ITAD BIR Ruling No. 353-13

December 10, 2013 ITAD BIR RULING NO. 353-13 Articles 5 & 7, Philippines-Singapore Tax Treaty Villanueva Nuez & Associates Metro Law Legal Offices Suite 0902-A, 19th Floor, Tektite East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Commercial Complex 1610 Pasig City Attention: Atty. Rodeo J. Nuez, Jr. Legal Counsel Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 13, 2012, on behalf of ED & F Man Asia Pte. Ltd. ("EMS") (formerly E D & F Man Cocoa (Singapore) Pte. Ltd. ), requesting confirmation that its income from services rendered to Schuurmans & Van Ginneken Philippines, Inc. ("SVGP") is exempt from Philippine 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") . It is represented that EMS, with address at 34 Jurong Port Rd, Singapore 619107, is a resident of Singapore within the meaning of the Philippines-Singapore tax treaty based on the Certificate of Residency issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore dated December 15, 2010; that based on its Articles of Association, EMS is company duly incorporated and registered under the laws of Singapore; that EMS is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on September 12, 2011; and that, on the other hand, SVGP is a domestic corporation duly organized and existing under Philippine laws, located at Rm B-6 WSC Bldg., Locsin cor San Sebastian Streets, Bacolod City. SHaIDE It is further represented that EMS and SVGP entered into a Management Service Agreement ("Agreement") May 24, 2012 which shall be effective on October 1, 2012 and shall remain in full force and effect until terminated in writing by either party; that under the Agreement, EMS shall provide world market advisory services for SVGP which shall be performed outside the Philippines, and which shall be rendered thru an employee of EMS by the name of Dean E.J. Nelson, or such authorized person EMS may designate; that in consideration of the rendition of service pursuant to the Agreement, SVGP shall pay EMS for the time cost for the management consultancy services provided by EMS; that EMS shall submit to SVGP, at the end of its fiscal year, an invoice relating to the fees and expenses, payable to SVGP within fifteen (15) days from receipt of invoice. It is further represented per the sworn certification issued by SVGP on February 7, 2012, that EMS shall perform its obligation under the Agreement only through electronic means like long distance calls, cellular calls and e-mails and that EMS shall have no personnel stationed in the Philippines at any given time; 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. It is finally represented, per the Affidavit executed by SVGP on August 12, 2013, that the initial payment for August 2013 was already remitted to EMS by SVGP on August 7, 2013 as shown by a Remittance Application Form of Standard Chartered Bank. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income received by nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . ASIDTa (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: aAHISE 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. 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. ITaESD 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) 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 foregoing 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. IcHTCS Since the services rendered by EMS are performed outside the Philippines, the compensation for such services constitutes income from sources without the Philippines and not subject to Philippine income pursuant to Section 42 (A) (3) of the Tax Code of 1997, as amended, which states that: "Sec. 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 (2) Services . Compensation for labor or personal services performed in the Philippines." DcCASI Similarly, the service fees are not subject to ten percent (10%) [now 12%] value-added tax (VAT) imposed under Section 108 (A) of the Tax Code of 1997, as amended: "Section 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: . . . 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 . . ." Section 108 (A) clearly states that the sale or exchange or services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will be done entirely outside the Philippines, the service fees to be paid by SVGP to EMS are therefore exempt from VAT. 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. cHaADC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue