ITAD Ruling No. 032-01

March 13, 2001 ITAD RULING NO. 032-01 RP-Singapore Art. 7 (1) Art 5 (2) (j) 62-00 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated May 8, 2000, on behalf of Boston Scientific Philippines, Inc. (BSPI), requesting confirmation of your opinion that the service fees paid by BSPI to Boston Scientific Asia Pacific, Pte. Ltd. (BSAP) are ordinary business profits and are not royalties, and therefore, not subject to Philippine income tax pursuant to the provisions of the RP-Singapore Tax Treaty. It is represented that BSAP is a corporation organized and existing under the laws of Singapore with business address at No. 1 Boon Leat Terrace, Harbourside Industrial Building 1, Singapore; that it is not licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated May 24, 2000; that BSPI is a corporation organized and existing under the laws of the Philippines with address at Unit 401, Jafer Place, No. 19 Eisenhower Street, Greenhills, San Juan, Metro Manila and primarily engaged in selling and marketing of Boston Scientific medical products and devices in the Philippines; that BSPI entered into a Management Services Agreement with BSAP effective January 1, 1999; that the services rendered by BSAP are performed entirely in Singapore which include (1) establishing and advice on maintaining and administering proper accounting procedures, ledgers, payroll processing and other bookkeeping records; (2) advice on establishing, maintaining and updating computer systems and data capture and control procedures; (3) advice on human resource management and training issues and assistance in setting up evaluation and other procedures and policies; (4) recruitment of key personnel and conduct of training for physicians and/or employees, strictly upon request; (5) general administrative and information services, including advice on company secretarial matters, insurance and liaison with suppliers; (6) monitoring compliance with general group treasury and management and administrative policies; (7) advice on sales and marketing policies and strategies, market research, market development, business planning, customer service policies and procedures and public relations matters; (8) advice on and administration of regulatory and clinical reports and management of clinical data; (9) group treasury functions and advice on financial reporting and other matters; and (10) warehousing and logistics functions in respect of goods warehoused in or imported through Singapore by BSP; and that in consideration, BSPI will pay BSAP annually the amount of US$94,000.00 as service fee. In reply, please be informed that Article 7(1), in relation to Article 5(2)(j) of the RP-Singapore tax treaty provides: "Article 7 "Business Profits "(1) The profits of an enterprise of one of the 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 purpose of this Agreement the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term "permanent establishment" includes specially but is not limited to: j) The furnishing of services, including consultancy services, by a resident of one the Contracting State 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." Moreover, under Article 12(3) of the same treaty provides: "Article 12 "Royalties "(3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Based on the foregoing provisions, the profits of a corporation which is a resident of Singapore is taxable only in Singapore, unless the Singaporean corporation carries on business in the Philippines through a permanent establishment situated therein. A Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel in relation to a particular project or any project connected therewith is for a period or periods aggregating more than 183 days. Considering that the services rendered by BSAP were performed entirely in Singapore, then it cannot be considered to have had a permanent establishment in the Philippines. Also, the services rendered by BSAP as provided under the Management Services Agreement do not fall under the above quoted definition of royalties as they do not involve the transfer of technology and know-how and are, therefore, considered ordinary business activities. Such being the case, your opinion is hereby confirmed. The service fees paid by BSPI to BSAP are not subject to Philippine income tax and value added tax. TaCEHA This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group