ITAD Ruling No. 069-02

April 25, 2002 ITAD RULING NO. 069-02 RP-Singapore, Art. 5 & 7 BIR Ruling No. ITAD-144-00 Tarriela Tagao Ona & Associates 8th Strata 200 Building, Emerald Avenue Ortigas Center, Pasig City Attention: Mr. Edgar E. Tarriela Gentlemen : This refers to your application for relief from double taxation dated September 18, 2001, on behalf of Schaefer Systems International Pte. Ltd. (SSIPL), requesting confirmation that service fees paid to SSIPL for various consultancy and other services rendered to SSI Shaefer System Philippines (SSPI) are not subject to Philippine income tax pursuant to the RP-Singapore tax treaty. It is represented that SSIPL is a non-resident corporation duly organized under the laws of Singapore with official address at 73 Tuas Ave., 1 Singapore 639512; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated November 5, 2001 issued by the Securities and Exchange Commission; that on October 21, 1999, SSIPL entered into a Service Agreement with SSPI, a corporation organized and existing under the laws of the Philippines with office address at 10-B Belvedere Tower, 19 San Miguel Avenue, Ortigas Center, Pasig City; that SSPI is engaged in design, build, project management and construction of automated warehouse system and all or any forms of automated warehouse systems, including but not limited to IT Systems; that under the Service Agreement, SSIPL shall provide SSPI various consultancy and other services to be rendered mainly in Singapore; that all services shall be provided by SSIPL on a time and material basis. Activities shall be charged according to the effort required at the rate set forth below: Services Rates C1 Staff Assistant SGD150.00/hour C2 Secretary SGD250.00/hour C3 Officer SGD400.00/hour C4 Technical SGD600.00/hour C5 Executives SGD900.00/hour C6 Managers SGD1,300.00/hour C7 Directors SGD1,600.00/hour and that most of the services shall be rendered in Singapore and SSIPL will be paid on a bi-annual basis for the services rendered in the Philippines. 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 therein. If the enterprise carries on or has carried on business as aforesaid, the profits on the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. HDAECI xxx xxx xxx Relative to the above, paragraphs (1) and (2)(j) of Article 5 of the aforesaid treaty provide, viz: "Article 5 "Permanent Establishment 1. For the purpose 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 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. xxx xxx xxx." Considering that SSIPL does not carry on business in the Philippines as aforesaid, as evidenced by the certificate of non-registration of corporate/partnership issued by the SEC, and since the services to be performed by its personnel will be done primarily outside of the Philippines and will not involve activities that will continue within the Philippines for a period or periods aggregating more than 183 days, SSIPL is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Hence, income derived by SSIPL 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 and BIR Ruling No. ITAD-144-00 dated September 28, 2000) However; the service fees derived from the services rendered within the Philippines by SSIPL to SSPI shall be subject to the ten percent (10%) value added tax (VAT) pursuant to Sections 108(A) of the Tax Code of 1997. Accordingly, being the payor in control of the payment, SSPI shall be responsible for the withholding of VAT on such fees on behalf of SSIPL by filing a separate VAT return for and on behalf of SSIPL 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 SSPI. In addition, SSPI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of SSIPL, the first three copies thereof to be given to SSIPL and the fourth copy to be retained by SSPI as its file copy. 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. IHSTDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service