ITAD Ruling No. 049-02

April 15, 2002 ITAD RULING NO. 049-02 Article 7 & 5, RP-Singapore Sec. 34 (A) (10) & Sec. 108, NIRC BIR Ruling No. ITAD-42-01 & 65-00 Present Value Managers Actuaries & Financial Consultants 5-B LPL Towers, 112 Legaspi Street Legaspi Village, 1229 Makati City Attention: Mr. Isagani de Castro, F.A.S.P. President Gentlemen : This refers to your letter dated October 2, 2000 on behalf of John Hancock International (Southeast Asia) Pte. Ltd. (JHISA), requesting for confirmation of your opinion that any compensation received by JHISA for services rendered or to be rendered to John Hancock Life Insurance Corporation (JHLIC) shall not be subject to income tax, value-added tax (VAT) and other taxes pursuant to the RP-Singapore tax treaty. It is represented that JHISA is a corporation duly organized and existing under the laws of Singapore; that it is a wholly owned subsidiary of John Hancock Life Insurance Company (parent company of JHLIC), a company incorporated in Boston, Massachusetts, USA; that JHISA is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines per certification issued by the Securities and Exchange Commission dated April 4, 2001; that JHISA was established to provide advisory support services to all the insurance subsidiaries of its parent company in Southeast Asian countries, namely, the Philippines, Thailand, Singapore, Malaysia, Indonesia and in such other countries which may be established in the future like Vietnam; that JHLIC is a corporation duly organized and existing under the laws of the Philippines; that on January 1, 2001, a Technical Support Services Agreement (the Agreement) was entered into by and between JHISA and JHLIC; that under the Agreement, JHISA shall provide advisory services in favor of JHLIC in the operational areas of actuarial, investments, corporate finance, marketing, underwriting and claims settling, data processing operations and reinsurance, using its personnel and facilities in Singapore, and charge JHLIC at cost; that JHLIC is not exclusively bound by the agreement and is free to contract other firms that can provide the same services at less cost; that the guiding principle behind the Agreement is to achieve maximum utilization of resources of personnel and facilities of the two subsidiaries of John Hancock Insurance Company in Boston, their parent company; that the compensation paid to JHISA are for services rendered outside the Philippines, or if rendered in the Philippines, are for short periods of less than 180 days; that the remittances will be substantiated with billing statements describing the services rendered, and are not marked up with any margin for profit. In view of the above representations, you now request for confirmation of the following, viz : "1. That the compensation to be paid to JHISA by JHLIC for services rendered in accordance with the agreement between the two parties, are not subject to income tax, withholding tax, VAT. "2. The compensation to be paid for service covered by the same agreement does not fall under the classification of royalties. There is no copyright, patent, design or model plan, transfer of technology, goodwill, or trademark that JHISA gives right to JHLIC to use in the Philippines, since similar services can be availed of or bought by JHLIC from other service consultants. Thus, the compensation for services to be rendered are not royalties, and not also subject to any tax applicable to royalties. "3. The advisory services of JHISA are either rendered offshore, or by consultants who come to the Philippines and stay for short periods of time in one year, that do not total to more than 180 days on the aggregate. Since JHISA has no permanent establishment in the Philippines the compensation it receives from JHLIC are not subject to Philippine tax. "4. The payments to be paid by JHLIC to JHISA for the services covered by the same agreement are ordinary and necessary business expenses of JHLIC, and allowed as a deduction from its gross income." In reply, please be informed that Article 7, paragraph 1, of the RP-Singapore tax treaty states: "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." In relation to the above, Article 5 of the same tax treaty provides: "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: 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. xxx xxx xxx" On the other hand, Article 12(3) of the RP-Singapore tax 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 aforequoted provisions, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines when, among others, the furnishing of services in the Philippines by that corporation, through its employees or other personnel, continue (for the same or connected project) for a period or periods aggregating more than 183 days. Considering that JHISA will perform the service entirely in Singapore, except for occasional visits to the Philippines of short duration which in no case shall exceed an aggregate of 183 days during the period of the Agreement, JHISA is deemed not to have a permanent establishment in the Philippines and, therefore, your opinion that the service payments made by JHLIC to JHISA are not subject to Philippine income tax is hereby confirmed. (BIR Ruling No. ITAD 42-01 dated April 10, 2001) It must be noted that under the Agreement, JHISA shall render service using only its customary skills so that the compensation to be received by JHISA shall not constitute as consideration for the use of, or the right to use, any copyright, patent, trade mark, design or model, plan, secret formula or process, or for the transfer of technology so that the payments therefor do not constitute royalties within the meaning of the RP-Singapore tax treaty. This is bolstered by the fact that similar services can be availed of or bought by JHLIC from other service consultants. However, the fees paid for the services rendered by JHISA in the Philippines are subject to the 10% value-added tax (VAT) pursuant to Section 108(a) of the National Internal Revenue Code (Tax Code) of 1997. Accordingly, JHLIC shall be responsible for the payment of VAT on behalf of JHISA 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 JHLIC as evidence in claiming input tax credit (BIR Ruling No. 65-00 dated April 6, 2000). This ruling is issued on the basis of the foregoing representations. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service