ITAD Ruling No. 042-01

April 10, 2001 ITAD RULING NO. 042-01 RP-Singapore DA-030-1-20-99; ITAD 65-00 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave., 1226 Makati City Attention: Mr . Alexander B . Cabrera Partner, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated May 23, 2000, on behalf of Caltex Sea Pte. Ltd. (Caltex-Singapore), requesting confirmation of your opinion that the service fees paid by Caltex Philippines Inc. (Caltex-RP) are not subject to Philippine Income/Withholding Tax and Value Added Tax (VAT), and that the payments of such fees are deductible business expenses of Caltex-RP. It is represented that Caltex-Singapore is a non-resident foreign corporation organized and existing under the laws of Singapore; that Caltex-Singapore operates a Finance and Treasury Centre (FTC) which has been approved under Section 43G of the Income Tax Act (Cap 134), 1996 edition "Income Tax Act"; that it plans to enter into a continuing Service Agreement with Caltex-RP; that Caltex-RP is a domestic corporation duly organized and existing under the laws of the Philippines, engaged in the manufacture, distribution, trading and marketing of petroleum products; that under the agreement, FTC of Caltex-Singapore shall provide services to Caltex-RP that shall consist of treasury, investment, and financial services enumerated in the "Schedule of Services" of their Service Agreement which shall create consistency across the associated companies, allow centralization of treasury, management functions and skills, reduce duplication of staff systems and processes required to handle these functions, thereby resulting in an overall reduction in costs; that all these services shall be performed by Caltex-Singapore in Singapore except for occasional visits or consultation with Caltex-RP of short duration of time not exceeding 183 days during the period of Service Agreement; that it shall neither involve the grant of a license for the use of the former's proprietary rights nor will it involve the transfer of technology; and that Caltex-Singapore will be paid a service fee equivalent to the cost and expenses incurred by FTC in connection with the services plus 5% mark-up on those costs. In reply, please be informed of the following provisions of the RP-Singapore Tax Treaty, to wit: "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) xxx xxx xxx "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 connected project) within the other Contracting State for a period or periods aggregating more than 183 days . (Emphasis supplied) aCHcIE "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. "xxx xxx xxx" Based on the aforequoted provisions, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if the furnishing of services by such Singapore-resident corporation, through its employees or other personnel, continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that there is no transfer of technology and FTC of Caltex-Singapore will perform the service entirely in Singapore except for occasional visits or consultations with Caltex-RP of short duration, which in no case shall exceed an aggregate of 183 days during the period of the service agreement, Caltex-Singapore is deemed not to have a permanent establishment in the Philippines and, as such, your opinion that the service payments made by Caltex-RP to FTC of Caltex-Singapore are not subject to Philippine income tax is hereby confirmed. However, the fees paid by Caltex-RP to Caltex-Singapore for the services rendered in the Philippines are subject to 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code. Accordingly, Caltex-RP shall be responsible for the payment of VAT on behalf of Caltex-Singapore by filing a separate VAT declaration/return (BIR Form 1600-Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) and the said return can be used by Caltex-RP as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulation No. 7-95)[BIR Ruling No. 49-96 dated April 11, 1996 / ITAD 65-00 dated April 6, 2000] Finally, the payment of fees by Caltex-RP to Caltex-Singapore may qualify as deduction from the former's gross income provided all the requirements for deductibility of an expense under Section 34 of the Tax Code of 1997 are present, and that proof is shown that said services are ordinary, necessary and actually resulted in benefits to the business operation of Caltex-RP. This ruling is issued on the basis of the facts as represented. However, if upon investigation it would be disclosed that the facts are materially different, then this ruling shall be considered automatically revoked. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group