ITAD Ruling No. 037-02

April 2, 2002 ITAD RULING NO. 037-02 RP-Singapore, Arts. 5 & 7 BIR Ruling No. ITAD-144-00 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. Alexander B. Cabrera Partner, Tax Services Department Gentlemen : This refers to your letter dated July 06, 2001 on behalf of your client, Kulicke & Soffa (Philippines) Inc. ("KSP"), requesting confirmation that payments made by KSP to Kulicke &. Soffa Singapore, Inc. ("KSS") are not subject to Philippine income tax and consequently to withholding taxes. Documents submitted show that: Kulicke & Soffa Industries, Inc. ("KSII") is a corporation duly organized and existing under the laws of the State of Delaware, U.S.A. It has a branch, KSS, in Singapore which is not licensed to engage in business in the Philippines per Securities and Exchange Commission (SEC) certification dated February 13, 2001. Kulicke & Soffa (Philippines), Inc. ("KSP"), duly organized and existing under Philippine laws and a wholly owned subsidiary of KSII, entered into an Intercompany Agreement effective September 25, 1997, with Macron Design Pte. Ltd. ("MACRON"), a corporation duly organized and existing under the laws of Singapore which is not licensed to engage in business in the Philippines per SEC certification dated February 09, 2001, to undertake renovation works for KSP's leased premises at Block 3, Lot 11, Laguna International Industrial Park, Mamplasan, Bian, Laguna. MACRON, in turn, sub-contracted Kajima Resources Development Corporation ("KRDC"), a Philippine company, to carry out and which actually carried out the renovation works at KSP. For purposes of facilitating settlement of KSP's contract with MACRON, KSS undertakes to effect payments of MACRON's invoices on behalf of KSP but only upon approval by the latter of all MACRON's invoices without mark-up. Based on the foregoing, it is your opinion that reimbursements made by KSP to KSS for the latter's payments to MACRON are not subject to Philippine taxes on the grounds that: 1) A non-resident foreign corporation is subject to income tax only on gross income derived from all sources within the Philippines in accordance with Section 28(B)(1) of the 1997 Tax Code; 2) Mere reimbursements of actual expenses/costs without any mark-up or profit element do not constitute income payments and are, therefore, not subject to Philippine income taxes (BIR Rulings No. DA-145-4-7-97 and No. 1-90); 3) Should the payments constitute business profits, the same are exempt from Philippine income taxes since KSS and MACRON do not have permanent establishments in the Philippines, pursuant to Article 7(1), in relation to Article 5, of the RP-Singapore tax treaty. In reply, please be informed that Article 7(1) in relation to Article 5 of the RP-Singapore tax treaty provides, viz: "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; (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. "xxx xxx xxx" It is clear from the above-cited provisions that business profits of a resident of Singapore shall be taxable in the Philippines if it has a permanent establishment in the Philippines but only so much of them as is attributable to that permanent establishment. For this purpose, a corporation which is a resident of Singapore shall be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as the payments to KSS by KSP are in fact payments to MACRON effected through KSS for MACRON's renovation works performed through KRDC, said payments constitute business profits for MACRON and as such are taxable if MACRON has a permanent establishment in the Philippines. Considering that MACRON is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to since the renovation services are performed by KRDC and not by MACRON nor by any of its personnel, this Office is of the opinion and so holds that the payments by KSP to MACRON effected through KSS are not subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5 of the RP-Singapore tax treaty. (BIR Ruling No. ITAD-144-00 dated September 28, 2000) This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group