ITAD BIR Ruling No. 356-13

December 17, 2013 ITAD BIR RULING NO. 356-13 Articles 7 & 5, Philippines-Singapore tax treaty Suarez & Narvasa Law Firm 3rd Floor, CSJ Building 105 Aguirre Street, Legaspi Village Makati City Attention: Karl Vincent B. Raso Gentlemen : This refers to your Tax Treaty Relief Application (" TTRA ") filed on July 5, 2013, on behalf of APCO Worldwide Advisory Services Pte., Ltd. ("APCO") , requesting for a ruling that the service fees to APCO by Bangko Sentral ng Pilipinas ("BSP") are not subject to 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 APCO, with registered address at 137 Market Street, #16-01 Singapore 048943, is a corporation organized and existing under the laws of Singapore, and is a resident thereof for income tax purposes based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated March 13, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 10, 2013; and that, on the other hand, BSP is a corporation organized and existing under the laws of the Philippines with principal address at Bangko Sentral Complex, A. Mabini corner P. Ocampo Sr. Street, Malate, Manila 1004. It is further represented that on October 1, 2012, APCO and BSP entered into a Consultancy Agreement ("Agreement") whereby APCO shall act as communications counsel for BSP and provide implementation support services to promote BSP' s initiatives internationally, which shall include but not be limited to the following services: DSTCIa 1. Branding and Positioning the Philippines as a Competitive Investment Destination; 2. Economic Story Development and International Media Placement; 3. Communications Support for International Media Placement; 4. Media Coaching and other Workshops for Government Officials; 5. Media and Issues Monitoring; and 6. Ad Hoc Communications Counsel and Support. That based on the Certification as to the Venue of Service issued by BSP dated June 21, 2013, the Agreement , and by implication the duration of services, covers the period from October 1, 2012 through September 30, 2013. However, all of the services under the Agreement shall be performed by APCO outside the Philippines in favor of BSP ; that invoicing for professional fees under the Agreement will be carried out on June 30, 2013 and October 31, 2013 and the final payment shall only be made upon completion of the entire scope of work under the Agreement and that, based on a notarized Certificate of Non-Payment issued by APCO on August 27, 2013, BSP has yet to be billed by APCO for services rendered by the latter pursuant to the subject Agreement . 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 derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." SAcaDE 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. xxx xxx xxx" In relation thereto, the provisions of the Philippines-Singapore tax treaty may apply to the service fees to be paid by BSP to APCO under the Agreement . Generally, business profits (or industrial and commercial profits) include payments for the supply of goods and services, and for the lease of personal properties. In this case, the compensation for project management and administrative advisory services, technical services, and training services, compensation for the supply of tools, equipment and materials, and compensation for the rental of tools and materials (but not equipment), being in the nature of business profits, are taxed under Article 7, in relation to Article 5, of the Philippines-Singapore tax treaty, thus: " 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. 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; IDSETA 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 . (underscoring supplied) Based on the foregoing, in order for APCO to be considered to have a permanent establishment to which said business profits may be attributed, it must satisfy the following conditions: the existence of a "place of business", i.e. , a facility such as premises or, in certain instances, machinery or equipment; this place of business must be "fixed", i.e. , it must be established at a distinct place with a certain degree of permanence; the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated." (Paragraph 2) Since APCO does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, APCO does not have a permanent establishment to which its business profits may be attributed to. TcHCDE Based on the above, considering that the services rendered by APCO to BSP under the Agreement are rendered entirely outside the Philippines as represented by the Certification issued by BSP, this Office is of the opinion and so holds that the service fees to be paid by BSP to APCO under the subject Agreement , shall be exempt from Philippine income tax based on Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty. 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