ITAD BIR Ruling No. 280-12

July 9, 2012 ITAD BIR RULING NO. 280-12 Articles 5 & 7, Philippines-Singapore Tax Treaty; BIR Ruling No. ITAD-105-11; BIR Ruling No. ITAD-052-11; BIR Ruling No. ITAD-042-00 Sykes Asia, Incorporated 26th Floor, Robinsons Summit Center 6783 Ayala Avenue, Makati City Attention: Mr. Enrico S. Macario Treasury and Tax Manager Gentlemen : This refers to your letter dated August 22, 2006 requesting confirmation that the profits derived by Open Dimensions (herein referred as "Open Dimension" ) on the activities performed for Sykes Asia, Inc. (herein referred as "Sykes" ) are not taxable in the Philippines 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 (herein referred as the "Philippines-Singapore tax treaty" ). It is represented that Open Dimensions is a partnership organized and existing under the laws of Singapore with registered address at 10 Anson Road #10-06, International Plaza, Singapore 079903 with Tax Reference No. 52828733L as evidenced by Certificate of Taxable Status issued by the Inland Revenue Authority of Singapore dated July 18, 2008; that Open Dimension is required to file its Income Tax Return for the Year of Assessment 2008 declaring its income derived from the business carried on in Singapore and any remittances from overseas for the period 1 January 2007 to 31 December 2007; that taxable profits of Open Dimension are assessable to Singapore income tax in the hands of its partners; that Open Dimension is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on August 14, 2006; that Open Dimension is engaged in business management and consultancy services; and that Sykes, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with head office located at the 26th Floor, Robinsons Summit Center, 6783 Ayala Avenue, Makati City. DaACIH It is further represented that on August 10, 2006, Open Dimension and Sykes entered into Independent Contractor Agreement (herein referred as Agreement ) for the conduct of management workshop which shall be effective for a period of three (3) months commencing on June 5, 2006 and expiring on September 30, 2006; that the Agreement shall be extended automatically if it is necessary for any reason to reschedule the workshops; that Open Dimension will provide all services as an independent contractor; that Sykes may retain Open Dimension to provide services on a project-by-project basis; that Open Dimensions conducted a Leadership Training Seminar for Sykes' selected managers and employees during September 25 to 30, 2006, for a period of 6 days, as evidenced by the certificate issued by the Treasury and Tax Manager of Sykes dated August 22, 2006; that for the services rendered by Open Dimensions, Sykes agrees to pay Fifty-Seven Thousand Nine Hundred Nine U.S. Dollars (US$57,909.00);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 taxpayer/s involved per the duly notarized certification issued by Sykes dated September 21, 2006. In reply, please be informed that Section 22 (B) of the National Internal Revenue Code (Tax Code) of 1997 defines the term "corporation" as follows: "Section 22. Definitions. When used in this Title xxx xxx xxx (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts ( cuentas en participacion ),association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. EHACcT xxx xxx xxx" Based on the above, the provisions of the Tax Code of 1997 concerning corporations apply also to partnerships, except general professional partnerships. In the instant case, Open Dimensions, though a partnership, is not a general professional partnership, hence it shall be treated as a corporation insofar as the application of the provisions of the Tax Code of 1997 is concerned. Accordingly, profits derived in the Philippines by a nonresident partnership, like Open Dimensions, are generally taxable under Section 28 (B) (1) of the Tax Code of 1997, as amended. It provides, viz.: "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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 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. AcHaTE xxx xxx xxx" In accordance with the foregoing, Article 7 (1), in relation to Article 5, of the Philippines-Singapore tax treaty 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 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' includes specially but is not limited to: xxx xxx xxx." j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx." Based on the above provisions, a corporation which is a resident of Singapore and does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees or other personnel continue for the same or a connected project within the Philippines for a period or periods aggregating more than 183 days. EScIAa Considering the representation, based on the certification issued by Sykes dated August 22, 2006, that the rendition of services in the Philippines by selected managers and employees of Open Dimensions when they conducted Leadership Training Seminar for Sykes on September 25-30, 2006, covered only a period of six (6) days, such rendition of services by Open Dimensions through some of its partners does not constitute permanent establishment of Open Dimensions in the Philippines. Hence, the payment for such services shall not be subject to Philippine income tax, and consequently to withholding tax, pursuant to the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD 105-11 dated April 7, 2011; BIR Ruling No. ITAD 052-11 dated February 15, 2011; BIR Ruling No. ITAD-042-00 dated February 10, 2000) 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. 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, Sykes, 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 Open Dimensions. In remitting the VAT withheld, Sykes 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 Sykes if it is a VAT-registered taxpayer. In case Sykes 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, Sykes 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 Open Dimensions and the fourth copy for Sykes 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] HCTAEc 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.