ITAD BIR Ruling No. 208-12

May 28, 2012 ITAD BIR RULING NO. 208-12 Sections 23 (F), 42 (A) (3) and 108 (A) National Internal Revenue Code of 1997, as amended; BIR Ruling No. 464-93; BIR Ruling No. 219-88 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 24, 2008 requesting confirmation that service fees paid by Detpak Packaging Philippines, Inc. ("Detpak Philippines") to Detpak Holdings Pte. Ltd. ("Detpak") 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") . Facts Detpak is a foreign corporation organized and existing under the laws of Singapore and is a resident thereof based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on September 22, 2008. Detpak is situated at 36 Robinson Road, Singapore. Detpak is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on October 22, 2008. On the other hand, Detpak Philippines is a domestic corporation situated at 500 Boni Avenue, Plainview, Mandaluyong City, Philippines. On December 27, 2007, Detpak and Detpak Philippines entered into a Services Agreement where Detpak agreed to provide the following services to Detpak Philippines: a) Corporate account management services: Price negotiations, new product development, ordering and forecasting, supply chain reviews, and quality complaint responses; b) Industry perspective services: Business development support of customer base, which includes meetings with senior executives of Detpak with senior executives of the clients, market reviews by marketing executives of Detpak, product launches in the market, customer reviews and performance discussions, review of competitors' offerings by the marketing team of Detpak. HAICET c) Management services. As performed by the Regional General Manager of Detpak such as business performance reviews, review of product range and product deletions, recruitment of employees, monthly results review, stock, debt and margin reviews and feedback, sales conferences and review of employee functions. d) Finance support services. Internal audit, finance funding, meetings with financiers, visits and meetings with auditors and accountants if required. e) Information Technology services ("IT") such as review of IT security, processes and protocol, review of hardware and software performance, meetings with IT suppliers, review of service agreements and supply contracts. The services will be performed by Detpak in Singapore and in the Philippines. In consideration, Detpak Philippines will pay service fees to Detpak equivalent to the costs incurred by it in providing the Services plus a mark-up of 5 percent of such costs. The fees will be paid within sixty days from receipt by Detpak Philippines of the invoice from Detpak. The Agreement was in effect from January 1 to June 30, 2008. Based on the Certification issued by the Country Manager of Detpak Philippines on October 21, 2008, Detpak sent its personnel, Mr. Shane Anthony Bracken, to the Philippines to perform services to Detpak Philippines under the Agreement, where he was in the country for only a total of 12 days throughout the term of the Agreement. Ruling A. Income tax 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: SICaDA 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) This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. aHTEIA Furthermore, the necessary requirement 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, with respect to the service fees paid by Detpak Philippines to Detpak for services rendered by the latter in the Philippines throughout the term of the Agreement on January 1 to June 30, 2008, for a total of 12 days, since the service fees were paid within sixty days after the end of the Agreement or, by estimate, on or before August 31, 2008, but the subject TTRA was filed on October 24, 2008, this Office hereby DENIES relief on such fees for having been filed beyond the fifteen-day period prescribed in the RMO. Accordingly, these fees shall be subject to income tax at the rate of 35 percent 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%)." On the other hand, with respect to the service fees paid by Detpak Philippines to Detpak for services rendered by the latter in Singapore throughout the term of the Agreement, the situs of these fees is not the Philippines under Section 42 (A) (3) of the Tax Code, 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; " (Emphasis ours) Accordingly, these service fees paid to Detpak , a foreign corporation, shall be exempt from income tax under Section 23 (F) of the Tax Code, to wit: "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) DTEAHI B. Value-added tax Finally, under Section 108 (A), in relation to Section 105, of the Tax Code, the service fees paid by Detpak Philippines to Detpak under the Agreement for services rendered by the latter in the Philippines are subject to value-added tax ("VAT"), while those paid to Detpak for services it rendered outside the Philippines are exempt from 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%). . ." 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. . ." ADHcTE Relative thereto, Detpak Philippines shall withhold VAT on the taxable service fees at the rate of 12 percent before remitting them to Detpak. Detpak Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If Detpak Philippines is a VAT-registered taxpayer; the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Detpak Philippines' claim of input tax on the fees; it may treat such 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 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."