ITAD Ruling No. 006-05

January 25, 2005 ITAD RULING NO. 006-05 Articles 5 and 7 of the Philippines-Singapore Tax Treaty BIR Ruling No. DA-ITAD 38-03 Ubano Ancheta Sianghio & Lozada Law Offices 5th Floor, COCOFED Building, 114 Amorsolo St., Legaspi Village Makati City 1229 Attention: Maria Teresa S. Sianghio Gentlemen : This refers to your letter dated August 4, 2004, on behalf of your client, Fuji Machine Mfg. (Singapore) Pte. Ltd. (FMS), requesting confirmation of your opinion that the service fees to be paid by Fuji Machine Philippines, Inc. (FMP) to FMS under their Consultancy Agreement are not subject to Philippine income tax pursuant to Articles 5 and 7 of the Philippines-Singapore tax treaty. It is represented that FMS is a nonresident foreign corporation duly organized and existing under the laws of Singapore with office address at 51 Ubi Avenue 1, #01-24 Paya Ubi Industrial Park, Singapore 408933; that it is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration dated July 2, 2004 issued by the Securities and Exchange Commission (SEC);that FMP, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Warehouse 888, Don Mariano Lim Industrial Complex, La Fuerza Compound, Alabang, Zapote Road, Almanza Uno, 1750 Las Pias City, Metro Manila; that on March 29, 2004, FMS and FMP entered into a Consultancy Agreement where FMS shall provide advice and recommendation regarding the implementation of FMP's operation and financial program, to wit: a) dispatch a personnel once a month, who will stay in the Philippines for not more than five (5) days for each month to review, evaluate and monitor the implementation of FMP's operation and financial program (e.g. accounting, sales, personnel, administration, operation); b) provide advice and recommendations necessary for the successful implementation of the program; c) coordination with officers and employees of FMP; d) preparation of monthly evaluation and progress reports and such any information relative to the Services as FMP may from, time to time, reasonably request; that in consideration for the faithful compliance by FMS of its obligations under the Agreement, FMP shall pay to FMS a professional fee every month, in an amount equivalent to Singapore Dollars: Fifteen Thousand (S$15,000.00);that FMS shall be considered an independent contractor which exercises complete control over the operation of its business, subject only to the conditions established by the Agreement. EaICAD In reply, please be informed that the fees to be paid by FMP to FMS for the above services are business profits taxable under paragraph 1 of Article 7 (Business Profits) of the Philippines-Singapore tax treaty, stated as follows: "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" In relation, Article 5 of the same treaty provides: "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" It is clear from the aforequoted provision that if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Accordingly, since FMS does not have a fixed place of business in the Philippines and since FMS will provide the above services in the Philippines for an aggregate period not exceeding 183 days in a calendar year, FMS cannot be considered to have a permanent establishment in the Philippines. Hence, the subject fees to be paid to FMS by FMP are, therefore, not subject to Philippine income tax under Section 28(B)(1) of the Tax Code of 1997 and consequently to the withholding tax. ( BIR Ruling No. DA-ITAD No. 38-03 dated February 21, 2003 ) Moreover, the provision of the above services in the Philippines by FMS, being "supply of services by a non-resident person or his employee with the use of property or rights belonging to the non-resident person" and "the supply of technical advice, assistance or services rendered in connection with technical management," fall within the definition of sale or exchange of services subject to ten percent (10%) value-added tax (VAT) under Section 108(A) [(5) and (6)] of the Tax Code of 1997. Accordingly, the portion of the subject fees to be paid by FMP to FMS for services performed in the Philippines are subject to 10% VAT. ( BIR Ruling No. DA-ITAD-No. 81-04 dated August 5, 2004 ) Thus, FMP, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT on such service fees before making any payment to FMS. In remitting the VAT withheld, FMP 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 proof of payment thereof shall serve as documentary substantiation for the claim of input tax by FMP upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case FMP is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset", whichever is applicable. In addition, FMP is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of FMS, the first three copies thereof to be given to FMS and the fourth copy to be retained by FMP as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group