ITAD Ruling No. 102-00

August 7, 2000 ITAD RULING NO. 102-00 RP-US-Arts. 5 & 8 RP-Australia-Arts. 5 & 7 RP-Singapore-Arts. 5 & 7 NIRC-Secs. 34 & 108 ITAD 61-00 ITAD 65-00 Joaquin Cunanan & Co. 14TH Floor, Multinational Bancorporation Center 6805 Ayala Avenue 1226 Makati City, Manila Attention: Mary Assumption S . Bautista-Villareal Principal, Tax Services Department Gentlemen : This refers to your letter dated April 13, 2000, requesting confirmation of the following: 1) that the payments made by your client NCR Corporation Philippines (NCRP) to NCR Corporation (NCR), NCR International, Inc. (NCRI), NCR (Australia) Pty. Ltd. (NCRA) and the NCR Asia-Pacific Regional Office (NAPRO) under the Integrated Services Agreement (ISA) are not subject to Philippine income tax pursuant to the RP-US Tax Treaty, RP-Australia Tax Treaty and the RP-Singapore Tax Treaty; 2) that the same payments are not subject to value-added tax (VAT); 3) and that said payments are considered ordinary and necessary in the conduct of NCRP's trade or business and deductible from its gross income under Section 34(A)(1) of the National Internal Revenue Code of 1997 (NIRC). It is represented that NCR and NCRI are non-resident foreign corporations duly organized and existing under the laws of the State of Maryland and the State of Delaware, respectively; that NCRA and NAPRO are, likewise, non-resident foreign corporations, affiliates of NCR and NCRI, duly organized and existing under the laws of Australia and Singapore, respectively; that NCR, NCRI, NCRA and NAPRO are not registered as corporation/partnership in the Philippines as per certifications dated February 16, 1999 issued by the Securities and Exchange Commission (SEC); that NCRP on the other has, is a corporation duly organized and existing under the laws of the Philippines, engaged in general import and export business, general commission business, sale and manufacture of all kinds of radio, wireless electric and radio instrumentalities; that on January 01, 1997, NCRP entered into an Integrated Services Agreement (ISA) with NCR, NCRI, NCRA and NAPRO whereby the latter corporations will provide administrative, management, advisory, technical and professional services to NCRP; that the services covered by the ISA will be rendered outside the Philippines, and the personnel of the aforementioned service providers will come to the Philippines only as the need arises, but such visits will not exceed, for the entire duration of the ISA, one hundred eighty-three (183) days; and, that the service fee will be charged out directly to NCRP based on total cost plus 10% uplift. In reply, please be informed that Article 8(1) in relation to Article 5(1) and (2) of the RP-US Tax Treaty provides, viz : "Article 8 BUSINESS PROFITS "(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 the other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." "Article 5 PERMANENT ESTABLISHMENT "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting State engages in a trade or business. cAHIST "(2) The term "fixed place of business" includes but is not limited to: "xxx xxx xxx (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting State 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" Also, Article 7(1) in relation to Article 5(1) and (2) of the RP-Australia Tax Treaty provides, viz : "Article 7 BUSINESS PROFITS "(1) The profits of an enterprise of one of the Contracting States 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 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 (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in that other State." "Article 5 PERMANENT ESTABLISHMENT "(1) For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term "permanent establishment" shall include especially xxx xxx xxx (k) a place in one of the Contracting States through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or periods aggregating more than six months in any taxable year or year of income, as the case may be, in relation to a particular project, or to any project connected therewith." And finally, Article 7(1) in relation to Article 5(1) and (2) of the RP-Singapore Tax Treaty provides, viz : "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." "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. "(2) The term "permanent business" includes specially but is not limited to: "xxx xxx xxx (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting State 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." TDAHCS Based on the aforequoted provisions, business profits derived by an enterprise/resident of the US, Australia and Singapore are taxable only in their respective States. However, if the said enterprise/resident has a permanent establishment/fixed place of business in the Philippines, their business profits which are attributable to such permanent establishments/fixed place of business, may be taxed in the Philippines In the absence of a fixed place of business, the existence of a permanent establishment is determined by the duration of stay of the enterprises' personnel in the Philippines, through whom the services of the said enterprises are rendered. In the case of the RP-US and RP-Singapore tax treaties, if the period of stay for the purpose of rendering services exceeded in the aggregate of more than 183 days, and in the case of RP-Australia, if the period exceeded in the aggregate of more than six (6) months in a calendar year, there is deemed to exist a permanent establishment in the Philippines. Considering that the services of NCR, NCRI, NCRA and NAPRO covered by the ISA will be rendered mostly outside the Philippines, and that the visits of their personnel in the Philippines will not exceed an aggregate period of 183 days/6 months, NCI, NCRI, NCRA and NAPRO do not have a permanent establishment in the Philippines to which their business profits could be attributed to. Hence, the service fees to be paid by NCRP are not subject to Philippine income tax prescribed under Section 28(B)[1] in relation to Section 57(A) of the NIRC. (BIR Ruling No. ITAD 61-00) Furthermore, Section 34(A)(1)[a] of the same Code provides that there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation/conduct of the trade, business or exercise of a profession. Inasmuch as the fees to be paid by NCRP to NCR, NCRI, NCRA and NAPRO are directly attributable to the development, management, operation/conduct of trade or business of NCRP, being incurred to promote efficiency and hone its business expertise, the same may be claimed by NCRP as deductible expenses. However, the fees to be paid by NCRP to the aforementioned service providers for services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, NCRP shall be responsible for the payment of VAT on the said services on behalf of NCR, NCRI, NCRA and NAPRO by filing a separate VAT declaration/return using BIR Form 1600, and the said VAT declaration/return can be used by NCRP as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95 [BIR Ruling No. ITAD 65-00 dated April 06, 2000] This ruling is being issued on the basis of the facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group