ITAD Ruling No. 027-05

April 6, 2005 ITAD RULING NO. 027-05 Articles 5 (Permanent Establishment), 7 (Business Profits) and 14 (Personal Services) Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD 81-04 Scobell Consulting Services, Inc. Anderson, Villaseor & Associates Suite 2008, Herrera Tower 98 Herrera corner Valero Streets Salcedo Village, Makati City Attention: Mr. A.S. Anderson Representative and Withholding Agent Gentlemen : This refers to your letter dated November 2, 2004 requesting confirmation that service fees to be paid by Redtech Project Management, Inc. (Redtech Philippines) to Red Technologies (S) Pte.,Ltd. (Redtech Singapore) are exempt from Philippine income tax pursuant to the pertinent provisions of the Philippines-Singapore tax treaty. It is represented that Redtech Singapore (formerly, Red Project Management Pte..Ltd. ) is a nonresident foreign corporation organized and existing under the laws of Singapore with principal office at 400 Orchard Road, 21/05 Orchard Towers, Singapore (formerly known as Red Project Management Pte.,Ltd. with registered office address at 1 North Bridge Road, 23-01 High Street Centre, Singapore),as confirmed by the relevant Business Profile issued by the Accounting and Corporate Regulatory Authority of Singapore on September 17, 2004; that Redtech Singapore 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 issued by the Securities and Exchange Commission on October 26, 2004; that, on the other hand, Redtech Philippines is a domestic corporation organized and existing under the laws of the Philippines with principal office at Suite 2008, Herrera Power, V.A. Rufino corner Valero Streets, Salcedo Village, Makati City, Philippines; that Redtech Singapore and Redtech Philippines are both engaged primarily in the business of communications and power line construction; that on March 1, 2004, Redtech Singapore and Redtech Philippines entered into a Service Agreement whereby Redtech Philippines contracted Redtech Singapore to provide for the former management and consultancy services relating to the installation of a fibre optic network at the North Luzon Diversion toll road in the Philippines (the Project);that the duration of the Project is from March 1 to August 19, 2004; and that in consideration, Redtech Philippines will pay Redtech Singapore Three Hundred Fifteen Thousand Five Hundred Twenty Singapore Dollars (S$315,520.00) exclusive of expenses that will be incurred for Redtech Philippines by the project manager or by any representative of Redtech Singapore . In reply, please be informed that service fees to be paid by Redtech Philippines to Redtech Singapore for the Project are business profits which may be taxable under paragraph 1, Article 7 (Business Profits) of the Philippines-Singapore tax treaty quoted below: "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" Paragraph 1 states that the subject service fees may be taxed in the Philippines if they are attributable to a permanent establishment which Redtech Singapore has in the Philippines. In relation, a permanent establishment , as defined in paragraphs 1 and 2, Article 5 (Permanent Establishment) of the Philippines-Singapore tax treaty, means "a fixed place of business in which the business of the enterprise is wholly or partly carried on," and includes, for example, a seat of management, a branch, an office, a store or other sales outlet, and a factory. A permanent establishment also includes the furnishing of services by a resident of a Contracting State (through employees or other personnel thereof) in the other Contracting State, which continues for a period or periods aggregating more than 183 days. Accordingly, since Redtech Singapore does not have a fixed place of business (e.g.,a branch or an office) in the Philippines as confirmed by the relevant Certificate issued by the Securities and Exchange Commission, and since Redtech Singapore will provide management and consultancy services in the Philippines only for 172 days (i.e.,from March 1 to August 19, 2004) which does not exceed 183 days, Redtech Singapore ,in either case, is not deemed to have a permanent establishment in the Philippines. This being so, the subject service fees to be paid by Redtech Philippines to Redtech Singapore for the Project are therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 81-04 dated August 5, 2004) On the other hand, the remuneration of the personnel (i.e.,the project manager or any representative of Redtech Singapore ) who will personally carry out the subject services are generally subject to Philippine income tax, unless the conditions set forth in paragraph 2, Article 14 (Personal Services) of the Philippines-Singapore tax treaty are all complied with, to wit: "Article 14 PERSONAL SERVICES "1. Subject to three provisions of Articles 15, 17, 18, and 19, salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. If the services are so performed, such remuneration or income as is derived therefrom may be taxed in that other Contracting State. "2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State for personal (including professional) services performed in the other Contracting State shall be taxable only in the first-mentioned Contracting State if a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 90 days in the case of professional services and 183 days in other cases, in the calendar year concerned; and b) the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned Contracting State; and c) the remuneration or income is not borne directly by a permanent establishment which that person has in the other Contracting State. "xxx xxx xxx" Paragraph 2 states that the subject remuneration will be exempt from tax if: (a) the personnel (taken individually) are present in the Philippines for an aggregate period or periods not exceeding 183 days in the calendar year concerned, (b) the remuneration is paid by an employer who is a resident of Singapore and (c) the remuneration is not borne by a permanent establishment which the employer has in the Philippines. Based on the representations made herein, all the three conditions required in paragraph 2 above are satisfied considering that (a) the length of stay in the Philippines of the concerned personnel of Redtech Singapore will not exceed 183 days since the duration of the Project is only his 172 days; (b) the remuneration is paid by an employer, Redtech Singapore ,who is a resident of Singapore; and (c) the remuneration is not borne directly by a permanent establishment which Redtech Singapore has in the Philippines, since Redtech Singapore , as represented, is not licensed to engage in business in the Philippines and as such is deemed as not having a permanent establishment therein. This being so, the subject remuneration of the concerned personnel are not subject to Philippine income tax. (BIR Ruling No. DA-ITAD 81-04 dated August 5, 2004) Finally, the provision of the above services in the Philippines by Redtech Singapore ,being "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 10 percent value-added tax (VAT) under Section 108(A)(6) of the National Internal Revenue Code of 1997. Accordingly, the subject service fees to be paid by Redtech Philippines to Redtech Singapore for the Project are subject to 10 percent VAT. (BIR Ruling No. DA-ITAD 38-03 dated February 21, 2003) With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Redtech Philippines ,the resident person making the payments to a nonresident person, shall be responsible for the withholding of the 10 percent VAT on such payments before remitting then to, Redtech Singapore ,the nonresident person. In remitting to the Bureau of Internal Revenue the VAT withheld on such payments, Redtech Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld).If it is a VAT-registered taxpayer, Redtech Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. On the other hand, if it is a non-VAT-registered taxpayer, Redtech Philippines may include as part of the cost of the services provided to it by Redtech Singapore the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset ,whichever is applicable. In addition, upon Redtech Singapore 's request, Redtech Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306),the first three copies for Redtech Singapore and the fourth copy for Redtech Philippines . HSIDTE 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