ITAD BIR Ruling No. 294-12

July 26, 2012 ITAD BIR RULING NO. 294-12 Articles 5 (Permanent Establishment), (Business Profits) and 23 (Non-discrimination) Philippines-Singapore tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on September 7, 2011 requesting confirmation that service fees paid by Globe Telecom, Inc. ("Globe") to A.T. Kearney Pte. Ltd. ("A.T. Kearney") 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 A.T. Kearney is a corporation organized and existing under the laws of Singapore and is a resident thereof based on its Certificate of Incorporation issued by the Registrar of Companies and Businesses in Singapore on December 14, 1995, and on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on August 8, 2011. A.T. Kearney is situated at 438 Alexandra Road, 05-03 Alexandra Point, Singapore. A.T. Kearney is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on September 12, 2011. On the other hand, Globe is a domestic corporation situated at Globe Telecom Plaza, corner Pioneer and Madison Streets, Mandaluyong City, Philippines. On June 29, 2011, Globe and A.T. Kearney entered into a Service Agreement where A.T. Kearney agreed to provide consultancy services to Globe for the B/OSS Transformation Program and Global Cost Benchmarking. The Program seeks to align or re-engineer the information technology structure of Globe for business acceleration, bottom-line performance increase and improving customer service. The specific business objectives of the Program are: 1. Establishing retention and loyalty initiatives for customers, representatives and dealers of Globe. 2. Meeting and exceeding desired customers' expectations across every channel and every interaction with Globe. 3. Adopting first-mover initiatives to capture market and ensuring lean processes are in place, supported by convergent system automation and waste elimination. 4. Driving stickiness through bundling, innovative products and services, which customers will find to be value-for-money and be proud to recommend. cETDIA The contract price of the Program is US$1,050,000.00, payable based on the amount of progress A.T. Kearney has done on the Program. A.T. Kearney will invoice Globe supported by a Certificate of Completion and Acceptance and such other documents required by the latter. Globe will pay the amount indicated in the invoice within thirty days from receipt thereof. The Agreement will take effect on March 28, 2011 to August 19, 2011. Based on the Certification issued by the Vice President of A.T. Kearney on August 17, 2011, the following personnel were sent by A.T. Kearney to provide consultancy services to Globe related to the Program: Personnel Date of Arrival Date of Departure Cristophe Firth May 23, 2011 July 22, 2011 Keat Yap March 28, 2011 September 2, 2011 Naveen Menon February 24, 2011 July 13, 2011 Samantha Lim July 26, 2011 August 12, 2011 Taarif Jafferi April 4, 2011 July 27, 2011 Total 191 days Ruling In reply, please be informed that payments made by Globe to A.T. Kearney under the Service Agreement may be taxed in the Philippines if A.T. Kearney has a permanent establishment in the Philippines to which such payments are attributable, pursuant to paragraph 1, Article 7 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." In relation to a permanent establishment involving the furnishing of services, including consultancy services, under paragraph 2 (j),Article 5 of the treaty, this activity constitutes a permanent establishment if undertaken for an aggregate period of 183 days, to wit: "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." Accordingly, since A.T. Kearney (through personnel thereof) furnished consultancy services in the Philippines for an aggregate period of 191 days, A.T. Kearney is deemed to have a permanent establishment with respect to this activity, under paragraph 2 (j),Article 5 of the treaty. This being the case, payments for such services made by Globe to A.T. Kearney are subject to income tax in the Philippines, under paragraph 1, Article 7 of the Philippines-Singapore tax treaty. Considered to have a permanent establishment, the service fees paid to A.T. Kearney shall be subject to income tax at the rate of 30 percent based on the taxable amount 1 thereof under Section 28 (B) (1) of the Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" SaAcHE This treatment is in accordance with paragraph 3, Article 7, and paragraph 2, Article 23, of the Philippines-Singapore tax treaty, where A.T. Kearney, as having a permanent establishment in the Philippines, shall be allowed to deduct certain expenses on the service fees received from Globe and connected to the Program, and where such allowance is available to domestic corporations in the Philippines carrying on the same activities, to wit: "Article 7 BUSINESS PROFITS xxx xxx xxx 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether included in the State in which the permanent establishment is situated or elsewhere." "Article 23 NON-DISCRIMINATION xxx xxx xxx 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities." Finally, under Section 108 (A) of the Tax Code, the service fees in question are subject to value-added tax ("VAT"), thus: "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, 2 raise the rate of value-added tax to twelve percent (12%) ..." Relative thereto, Globe shall withhold VAT on the payments at the rate of 12 percent before remitting them to A.T. Kearney. Globe shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation Globe's claim of input tax on the fees. Otherwise, if Globe is not a VAT-registered taxpayer, it may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. 3 Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "SEC. 31. Taxable Income Defined. The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws." 2. 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. 3. 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 corporation, individuals, estates and trust, 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."