ITAD Ruling No. 081-04

August 5, 2004 ITAD RULING NO. 081-04 Articles 5 (Permanent Establishment), 7 (Business Profits) and 14 (Personal Services) Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD 38-03 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Avenue Makati City Attention: Ms. Mary Assumption Bautista-Villareal Principal, Tax Services Gentlemen : This refers to your letter dated May 7, 2004 requesting confirmation that service fees to be paid by Jardine Lloyd Thompson Insurance Brokers, Inc. (Jardine Philippines) to Jardine Lloyd Thompson Asia Pte., Ltd. (Jardine Singapore) under the Onshore Services Agreement between the parties are exempt from Philippine income tax pursuant to Articles 5 (Permanent Establishment) and 7 (Business Profits) of the Philippines-Singapore tax treaty. It is represented that Jardine Singapore is a nonresident foreign company organized and existing under the laws of Singapore with principal office at 78 Shenton Way, Nos. 29-02, Singapore, as confirmed by the Certificate of Residence issued by the Inland Revenue Authority of Singapore on May 11, 2004; that Jardine Singapore is not registered either as a corporation or as a partnership and has not been licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on May 17, 2004; that Jardine Philippines, on the other hand is a domestic company organized and existing under the laws of the Philippines with principal office at 25th Floor, Philamlife Tower, 8767 Paseo de Roxas Avenue, Makati City, Philippines; that Jardine Philippines and Jardine Singapore are both engaged primarily in the insurance business; that, on January 1, 2004, Jardine Philippines and Jardine Singapore entered into an Onshore Services Agreement where Jardine Singapore agreed to provide Jardine Philippines the following services, as requested by the latter, all entirely in the Philippines and for an aggregate period not exceeding 183 days: onsite technical assistance and facilitation of the bespoke broking system ("BOSS") and the installation of any upgrades thereto; onsite training and assistance to Jardine Philippines' personnel on BOSS; onsite training and assistance to Jardine Philippines' staff on financial reporting software and any system upgrades or enhancements thereto; onsite assistance and advice on reporting requirements formulated by the Group 1 which enable Jardine Philippines to ensure its compliance with Industry Best Practice; conducting special assignments within the Philippines to ensure Jardine Philippines' adherence to Industry Best Practice; and any other services as may be agreed from time to time between the parties; and that, in consideration, Jardine Philippines shall pay Jardine Singapore fees for the above services, in Singapore dollars and on a quarterly basis. In reply, please be informed that fees to be paid by Jardine Philippines to Jardine Singapore for the above services are business profits taxable under paragraph 1, Article 7 (Business Profits) of the Philippines-Singapore tax treaty below: "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" Applying paragraph 1 above to the instant case, the subject fees to be paid by Jardine Philippines to Jardine Singapore may be taxed in the Philippines if such fees are attributable to a permanent establishment which Jardine Singapore has in the Philippines. A permanent establishment , as defined in paragraphs 1 and 2, Article 5 (Permanent Establishment) of the Philippines-Singapore tax treaty, means "a fixed place of business in which the business of the enterprise is wholly or partly carried on," and includes, for example; a seat of management, a branch, an office, a store or other sales outlet, and a factory. A permanent establishment also includes the furnishing of services by a resident of a Contracting State (through employees or other personnel thereof) in the other Contracting State, where this activity continues within the other State for a period or periods aggregating more than 183 days. Accordingly, since Jardine Singapore does not have a fixed place of business in the Philippines and since Jardine Singapore will provide the above services in the Philippines for an aggregate period not exceeding 183 days so as no permanent establishment of Jardine Singapore would be constituted in the Philippines, the subject fees to be paid to Jardine Singapore by Jardine Philippines for the above services are therefore exempt from Philippine income tax. ( BIR Ruling No. DA-ITAD 38-03 dated February 21, 2003 ) The remuneration of the personnel who will personally carry out the above services is generally subject to Philippine income tax, unless the conditions set forth in paragraph 2, Article 14 (Personal Services) of the Philippines-Singapore tax treaty are all complied with, to wit: "Article 14 PERSONAL SERVICES "1. Subject to the provisions of Articles 15, 17, 18, and 19, salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. If the services are so performed, such remuneration. or income as is derived therefrom may be taxed in that other Contracting State. "2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State for personal (including professional) services performed in the other Contracting State shall be taxable only in the firstmentioned Contracting State if a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 90 days in the case of professional services and 183 days in other cases, in the calendar year concerned; and b) the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned Contracting State; and c) the remuneration or income is not borne directly by a permanent establishment which that person has in the other Contracting State. "xxx xxx xxx" Paragraph 2 above states that the subject remuneration will be exempt from tax if: (a) the personnel (taken individually) are present in the Philippines for an aggregate period or periods' not exceeding 183 days in the calendar year concerned, (b) the remuneration is paid by an employer who is a resident of Singapore and (c) the remuneration is not borne by a permanent establishment which the employer has in the Philippines. DTcACa Based on the representations made herein, all the three conditions required in paragraph 2 above can be satisfied considering that (a) the length of stay in the Philippines of the concerned personnel of Jardine Singapore will not exceed 183 days; (b) the remuneration is paid by an employer, Jardine Singapore, who is a resident of Singapore; and (c) the remuneration is not borne directly by a permanent establishment which Jardine Singapore has in the Philippines since Jardine Singapore, as represented, is not licensed to engage in business in the Philippines to be deemed as having a permanent establishment therein. This being so, the subject remuneration of the concerned personnel are not subject to Philippine income tax. ( BIR Ruling No. DA-ITAD 38-03 dated February 21, 2003 ) Finally, the provision of the above services in the Philippines by Jardine Singapore, being "the supply of services by a nonresident person or his employee with the use of property or rights belonging to the nonresident person" and "the supply of technical advice, assistance or services rendered in connection with technical management," fall within the definition of sale or exchange of services subject to 10 percent value-added tax (VAT) under Section 108(A)[(5) and (6)] of the National Internal Revenue Code of 1997. Accordingly, the subject fees to be paid by Jardine Philippines to Jardine Singapore for the above services are subject to 10 percent VAT. ( BIR Ruling No. DA-ITAD 38-03 dated February 21, 2003 ) With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002 provide that the resident person making the payments to a nonresident person, Jardine Philippines, shall responsible for the withholding of the 10 percent VAT on such payments before remitting them to the nonresident person, Jardine Singapore. In remitting to the Bureau of Internal Revenue the VAT withheld on such payments, Jardine Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Jardine Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Jardine Philippines may include as part of the cost of the services provided to it by Jardine Singapore the VAT consequently shifted or passed on to it and it may treat such VAT either as expense or asset , whichever is applicable. In addition, upon Jardine Singapore's request, Jardine Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies to be given to Jardine Singapore and the fourth copy to be retained by Jardine Philippines as its file copy. 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 Footnotes 1. Jardine Lloyd Thompson Group plc (a company registered and incorporated in the United Kingdom) and its worldwide subsidiaries.