ITAD Ruling No. 066-00

April 6, 2000 ITAD RULING NO. 066-00 RP-Singapore Article 5, 7 77-84; 47-97;184-90 Romulo Mabanta Buenaventura Sayoc & de los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty . Priscilla B . Valer and Atty . Jayson L . Fernandez Gentlemen : This is in connection with you application for relief from double taxation dated March 21, 2000 on behalf of your client, Stamford Hospital Management Pte. Ltd. (SHM), requesting confirmation of your opinion that the amounts received by SHM from Pacific Millennium Management Corporation (PMMC), Triple-A Properties, Inc. (TPI), and Ms. Melesa D. Chua (Ms. Chua), hereinafter referred to as the "Local Parties", as consideration for the termination of cancellation of the Agreements described below is not subject to income tax, and consequently to any withholding tax, in the Philippines by virtue of Article 7 in relation to Article 5 of the RP-Singapore Tax Treaty. It is represented that SHM is a nonresident foreign corporation organized and existing under and by virtue of the laws of Singapore with offices at Orchard Road, #11-00 Ngee Am City, Singapore; that it is engaged in the business of planning, designing, decorating, furnishing, equipping, as well as the management and operation of serviced apartments; that TPI, a domestic corporation organized and existing under the laws of the Republic of the Philippines, is the developer and owner of the Millennium Suites Condominium Project (the Project) which was envisioned to be a serviced apartment complex; that TPI assigned the rights to manage the Project to PMMC, another domestic corporation; that Ms. Chua is the majority stockholder of both TPI and PMMC. It is further represented that on March 11, 1999, SHM entered into the following agreements relating to the development, operation and management of the Project as a serviced apartment complex (hereinafter referred to as the "Agreements"): 1. Master Agreement by and among PMMC, TPI, and SHM which sets out the terms on which the parties will enter into various agreements culminating in the financing, management and operation of the serviced apartments and the operational area of the Project. 2. Pre-Opening Services Agreement by and between PMMC and SHM by virtue of which SHM was appointed by PMMC as its agent in the management and operation of the serviced apartments once the Project is completed. Such services will include the provision of advice on the design, decor, furnishing, equipping, and other matter affecting the operating efficiency of the serviced apartments. 3. Management Agreement by and between PMMC and SHM by virtue of which SHM was appointed as operator of the serviced apartments owned by unit owners and the operational areas owned by PMMC. 4. Option Agreement by and between TPI and SHM by virtue of which SHM was granted a call option to purchase twenty nine (29) units it the Millennium Suites Condominium Project. 5. Option Agreement by and between Ms. Chua and SHM by virtue of which SHM was granted a call option to purchase fifty percent (50%) of Ms. Chua's outstanding shares in PMMC. that shortly after the execution of the aforementioned Agreements, SHM on the other hand and the Local Parties on the other, had a major disagreement with respect to the performance of their respective obligation under the Agreements; that the parties eventually agreed that it was in their best interest to settle completely and finally all of their claims and causes of action that each may have against the others that may have arisen out of or in connection with one, some or all of the Agreements, the Local Parties agreed to pay SHM the sum of Thirty Million Pesos (P30,000,000.00) to answer for any expenses or damages which may have been incurred by SHM as a consequence of the premature termination of the Agreements; that at the time of termination, SHM has performed abroad only preliminary works which relate to the structuring of the offshore financing aspect of the Project and the review of the concept, configuration and designs of the serviced apartments. In reply, please be informed that damages for a breach of contact constitute taxable income to the recipient thereof in the year received only to the extent that such damages constitute a loss of anticipated profits and non-taxable to the extent that the same represent a return of capital investment. (BIR Ruling dated September 8, 1954) In view thereof, amounts paid by the Local Parties to SHM in consideration for the termination of the aforementioned Agreements which do not represent a return of capital or investment, but constitute loss of profits, are considered to be taxable income in the year received works outside the Philippines prior to the termination of the Agreements, SHM cannot be considered to have a permanent establishment (PE) in the Philippines to which its income may be attributable. In this light, we refer you to Article 7, paragraph 1 of the RP-Singapore Tax Treaty which provides, viz: "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" Moreover, paragraphs (1), (2) and (3) of Article 5 of the aforesaid treaty provide, viz: "ARTICLE 5 " PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an 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; prcd (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 outer Contracting State for a period or periods aggregating more than 183 days. Under the aforequoted provisions, it is clear that if an enterprise of Singapore does not carry on business in the Philippines through a PE situated in the latter, the profits of an enterprise of Singapore shall not be subject to Philippine income tax. Accordingly, since SHM does not maintain a PE in the Philippines, the amounts it will be receiving from the Local Parties in consideration for the premature termination of the above-mentioned Agreements, being considered as constituting loss of profits, will not be subject to income tax or any withholding tax in the Philippines pursuant to Article 5 and Article 7 of the RP-Singapore Tax Treaty. (BIR Ruling Nos. 77-84 dated April 25, 1984; 47-97 dated April 14, 1997). This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. cdlex Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group