ITAD Ruling No. 083-03

June 17, 2003 ITAD RULING NO. 083-03 Arts. 5 & 7, RP-Thailand Tax Treaty Secs. 28 & 42 of the Tax Code of 1997 DA-ITAD-34-03 Puyat Jacinto & Santos Law Offices 12/f Manilabank Building 6772 Ayala Avenue Makati City Attention: Atty. David B. Puyat Atty. Virginia B. Viray Atty. Myra Ann A. Salvador Gentlemen : This refers to your application for relief from double taxation dated April 01, 2003, on behalf of your client, City Space Design Group Ltd. (City Space), requesting confirmation of your opinion that the service fee as well as the reimbursement of expenses, payable to City Space are not subject to income tax in the Philippines pursuant to the RP-Thailand tax treaty. It is represented that City Space is a corporation organized and existing under the laws of Thailand with principal office at 2/2 Bank of America Center, 2nd Floor, Wireless Road, Kwaeng Lumpince, Khet Pathumwan, Bangkok, Thailand; that it is engaged in the business, among others, of providing interior design for buildings, residences, offices and commercial buildings; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 03, 2003; that Reuters Limited (Reuters) is a corporation organized and existing under the laws of the Philippines with business address at 10th Floor L.V. Locsin Building, Ayala Ave., cor. Makati Ave., Makati City; that on March 6, 2003, City Space entered into a consultancy agreement with Reuters for the provision of interior design consultancy services on the new premises of the local office of Reuters located at 18th Floor, Enterprise Centre, Tower 1, Ayala Avenue cor. Paseo De Roxas Streets, Makati City; that under the said Agreement, City Space shall perform consultancy services in six phases, namely: (1) programming phase; (2) schematic design; (3) design development; (4) construction documentation; (5) tender or negotiation; and (6) contract administration/construction supervision; that City Space shall perform the different phases of the services in Thailand except that it shall be required to make weekly supervisory visits not exceeding an aggregate of 183 days to the site during the contract administration/construction supervision stage of the project in order to monitor the progress and quality of the work; that in consideration for the services to be rendered by City Space, it shall be paid a fixed service fee; and that all expenses incurred by City Space in the course of its performance of the services provided in the Agreement shall be reimbursed by Reuters. aDSAEI In reply, please be informed that Articles 7 and 5 of the RP-Thailand 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 through which the business of the enterprise is wholly or partly carried on. "(2) The term 'permanent establishment' includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a building site or construction project where such site or project continues for a period of more than six months; (h) an assembly or installation project which exists for more than three months; (i) premises used as a sales outlet; (j) a warehouse, in relation to a person providing storage facilities for others; (k) 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 protect) within the other Contracting State for a period or periods aggregating more than 183 days . (emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, a corporation which is a resident of Thailand may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, for the same or a connected project, continue within the Philippines for a period or periods aggregating more than 183 days. TDESCa Considering that City Space shall perform the different phases of the services in Thailand except for the weekly supervisory visits to the site during the contract administration/construction supervision stage by its representatives for a period not exceeding an aggregate of 183 days, then City Space cannot be considered to have a permanent establishment in the Philippines. Moreover, Section 28(B)(1) in relation to Section 42(C)(3) of the National Internal Revenue Code of 1997 (NIRC) provides, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx "(B) Tax on Non-resident Foreign Corporation . "(1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided , That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). ( Emphasis supplied ) "SEC. 42. Income from Sources Within the Philippines . "(C) Gross Income From Sources Without the Philippines . The following items of gross income shall be treated as income from sources without the Philippines: xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines;" Based on the afore-cited provisions, a nonresident foreign corporation is taxable only on income derived from sources within the Philippines so that if a nonresident foreign corporation furnishes and performs services in the Philippines, the service fees therefrom is taxable in the Philippines. Considering that the services of City Space to Reuters under the said Agreement from programming, schematic design, design development, construction documentation, tender or negotiation are rendered outside the Philippines, the corresponding service fees to be paid by Reuters to City Space are considered income from sources outside the Philippines. ( BIR Ruling No. DA-ITAD-34-03 dated February 13, 2003 ) Moreover, since the above-mentioned services are to be performed in Thailand and should it be necessary for City Space to send its employees to the Philippines during the contract administration/construction supervision stage, their length of stay shall not exceed an aggregate of 183 days, City Space is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Hence, this Office confirms your opinion and so holds that the service fee to be derived by City Space from Reuters are not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5(2)[k] of the RP-Thailand tax treaty and Section 28(B)(1) in relation to Section 42(C)(3) of the NIRC of 1997. However, the fees to be paid by Reuters to City Space for the services actually rendered in the Philippines consisting of actual visitations to the country during the contract administration/construction supervision stage are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, Reuters, 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 making any payment to City Space. In remitting the VAT withheld, Reuters 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 Reuters upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case Reuters 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, Reuters is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of City Space, the first three copies thereof to be given to City Space and the fourth copy to be retained by Reuters as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002]. As regards the issue whether the reimbursement of expenses payable to City Space are not subject to income tax, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. ( BIR Ruling No. DA-ITAD-101-02 dated May 28, 2002 ) The determination if the reimbursed expenses of City Space are not subject to income tax shall be best determined by the proper investigative office of the Bureau. 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