ITAD Ruling No. 053-02

April 16, 2002 ITAD RULING NO. 053-02 Articles 5 & 7, RP-Singapore Tax Treaty BIR Ruling No. 88-86 BIR Ruling No. ITAD-144-00 Laya Mananghaya & Co. 22/F Antel 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City Attention: Manuel P. Salvador III Director, Tax and Corporate Services Gentlemen : This refers to your letter dated August 7, 2000 requesting confirmation of your opinion that the service fees paid by New Zealand Milk Products Philippines, Inc. to Milk Products Holdings (SEA) Pte. Ltd. are not subject to Philippine income tax pursuant to the RP-Singapore Tax Treaty. It is represented that Milk Products Holdings (SEA) Pte: Ltd. ("MPH") is a non-resident foreign corporation organized and existing under the laws of Singapore with office address at 220 Pandan Loop, Singapore, 128409; that in 1991, it established a representative office in the Philippines under Batas Pambansa Bldg. 68 as per certification issued by the Securities and Exchange Commission dated October 11, 2000; that until June 1996, the said representative office undertook research and development, technical advice/support and product promotion to New Zealand Milk Products Philippines, Inc. ("NZMP") in the Philippines; that after June 1996 up to the present, the representative office has been in a state of dormancy; that on June 1, 1996, MPH entered into a Management Service Agreement with NZMP, a corporation organized and existing under the laws of the Philippines with office address at 13 Economia Street, Libis, Quezon City; that NZMP is engaged in the business of manufacturing, importing, selling, exporting, trading, and distribution on a wholesale basis of dairy and other food products under the "ANCHOR" trademark and brand and such other brand as may be agreed upon, and to engage in milk production, milk processing, sale, import and export, improvement, preparation, deal and trade on wholesale basis in milk and like products; that under the Management Service Agreement that has a term of 12 months from June 1, 1996, with automatic renewal annually, MPH shall perform the following services for NZMP: (a) Provide technical advice on the composition, functionality and appropriate handling/processing conditions of the New Zealand Dairy Board (NZDB) range of products; (b) Provide specialist customer support in circumstances where NZMP's own technical resources are inadequate and need supplementing; (c) Update new products and application developments (d) Assist with sourcing product requirements from NZDB (e) Provide sensory evaluation services out of the Singapore Regional Development Centre (f) Provide advice on Consumer Product Marketing including, but not limited to: HDTISa market research requirements and questionnaire structure/content packaging design media material content media planning promotional campaign requirements and structure structure of distribution systems (g) Provide consumer marketing training through regional workshops and training courses (h) Provide advice on Information Systems including hardware software personnel requirements (i) Provide Internal Audit services covering the full scope of NZMP's operation (j) Assist with the establishment and operation of banking facilities (k) Provide Treasury Services (l) Assist with the recruitment of required expatriates (m) Provide advice on personnel policies (n) Provide advice on the construction and operation of the manufacturing facilities including, but not limited to: plant design contractor selection management systems quality audits personnel requirements; that the said services will be performed by MPH staff/facilities based in Singapore who will liaise with NZMP staff; that in case it would be necessary for MPH staff to conduct regular visits in the Philippines, their stay will not be more than 183 days in any calendar year; that MPH shall submit an invoice of the service package every six months; and that the amount payable pursuant to the terms and conditions of the Agreement shall be Singapore $357,960 for the period June 1, 1996 to May 31, 1997. In reply, please be informed that Article 7(1) of the RP-Singapore Tax Treaty provides: "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 herein. 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 thereto, paragraphs (1), (2) and (3) of Article 5 of the same treaty provide, 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 especially 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. "3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise." Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the abovementioned services will be performed by MPH staff based in Singapore who will liaise with NZMP staff, and in case it would be necessary for MPH staff to conduct regular visits in the Philippines, their stay here will not be more than 183 days in any calendar year, MPH cannot be considered to have a permanent establishment in the Philippines. Hence, the services fees paid to MPH under the Management Services Agreement are not subject to Philippine income tax. [BIR Ruling 88-86; ITAD 144-00] However, the fees paid by NZMP for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, NZMP being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of MPH by filing a separate VAT return for and on behalf of MPH using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from NZMP if it is a VAT-registered taxpayer. In case NZMP 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, whichever is applicable. In addition, NZMP is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of MPH, the first three copies thereof to be given to MPH and the fourth copy to be retained by NZMP as its file copy. [Sections 4 & 6, Revenue Regulation No. 4-2002] HITAEC 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service