ITAD Ruling No. 059-04

June 3, 2004 ITAD RULING NO. 059-04 Article 5 and 7 Philippines-Singapore tax treaty Section 28 (B) (1), 42 (C) (3) & 108 (A) of the Tax Code of 1997 BIR Ruling No. 100-99 Bernaldo Mirador Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue corner H.V. Dela Costa Street, Makati City 1200 Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated October 22, 2003, on behalf of Phil-Trident Land, Inc. (PTLI), requesting for confirmation of your opinion that the service fees paid by PTLI to Neptune Orient Lines Ltd., (NOL) in consideration for the services performed outside the Philippines are considered as income sourced outside of the Philippines, and therefore, not subject to Philippine income tax, expanded withholding tax, and value-added tax (VAT), and that PTLI shall be allowed to claim such service fees as deduction for income tax purposes. It is represented that PTLI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 2nd Floor, NOL Towers, Madrigal Business Park, Commerce Avenue, Ayala Alabang, Muntinlupa; that it is registered with the Securities and Exchange Commission (SEC) under Reg. No. 177197 with primary purpose to acquire by purchase, lease, donation or otherwise, and to own, use improve, develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment or otherwise, real estate of all kinds, whether improve, manage or otherwise dispose of buildings, houses, apartments, and other structures of whatever kind, together with their appurtenances; that NOL is a foreign corporation duly organized and existing under the laws of Singapore, with principal address at 456 Alexandra Road, 0600 NOL Building, Singapore; that it is likewise engaged in the same line of business as that of PTLI; that it has no permanent establishment in the Philippines; that it is not registered as a corporation or as a partnership in the Philippines per certification issued by the SEC dated November 11, 2003; and that on October 8, 2003, PTLI and NOL entered into a Management and Consultancy Services Agreement since PTLI is still at its start up of operations, and that it is not practical or economical for PTLI to hire full-time employees to perform the following functions: a) IT support services relating to accounting system, b) credit evaluation system, c) marketing service assistance, d) treasury support services, e) personnel services, and f) other related services as agreed by the parties; that under the Management and Consultancy Services Agreement, NOL agrees to provide certain consultancy services to PTLI, such as, but not limited to the following: a) to canvass prospective buyers, b) to promote the business and interests of PTLI, c) to provide advertising services and the like, d) to prepare the strategic and marketing plans of PTLI, e) to provide advisory input to ensure the consistency on the strategic and marketing plans of PTLI, f) to provide consultation on areas of marketing improvement, accounting and cost control principles, procurement of supplies, human resource management and information systems, g) to supervise the operations of business of PTLI on a quarterly basis, h) to give advice on the operations of the business of PTLI, i) to advice PTLI on such other matters as may be needed to the foregoing, and j) to perform all other services necessary to implement the foregoing; that the services shall be carried out by NOL in its hone office in Singapore and in the Philippines, if necessary; that the authorized representative of NOL who shall come to the Philippines as required by the nature of his work, which is to perform services under the Management and Consultancy Services Agreement shall stay in the Philippines for a period not exceeding 183 days during the entire duration of the project; that the term of the Management and Consultancy Services Agreement, shall take effect in January 2003 and will remain valid and existing until terminated by either party; and that in consideration of the performance of the said services, PTLI shall pay NOL a management and consultancy service fee in the total amount of Six Thousand US Dollars (US$6,000) per month, exclusive of out-of-pocket expenses, such as airline ticket, hotel accommodation, meal allowances and the like, incurred by PTLI in coming to the Philippines. In reply, please be informed that Articles 7 and 5 of the Philippines-Singapore tax treaty provide: "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' 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 a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. "xxx xxx xxx" Based on the foregoing, a corporation which is a resident of Singapore and does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services, including consultancy services, 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. Inasmuch as it is represented that the consultancy services to be rendered by NOL for PTLI are to be performed outside of the Philippines by NOL except for occasional visits to and consultation with PTLI, which visits shall in no case exceed 183 days during the entire duration of the management consultancy project, then the furnishing of said services by NOL through its employees or other personnel shall not constitute carrying of business through a permanent establishment in the Philippines. Such being the case, income derived by NOL which are in the nature of business profits are not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5 of the RP-Singapore tax treaty. ( BIR Ruling No. 100-99 dated July 9, 1999 ) THcaDA However, the fees to be paid by PTLI to NOL in the Philippines covering those occasional visits and consultation with PTLI are subject to the 10% value-added tax pursuant to Sec. 108 of the National Internal Revenue Code of 1997. Accordingly, PTLI, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before any payment to NOL. In remitting the VAT withheld, PTLI shall use 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 documentary substantiation for the claim of input tax by PTLI upon filing its own VAT, if it is a VAT-registered taxpayer. In case PTLI is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, PTLI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of NOL, the first three copies thereof to be given to NOL and the fourth copy to be retained by PTLI as its file copy. [Section 4 & 6, Revenue Regulation No. (RR) 4-2000; 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service