ITAD BIR Ruling No. 251-14

October 10, 2014 ITAD BIR RULING NO. 251-14 Articles 5 and 7, Philippines-India Tax Treaty Sections 28 (B) (1), 32 (B) (5), and 108 of the Tax Code, as amended Team Philippines Energy Corporation 2232 Suite 501 CTC Building Roxas Boulevard, Pasay City Attention: Kazunobu Takijima Vice President-Controller Gentlemen : This refers to your tax treaty relief application (TTRA) filed on October 20, 2011 requesting for confirmation that income payments made by Team (Philippines) Energy Corporation ("Team Phil") to Green Cube Solutions Private Limited ("Green Cube-India") are exempt from tax pursuant to the Convention between the Republic of the Philippines and the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-India tax treaty"). It is represented that Green Cube-India is a foreign corporation organized and existing under the laws of India and a resident thereof with principal address at P-106, Lake Terrace, Kolkata-700029 based on the Certificate of Residence issued by the tax authority of India on May 1, 2012; that Green Cube-India is not registered as a corporation or as a partnership based on the Certification of Non-registration of Company issued by the Securities and Exchange Commission on July 4, 2011; and that, on the other hand, Team Phil is a domestic corporation situated at 2232 Suite 501 CTC Building Roxas Boulevard. It is also represented that on May 17, 2011, Green Cube-India and Team Phil entered into an Oracle Business Intelligence Foundation Suite with Hyperion Essbase Implementation Services Agreement under Purchase Order No. 63753 (" Agreement "); that Green Cube-India 's service was engaged for the actual installation and customization of the Oracle application, that is, database management and generation of reports related to energy trading at the Wholesale Electricity Spot Market; that payment will be made as per mile stone detailed below: a) 10% mobilization advance along with purchase order; TcaAID b) 10% on set-up of development environment and product training; c) 20% on completion of requirement analysis and CRP no. 1; d) 20% on completion of application design, meta data setup and submission of initial design document; e) 20% on completion of application of build and start of UAT; f) 10% completion UAT; and g) 10% after first live run. that Green Cube-India assigned its employee, Mr. Anirban Mukherjee, to provide services under the Agreement; that Mr. Mukherjee was physically present in the Philippines for a total of fifty three (53) days from July 2, 2011 to August 23, 2011 to perform the required services, to wit: based on the Certificate issued by the Corporate Secretary and legal counsel of Team Phil on January 11, 2013; and that, based on the Certification of the Corporate Secretary and legal counsel of Team Phil dated August 31, 2012, the following amounts were paid via telegraphic transfer: Description Amount in US$ Invoice Date Payment Date 10% Mobilization 6,125.00 July 22, 2011 October 27, 2011 Advance 10% Completion of 6,125.00 February 1, 2012 July 5, 2012 training 20% Completion of 12,250.00 February 1, 2012 July 5, 2012 Requirement Analysis It is finally represented that the income subject of this application is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or judicial appeal based on the Certificate issued by the legal counsel of Team PH on October 5, 2012. A. On income tax In reply, please be informed that the fees to be paid to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: DHACES "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, such fees may be exempt or partially exempt (if subject to a reduced rate only) to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the same Code provides: "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." For this purpose, you invoke the Philippines-India tax treaty. Article 7 thereof 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 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. . . ." CacEIS Relative thereto, Article 5 of the treaty enumerates what constitutes a permanent establishment. Paragraphs 1 and 2, Article 5 of the treaty provide: "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a place of exploration of natural resources; h) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; i) a warehouse, in relation to a person providing storage facilities for others." Under the above-quoted provisions, Green Cube-India is deemed to have a permanent establishment if it has a fixed place of business through which its business is wholly or partly carried on, such as, a store or other sales outlet, a branch, an office, a factory, a workshop, and a warehouse. Accordingly, since Green Cube-India rendered services in the Philippines for a period of 53 days only, or for a period of less than six months, the service fees to be paid by Team Phil to Green Cube-India under the Agreement are exempt from income tax, pursuant to paragraph 1, Article 7, in relation to paragraphs 1 and 2, Article 5, of the Philippines-India tax treaty. STaAcC B. On value-added tax However, service fees representing payments for the sale of services rendered in the Philippines, are subject to value-added tax ("VAT"). Section 108 (A) of the National Internal Revenue Code of 1997, as amended, provides: "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%) . . ." 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 Bureau 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.