ITAD Ruling No. 093-02

May 16, 2002 ITAD RULING NO. 093-02 RP-US Art. 5 and 8 1997 NIRC Sec. 34 (A) (1) Sec. 42 (C) (3); Sec. 108 BIR Ruling No. 113-96 ITAD 132-00 Joaquin Cunanan & Co. 14/F, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty. Mary A. S. Bautista-Villareal Principal, Tax Services Department Gentlemen : This refers to your letter dated January 20, 1999 requesting confirmation of the following opinions: (1) that the service fees paid by your client, Ogilvy & Mather Philippines, Inc. (OMP) to the Ogilvy Group, Inc. (TOG), a non-resident foreign corporation, for services rendered outside the Philippines are not subject to income tax and consequently to the withholding tax prescribed by Section 42(C)(3) of the Tax Code of 1997; (2) that the portion of the service fees pertaining to services rendered outside the Philippines is exempt from the 10% value-added tax (VAT); and (3) that the said payments are considered ordinary and necessary in the conduct of OMP's trade or business in the Philippines and as such are deductible from OMP's gross income pursuant to Section 34(A)(1) of the Tax Code of 1997. It is represented that OMP is a domestic corporation primarily engaged in the business of advertising; that TOG is a corporation organized and existing under the laws of the United States and is engaged in the business of advertising, direct marketing, promotional consultancy and related services; that TOG is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated January 5, 1999; that OMP entered into an agreement with TOG for the Provision of Coordination and Support Services (Agreement) with the objective of improving OMP's methods of operations to maximize profitability; that in order to meet the foregoing objective, TOG will render two (2) kinds of services, to wit: (1) services in relation to client coordination and (2) services on client support and profitability; that the said services shall be rendered by TOG outside the Philippines for a period of five (5) years starting January 1, 1998; that in the event the presence of TOG's personnel in the Philippines will be required, the same will not exceed a period of 183 days for the entire duration of the agreement; and that the fee for the above services shall be based on time spent by TOG's Regional Support Centre staff on Philippine matters for service No. 1 and on the Philippines' pro-rata share in client's profit for service No. 2. In reply, please be informed of the pertinent provisions of the RP-US tax treaty, to wit: Paragraph 1, Article 8 of the RP-US Tax Treaty provides, viz : "1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." Paragraph 2(j), Article 5 of the RP-US tax treaty provides, viz : "1. . . . "2. . . . (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." Based on the foregoing provisions, the profits of a corporation which is a resident of the US is taxable only in the US, unless it carries on business in the Philippines through a permanent establishment situated therein. A US corporation may be deemed to have a permanent establishment in the Philippines if, among others, it furnishes services (including consultancy service) through its employees or personnel for a period or periods aggregating more than 183 days, in relation to a particular activity, or to any project connected therewith. Considering that in the event the presence of TOG's personnel in the Philippines will be required, the same will not exceed a period of 183 days for the entire duration of the agreement, TOG cannot be considered to have a permanent establishment in the Philippines. Such being the case, this Office hereby confirms your opinions as follows: 1. The service fees which OMP pays to TOG are not subject to Philippine income tax and consequently to the withholding tax prescribed by Section 42(C)(3) of the Tax Code of 1997; 2. While the portion of the transaction rendered outside the Philippines is not subject to value-added tax, the service fees paid for the services rendered by TOG's employees within the Philippines are subject to the 10% value-added tax (Section 108, Tax Code of 1997). Accordingly, being the payor in control of the payment, OMP shall be responsible for the withholding of VAT on such fees on behalf of TOG by filing a separate VAT return for and on behalf of TOG 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 OMP. In addition, OMP is required to issue the Certificate of Creditable tax Withheld at Source (BIR form 2307) in quadruplicate upon request of TOG, the first three copies thereof to be given to TOG and the fourth copy to be retained by OMP as its file copy. As regards your query whether the subject payments of services are considered deductible expenses of OMP under Section 34(A)(1) of the Tax Code of 1997, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service