ITAD Ruling No. 047-05

May 31, 2005 ITAD RULING NO. 047-05 Articles 7 & 5, Philippines-France Tax Treaty BIR Ruling No. DA-ITAD 125-03 Atty. Zenaida P. Alcantara 1845 Paz M. Guazon, Paco, Manila M a a m : This refers to your letter dated November 3, 2004 on behalf of your client, Essilor Manufacturing Philippines, Inc. (Essilor-Phil.) requesting confirmation of your opinion that the service fees paid by Essilor-Phil. to Essilor International (Compagnie Gnrale d' Optique) S.A. (Essilor-France) are exempt from Philippine income tax pursuant to the Philippines-France tax treaty. It is represented that Essilor-France is a nonresident foreign corporation duly organized and existing under the laws of France with principal office address at 147 Rue de Paris, 94227 Charenton Cedex, France; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification of Non-Registration dated November 3, 2004 issued by the Securities and Exchange Commission; that Essilor-Phil. is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at Bataan Economic Zone SFB #10 Mariveles, Bataan; that it is registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise engaged in the manufacture of synthetic optical lenses; that on December 27, 1996, Essilor-Phil. and Essilor-France entered into a Services Agreement whereby the following services will be performed by Essilor-France for Essilor-Phil.: 1. Financial Communication Delivery of information to financial analysts and international press for the whole group 2. Administration Management of international human resources Group coordination with outside auditors 3. Legal Definition and coordination of group insurance policies Coordination, drafting, review and execution of legal documents for all subsidiaries Provision of general legal advice 4. Financial Control Review of business operations, control of actual, forecasted and budgeted results with each subsidiary Coordination of reporting system Provision of reports and recommendations on business procedures and policies 5. Accounting Assistance and support with accounting issues Consolidation 6. Managerial services for Europe Coordination of the management of European subsidiaries Creation and application of strategy and policies Development of European know-how Reproduction and adaptation of best practices Assistance and support in negotiating with major customers 7. Managerial services for the whole group Coordination of the management of all subsidiaries Creation and definition of global strategy Development of worldwide know-how Reproduction and adaptation of best practices Assistance and support in negotiating with major customers 8. Financial services Management of internal and external financing Assistance and support in treasury management Foreign exchange and risk advice management Support in negotiating financial services Drafting and management of guarantees, bonds suretyships and letters of comfort 9. Marketing services Creation and delivery of presentations to customers and the press Provision of materials and guidelines to subsidiaries 10. Information strategy Definition of intra-group data processing and telecommunication strategy and policies that the above services will be performed by Essilor-France staff/facilities based in France who will liaise with Essilor-Phil. staff; that in case it is necessary for Essilor-France staff to conduct regular visits in the Philippines their stay will not be more than 183 days in any calendar year as confirmed by the duly notarized certification issued by the Finance and Administrative Manager of Essilor-Phil.;that in consideration for the services rendered by Essilor-France, Essilor-Phil. shall pay an annual fee equal to 48% of the latter's annual industrial net sales as defined in Article 6.2 paragraph 5 of the Services Agreement; that the fee shall be paid in four (4) quarterly payments, each installment being payable within 30 days after receipt by Essilor-Phil. of the invoice issued by Essilor-France; and that the Services Agreement shall be for one year from January 1, 1997, and shall be automatically renewed for additional successive one-year periods unless terminated by either party by written notice at 30 days prior to the expiry of the initial or renewal term. HEDSIc In reply, please be informed that Article 7 and Article 5 of the Philippines-France tax treaty provide as follows: "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. "xxx xxx xxx." "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' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) premises used as a sales outlet; f) a workshop; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project which exists for more than six months; or supervisory activities in connection therewith, where such activities continue for a period of more than six months; i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-months period. "xxx xxx xxx." Based on the foregoing provisions, the profits of a corporation which is a resident of France are taxable only in France, unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. Such enterprise may be deemed to have a permanent establishment in the Philippines if it furnishes services within the Philippines through its employees or other personnel for a period or periods aggregating more than six months within any twelve-month period. Considering that the services performed in the Philippines by the employees of Essilor-France for the years 1997 to 2004, per certification issued by the Finance and Administrative Manager of Essilor-Phil., did not exceed a period aggregating more than six months within any 12-month period, then Essilor-France is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, this Office is of the opinion and so holds that the payments by Essilor-Phil. to Essilor-France for the years 1997 to 2004 are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-France tax treaty. As regards the taxability of income that would be derived by Essilor-France employees who will visit the Philippines, please be informed that Article 15 of the Philippines-France tax treaty provides, viz.: "Article 15 DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. "xxx xxx xxx." Accordingly, the income derived by Essilor-France employees who conducted regular visits in the Philippines shall be taxable only in France if all the conditions in the abovequoted provisions are present. The absence of any of the said conditions shall subject the income of such employees to Philippine income tax in the same manner as an individual citizen and a resident alien individual under Section 24 in relation to Section 25(A) of the National Internal Revenue Code of 1997. (BIR Ruling DA-ITAD 125-03 dated August 11, 2003) However, the fees paid by Essilor-Phil. to Essilor-France for services actually rendered in the Philippines are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Essilor-Phil., being the resident withholding agent and payor in control of payment, shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to Essilor-France. In remitting the VAT withheld, Essilor-Phil. shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Essilor-Phil. if it is a VAT-registered taxpayer. In case Essilor-Phil. is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset", whichever is applicable. In addition, Essilor-Phil. is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon request of Essilor-France, the first three copies thereof be given to Essilor-France and the fourth copy to be retained by Essilor-Phil. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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 without force and effect insofar as the herein parties are concerned. ESTCHa Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service