ITAD Ruling No. 054-01

June 11, 2001 ITAD RULING NO. 054-01 Articles 5, 7- RP-Singapore Tax Treaty DA-ITAD-42-01 Caltex (Philippines), Inc . 6/F 6750 Ayala Avenue 1226 Makati City Attention: Josue C . Baez General Manager Fiscal Services Gentlemen : This refers to your letter dated January 11, 2001, requesting confirmation of the following: 1) that the service fees that Caltex Services Pte. Ltd. (CSPL) will receive from Caltex Philippines Inc. (CPI) are not subject to Philippine income tax pursuant to RP-Singapore Tax Treaty; 2) that the said payments are not subject to value-added tax (VAT); and 3) that the said payments are considered ordinary and necessary business expenses and deductible from CPI's gross income under the National Internal Revenue Code of 1997 (NIRC). It is represented that Caltex Services Pte. Ltd. (CSPL) is a non-resident foreign corporation organized and existing under the laws of Singapore with registered office address at 30 Raffles Place, #25-00 Caltex House, Singapore; that CSPL is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by Securities and Exchange Commission (SEC) dated March 16, 2001; that CSPL operates a Global Operational Headquarters ("GOHQ") which has been approved under section 43E of the Income Tax Act (Cap 134), 1996 Edition ("Income Tax Act); that it plans to enter into a continuing Service Agreement between Caltex Philippines, Inc. (CPI); that CPI 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, CSPL shall provide to CPI, unless otherwise terminated by a previous notice in writing by either party, advice, assistance and coordination in the areas of general management and administration, corporate finance, business planning and coordination, training and personnel management, procurement of raw materials and components, economic and investment research and analysis, marketing control and sales promotion planning and environment, health and safety matters as enumerated in the "Schedule of Services" of the Service Agreement; that these services shall neither involve the grant of a license for the use of CSPL's proprietary rights nor will these involve the transfer of technology; that all these services shall be performed by CSPL in Singapore, except for occasional visits or consultations with CPI of short duration, which in no case shall exceed an aggregate of 183 days during the period of the Service Agreement; that CSPL will be paid a service fee equivalent to all costs and expenses properly incurred by CSPL in connection with the provision of the services to CPI; that the costs attributable to CPI in connection with the provision of the above-mentioned services to CPI shall be determined based on actual time spent and/or any other basis acceptable to both CSPL and CPI. 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) . . . f) 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) "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 . (emphasis supplied) 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 CSPL will perform the service entirely in Singapore except for occasional visits or consultations with CPI of short duration, which in no case shall exceed an aggregate of 183 days during the period of the service agreement, CSPL is deemed not to have a permanent establishment in the Philippines and, as such, your opinion that the service payments made by CPI to CSPL are not subject to Philippine income tax is hereby confirmed. However, the fees paid by CPI to CSPL for the services rendered in the Philippines are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code. Accordingly, CPI shall be responsible for the payment of VAT on behalf of CSPL 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 CPI as evidence in claiming input tax credit (Section 4.102-1(b), Revenue Regulation No. 7-95)[BIR Ruling No. DA-ITAD-42-01 dated April 10, 2001]. Finally, the payment of fees by CPI to CSPL 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 the said services are ordinary, necessary and actually resulted in benefits to the business operation of CPI. 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.) LILIAN B. HEFTI Officer-in-Charge