ITAD Ruling No. 029-02

March 14, 2002 ITAD RULING NO. 029-02 RP-Singapore, Article 2 Sections 108, 113 & 236 NIRC BIR Ruling No. DA-071-02-05-99 Procter & Gamble Philippines, Inc. 6750 Ayala Avenue Office Tower Ayala Center, Makati City Attention: Edmundo I. Imperial Director of External Relations & General Counsel This refers to your letters dated April 30, 2001, June 25, 2001 and August 7, 2001 seeking clarification on the value-added tax (VAT) consequences and related VAT invoicing procedures relative to the transactions described under BIR Ruling No. ITAD-182-00 dated December 6, 2000. Based on your representations in your tax treaty relief application dated November 16, 2000, this Bureau opined in BIR Ruling No. ITAD-182-00 dated December 6, 2000 that P&G International Operations Pte Ltd. (PGIOPL) will not have a permanent establishment in the Philippines pursuant to Articles 5 and 7 of the RP-Singapore tax treaty, the dispositive portion of which states: "In fine, your opinion that PGIOPL will not have a permanent establishment in the Philippines pursuant to Arts. 5 and 7 of the RP-Singapore Tax Treaty and will not be subject to Philippine income tax on the business profits or income to be derived on the sale of goods to customers in the Philippines and that PGIOPL will not be subject to the 1% creditable withholding tax on the sale of goods to customers in the Philippines, and PGIOPL will also not be required to withhold the same tax on payments to local suppliers of raw and packing materials, is hereby confirmed." As the said ruling only settled the income tax liability of PGIOPL in the Philippines, you are now seeking clarification on the VAT implications and the consequent VAT invoicing procedures relative to the transactions described therein, more particularly for our confirmation on the following opinion: 1. Although PGIOPL will not be subject to Philippine income tax on the business profits or income to be derived on the sale of goods to customers in the Philippines, PGIOPL remains subject to value-added tax (VAT) on the same; 2. Since PGIOPL does not have a permanent establishment in the Philippines, Procter & Gamble Distributing (Philippines), Inc. (PGDI, formerly Newco), PGIOPL's commissionaire agent, may issue its own invoice on behalf of PGIOPL to evidence the sale of PGIOPL's goods to customers in the Philippines; 3. Since PGIOPL does not have a permanent establishment in the Philippines, PGDI may file VAT returns and pay the VAT due of PGIOPL; and 4. PGDI will be subject to VAT and will also file its VAT returns on its own behalf in respect of its services rendered as a commissionaire. In reply, this Office is of the opinion and so holds: 1. While PGIOPL is not subject to Philippine income tax, it remains subject to VAT The Philippines-Singapore tax treaty only covers elimination of double taxation with respect to taxes on income (Article 2, Taxes Covered). Under the Tax Code of 1997, VAT is not an income tax but a form of sales tax, a tax imposed on consumption levied on the sale or supply of goods and services in the Philippines and on imports of goods into the Philippines. As opposed to income tax which is a direct tax, VAT is an indirect tax such that the amount of tax may be shifted or passed on to the buyer; transferee or lessee of goods, properties or services. Therefore, and since PGIOPL sells its goods in the Philippines in the course of its trade or business, it shall be subject to VAT equivalent to 10% of the gross selling price of the subject goods sold to customers in the Philippines (Section 105 & 106, NIRC). While the taxpayer's profits are derived from the conduct of a trade or business in the Philippines, which thus makes it subject to VAT, the manner in which such business is conducted does not give rise to a permanent establishment as that term is described in the treaty, and as earlier elaborated in BIR Ruling No. ITAD-182-00 dated December 6, 2000. The determination of whether a taxpayer is subject to income tax, on one hand, or VAT, on the other, is grounded on different principles, in this case, one contained in a tax treaty, an international agreement, and the other, in the Tax Code, which is a law of domestic origin. Thus, this Bureau has held several times in the past that a taxpayer may be subject to VAT even if its activities do not give rise to a permanent establishment in the Philippines. Accordingly, PGIOPL shall be required to secure a Tax Identification Number (TIN) and register as a VAT taxpayer, but nonetheless remains a non-resident foreign corporation without a permanent establishment in the Philippines. The issuance of a TIN to a non-resident foreign person/corporation is not conclusive as to the presence of a "permanent establishment" in such Contracting State as defined under Article 5 of the RP-Singapore tax treaty. (BIR Ruling No. DA-071-02-05-99) In this regard, Section 4.107-1 of Revenue Regulations No. 7-95 (Consolidated Value-Added Tax Regulations), in implementing Section 113 and 236 of the Tax Code of 1997, provides that any person who sells, barters, exchanges, leases goods or properties and renders services subject to VAT is required to secure a Taxpayer Identification Number (TIN) and register as a VAT taxpayer. 2. PGIOPL is required to issue duly registered receipts or sales or commercial invoices for every sale or lease of goods or properties or services Section 4.108-1 of the above Consolidated Value-Added Tax Regulations provides as follows: Section 4.105-1. Invoicing Requirements All VAT registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN and address of seller [a statement that the seller is a VAT registered person, followed by his TIN (Sec. 113(A)(1), NIRC of 1997]; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word "zero rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration [the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT (Sec. 113 (A)(2), NIRC of 1997) xxx xxx xxx" Based on the aforecited provisions, a corporation liable to pay VAT is required to register as a VAT taxpayer and issue duly registered receipts or sales or commercial invoices to evidence the sale of its goods in the Philippines. Hence, as a registered VAT taxpayer, PGIOPL is required to issue its duly registered receipts or sales or commercial invoices for every sale or lease of goods or properties or services to its Philippine customers. 3. PGIOPL may authorize PGDI to issue PGIOPL's invoices to Philippine customers, file VAT returns and pay the VAT due of PGIOPL As already stated, PGIOPL will issue its own official invoice to evidence its sale in the Philippines and pay the corresponding VAT. However, since PGIOPL does not maintain an office in the Philippines, by a contract of agency, PGIOPL may constitute PGDI as its local agent who shall be responsible for the issuance of official receipts of PGIOPL to its Philippine customers and for the filing and payment of the corresponding VAT of PGIOPL's sale of goods in the Philippines. For this purpose, PGDI must maintain separate books of accounts for the sale of PGIOPL's goods in the Philippines. 4. PGDI will be subject to VAT and will also file its own VAT returns in respect of its services rendered as a commissionaire agent for PGIOPL While it is PGDI that files the VAT return and pays for the VAT of and on behalf of PGIOPL, PGDI remains subject to VAT for its sale of services to PGIOPL and to other entities. Under the Tax Code of 1997 and pertinent regulations, transactions arising from the sale of goods and service must be evidenced by the issuance of an official invoice. In fine, while PGIOPL is not subject to Philippine income tax pursuant to Articles 5 and 7 of the RP-Singapore tax treaty, it remains subject to VAT on the sale of goods to customers in the Philippines (BIR Ruling No. DA-071-02-05-99). However, since PGIOPL does not have an office in the Philippines, PGDI may be authorized to issue PGIOPL's invoice to evidence the subject sale and file and pay for the corresponding VAT on behalf of PGIOPL using the latter's official invoices and TIN. Moreover, PGDI will also be subject to VAT and will also file its own VAT return in respect of its services as a commissionaire agent for PGIOPL. 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 considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue