ITAD Ruling No. 085-04

August 12, 2004 ITAD RULING NO. 085-04 Art. 5&7, Philippines-Singapore tax treaty Sec. 108 of the NIRC of 1997 BIR Ruling No. DA-ITAD-53-02 Abenson, Inc. Benito Building, #11 Sheridan Street Mandaluyong City Attention: Ms. Ruby Muoz Accounting Manager Gentlemen : This refers to your letter dated April 13, 2004, requesting for a relief from double taxation for the payments made by Abenson, Inc. (Abenson) to Addison Design Consultants Pte Ltd. (Addison), under the "Retail Brand Identity Program" Agreement between the parties pursuant to the Philippines-Singapore tax treaty. It is represented that Addison is a nonresident foreign corporation organized and existing under the laws of Singapore with office address at 200 Cantonment Road, #04-02/03 Southpoint, Singapore 089763; that it has a representative office in the Philippines located at 9/F Unit 908 National Life Insurance Bldg., Ayala Ave., Makati City; that the representative office undertakes the promotion of the company's business activities and explores the potential of the Philippine market; that on March 16, 2004, Abenson and Addison entered into a "Retail Brand Identity Program" (Agreement, for brevity), the scope of work under the Agreement includes the creation of a new retail brand design system for Flagship Store, Home Plus , and Shopping Center for Abenson; that the final deliverable under the agreement will be a Trademark Production Artwork in the form of soft copy CD-ROM only for all printed materials listed and design intent drawings and technical specifications for signage requirements; that the duration of the design project between Addison and Abenson will take less than one month to complete per certification issued by Abenson dated April 14, 2004; that in consideration for the services rendered by Addison, Abenson will pay them a service fee in a total amount of P555,000.00; that when the whole program is completed and upon full payment of fees and out-of-pocket expenses due to Addison, Addison will transfer the copyright of the design to Abenson; and that any other work developed in the course of the program remains the property of Addison. In reply, please be informed that Article 7(1) of the Philippines-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 herein. 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" In relation thereto, paragraphs (1), (2) and (3) of Article 5 of the same treaty provide, viz : "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. DaEcTC "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 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 other Contracting State for a period or periods aggregating more than 183 days . "3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or occasionally delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise. "xxx xxx xxx" Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the abovementioned services will be performed by Addison staff based in Singapore who will liaise with Abenson staff, and in case it would be necessary for Addison staff to conduct regular visits in the Philippines, their stay here will not exceed 183 days in any calendar year, Addison cannot be considered to have a permanent establishment in the Philippines. Hence, the services fees paid to Addison under their Agreement are not subject to Philippine income tax. ( BIR Ruling No. DA-ITAD-53-02 dated April 16, 2002 ) However, the fees paid by Abenson for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Abenson being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of Addison by filing a separate VAT return for and on behalf Addison using BIR Form 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 Abenson if it is a VAT-registered taxpayer. In case Abenson is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, Abenson is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Addison, the first three copies thereof to be given to Addison and the fourth copy to be retained by Abenson as its file copy. [Sections 4,& 6, Revenue Regulations No. 4-2002] 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. aDTSHc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service