ITAD Ruling No. 062-00

March 21, 2000 ITAD RULING NO. 062-00 RP-Singapore Tax Treaty VAT Ruling 1-99 VAT Ruling 1-90 BIR Ruling 44-99 Joaquin Cunanan & Co. 14TH Floor Multinational Bancorporation Center 6805 Ayala Avenue, City of Makati Attention: Ms . Mary Assumption S . Bautista Principal Tax Services Division This refers to your letter dated November 3, 1999 requesting for a confirmation of your opinion that payments for the services rendered by 3M Asia Pacific Pte. Limited (3M Asia) to 3M Philippines ( 3M Phils.) are not subject to Philippine income and value added taxes and that the same qualify as deductible business expenses of 3M Phils. It is represented that 3M Asia is a non-resident foreign corporation organized and existing under the laws of Singapore; that it is not registered either as a corporation/partnership in the Philippines as per certification dated November 23, 1999 issued by the Securities and Exchange Commission; that 3M Phils. is a corporation organized and existing under the laws of the Philippines; that 3M Asia and 3M Phils. entered into a Shared Accounting Services Agreement, whereby 3M Asia shall provide accounting services to 3M Phils. in the following areas: (1) Procedural overview: (a) General ledger accounting, (b) Intercompany payable and receivable, (c) Fixed assets, (d) Accounts payable, (e) Employees payable, (f) Accounts receivable and (g) Corporate reporting and (2) Training services in the following areas: (a) Introduction to the new Shared Services Centre accounting procedures and the parties respective roles and responsibilities, (b) Training on new accounting policies, procedures and transaction processing including any modifications thereon, and (c) Development of communication tools and protocols; that the duration of the agreement is intended to be continuous; that the initial term shall be two (2) years which shall include a transition period during which implementation, commissioning and training will be provided by 3M Asia at no cost to 3M Phils; that the agreement shall neither involve the grant of a license for the use of 3M Asias proprietary rights nor will it involve the transfer of technology; that the above services will be performed entirely by 3M Asia in Singapore except for the delivery of procedure, communication and training during the implementation period which in no case shall exceed thirty (30) days in the aggregate; and that in consideration for the services, 3M Phils. agreed to reimburse the actual cost incurred by 3M Asia in rendering the services without markup or profit element. In reply, please be informed that Article 5(2)(j) in relation to Article 7(1) of RP-Singapore Tax Treaty provide as follows: "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) A seat of management; 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." (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." In as much as there is no transfer of technology and 3M Asia will perform the service entirely in Singapore except for the delivery of procedure, communication and training during the implementation period which in no case shall exceed thirty (30) days in the aggregate, 3M Asia is deemed not to have a permanent establishment in the Philippines and, as such, the service payments made by 3M Phils. to 3M Asia are not subject to Philippine income tax. Furthermore, the payments do not constitute income as they are mere reimbursement of the actual cost and expenses with no mark up or profit element. (BIR Ruling No. 001-90) Likewise, the fees under the subject agreement are not subject to the 10% VAT as the said payments are mere reimbursement of actual cost and expenses, without any mark up or profit element. This finds support in Section 105 of the Tax Code of 1997 which provides that only a "person who in the course of trade or business sells, barters, exchanges, leases, goods or properties or renders services, and any person who imports goods shall be subject to the Value Added Tax (VAT)" (VAT Ruling No. 1-99; BIR Ruling 44-99) Finally, the fees paid to 3M Asia being ordinary and necessary business expenses qualify as deduction from 3M Phils. gross income pursuant to Section 34(A)(1) of the Tax Code of 1997. This ruling is being 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 as automatically revoked. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group