ITAD BIR Ruling No. 322-12

August 23, 2012 ITAD BIR RULING NO. 322-12 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Singapore tax treaty Globe Telecom, Inc. Globe Telecom Plaza Pioneer corner Madison Streets Mandaluyong City Attention: Norina Aileen C. Sanchez Amormio T. Latorre Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 31, 2011 requesting confirmation that service fees paid by Globe Telecom, Inc. ("Globe") to John Foord (Asia) Pte. Ltd. ("John Foord") 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 John Foord is a foreign corporation and a resident of Singapore based on its Memorandum and Articles of Association and its Certificate of Residence issued by the Inland Revenue Authority of Singapore on March 10, 2011. John Foord is located at 10 Raeburn Park, Singapore. It 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 May 27, 2011. On the other hand, Globe is a domestic corporation located at Globe Telecom Plaza, Pioneer corner Madison Streets, Mandaluyong City, Philippines. On March 9, 2011, Globe and John Foord entered into an Agreement for Insurance Valuation Services where John Foord agreed to provide services to Globe by making a valuation or appraisal of the latter's tangible assets in the Philippines including those of its subsidiaries. The services will be done in the Philippines from April 1 to May 20, 2011. In consideration, Globe will pay service fees to John Foord amounting $16,500.00, payable within 30 days from the submission of a final written report by the latter to Globe . Globe has 6,725 sites in the Philippines but John Foord will inspect only eight of them: four in the National Capital Region; two in Southern Luzon; and two in the Visayas. John Foord will design an optimized combination of site and desktop analysis and valuation that would accurately represent the basis of valuation of Globe 's tangible properties. Based on the Certification of Duration of Service issued by Globe on May 24, 2011 and its letter on May 31, 2011, John Foord has sent its personnel, Balcarse Liberato ,to the Philippines to carry out the subject services. He was in the country in April and May 2011 for an aggregate of thirteen days only. Based on the Official Receipt issued by John Foord on June 13, 2011 ,it confirmed receipt on that date of the amount of $16,500.00 as Globe 's payment for the services it carried out in the Philippines. 1 Ruling Relative thereto, please be informed that under paragraph 1, Article 7 of the Philippines-Singapore tax treaty, the service fees paid to John Foord may be taxed in the Philippines if they are attributable to a permanent establishment which John Foord has in the Philippines, to wit: cTECHI "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, paragraphs 1 and 2, Article 5 of the treaty define it as follows: "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: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and 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." DTAIaH With respect to furnishing of services (including consultancy services) in the Philippines, John Foord is deemed to have a permanent establishment if it has branch, an office, or other fixed place of business, or it furnished the services (through employees or other personnel thereof) for more than an aggregate of 183 days. Accordingly, since John Foord is not engaged in trade or business in the Philippines to which a branch, an office, or other fixed place of business is necessary, and it did not furnish services in the Philippines for more than an aggregate of 183 days but for an aggregate of thirteen days only, it is not deemed to have a permanent establishment with respect to the valuation and appraisal services it performed in the Philippines for Globe , pursuant to paragraphs 1 and 2, Article 5 of the Philippines-Singapore tax treaty. Therefore, the service fees paid by Globe to John Foord for these services shall be exempt from income tax, pursuant to paragraph 1, Article 7 of the treaty. On the characterization of the service fees as business profits and not payments for know-how or royalties ,the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) mention: "11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. ECcaDT 11.3 The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services." (Pages 225-226) Based on the commentaries, in a contract for the supply of know-how, there would generally be very little more which needs to be done by the supplier other than to supply existing information or reproduce existing material. On the other hand, in a contract for the performance of services, this involves, in a majority of cases, a very much greater level of expenditure by the supplier in order to perform his contractual obligations to the other party, such as salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. STaAcC Accordingly, since the Agreement for Insurance Valuation Services did not call for John Foord to supply existing information or reproduce existing material to Globe ,but to provide appraisal and valuation services to Globe 's (and its subsidiaries) tangible assets in the Philippines by making an onsite visit to the sites where these assets are located, this Agreement is a contract for the performance of services and not for the supply of know-how. Moreover, on account that John Foord actually sent its personnel to the Philippines to fulfil its contractual obligations to Globe ,it is certain that a greater level of expenditure (such as the salary and other remuneration of the personnel) was incurred by John Foord in the process. This being the case, the service fees paid therefor constitute business profits and not payments for know-how or royalties. Finally, under Section 108 (A) of the Tax Code, in relation to Section 105 of the Tax Code, the service fees for services performed in the Philippines by John Foord, a nonresident foreign person, are subject to value-added tax ("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, 2 raise the rate of value-added tax to twelve percent (12%) ..." "SEC. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. caTESD The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests),or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Relative thereto, Globe shall withhold VAT on the service fees at the rate of 12 percent before remitting them to John Foord. Globe shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).The duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Globe 's claim of input tax on the fees; otherwise, if it is not a VAT-registered taxpayer, it may treat the 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. 3 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. Since the TTRA was filed on May 31, 2011 and the service fees subject thereof were actually paid afterwards on June 13, 2011 ,the TTRA shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") ,to wit: "Section 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. " (Emphasis ours) 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 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."