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%). xxx xxx xxx 2. The VAT rate was increased to 12% on 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. Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.