ITAD Ruling No. 038-02

March 14, 2002 ITAD RULING NO. 038-02 RP-Singapore Tax Treaty, Article 5 & 7 Tax Code of 1997, Section 34(A)(1)(a) BIR Ruling No. ITAD 61-00 BIR Ruling No. 047-97 BIR Ruling No. DA-ITAD-54-01 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Ayala Avenue Makati City Attention: Alexander B. Cabrera Partner-Tax Services Department Gentlemen : This refers to your application for tax treaty relief on behalf of Zeller Plastik Philippines, Inc. (ZPPI) requesting confirmation of your opinion that the service fees to be paid by ZPPI to CarnaudMetalbox Asia Limited (CAL) are not subject to Philippine tax and that the same qualify as deductible business expense under Section 34(a)(1) of the Tax Code as amended. It is represented that CAL is a non-resident foreign corporation duly organized and existing under the laws of Singapore; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 9, 2001; that ZPPI is a corporation duly organized and existing under Philippine laws; that on January 1, 1997, ZPPI entered into a Service Agreement with CAL whereby CAL shall render support services to ZPPI in areas of management, administration, planning, cash flow control, marketing, purchasing and human resources; that these services do not involve any transfer of technology or the grant of license for the use of proprietary rights; that CAL will not gain any proprietary rights for methods, processes or information developed or acquired in rendering services to ZPPI; that the said services shall be rendered by CAL in Singapore and, in case CAL is required (or requested by ZPPI) to render service in the Philippines, such services shall in no case exceed six months; that in consideration of the services rendered by CAL, ZPPI agrees and undertakes to pay a service fee to CAL; and that the amount of service fee is pre-determined for each year at the commencement of the year, after taking into account the level of services that CAL has rendered in the previous year. In reply thereto, please be informed that Article 7 of the RP-Singapore Tax Treaty states that: "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. Moreover, Article 5(1) and (2) of the same treaty provides, viz: "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" Considering that the services to be performed by CAL under the Service Agreement will be rendered in Singapore, and that should it be rendered in the Philippines the same shall not exceed 183 days, CAL cannot be considered to have a permanent establishment in the Philippines to which the fees or income could be attributable. Such being the case, the amount to be paid by ZPPI to CAL are not subject to Philippine income tax and consequently to the withholding tax prescribed under Section 28(B)(1) in relation to Section 57(A) of the Tax Code of 1997. (BIR Ruling No. ITAD-61-00) Finally, the fees paid by ZPPI for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, ZPPI shall be responsible for the payment of VAT on said services on behalf of CAL by filing a separate VAT declaration/return using BIR Form 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) and the said VAT declaration/return can be used by ZPPI as evidence in claiming input tax credit. (Sec. 4.102-1(b). Revenue Regulations No. 7-95)[BIR Ruling No. DA-ITAD-54-01 dated June 11, 2001] As regards your opinion that the service fees to be paid by ZPPI to CAL qualify as deductible business expense under Section 34(a)(1) of the Tax Code, as amended, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. This ruling is issued on the basis of the foregoing 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group