ITAD Ruling No. 105-04

September 13, 2004 ITAD RULING NO. 105-04 Articles 5 and 7, Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD-37-02 Murata Electronics Philippines Inc . 124 GRM Building East Science Ave. Laguna Technopark Bian, Laguna Attention: Mr . Kohei Miyao President Gentlemen : This refers to your letter dated November 4, 2003 requesting confirmation that the charges to be paid by your company, Murata Electronics Philippines Inc. (Murata Phil), to Murata Electronics Singapore (Pte) Ltd., Inc. (Murata Singapore) under the Data Communication Agreement, are not subject to Philippine income tax pursuant to the Philippines-Singapore tax treaty. It is represented that Murata Singapore and Starhub (Pte) Ltd. (Starhub) are non-resident foreign corporations duly organized and existing under the laws of Singapore; that they not registered either as corporations or as partnerships licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission dated October 15, 2003 and June 21, 2004; that Murata Phil is a corporation duly organized and existing under Philippine laws; that Murata Singapore is an ASEAN regional headquarters responsible for sourcing the most cost effective solution for its ASEAN affiliates in terms of data communications; that Murata Singapore and Starhub entered into agreement whereby Starhub will provide data communication line services for data transmission and other on-line applications for Murata Singapore's ASEAN affiliates; that for the above services, Starhub will bill its charges to Murata Singapore and the latter will then redistribute said charges to its ASEAN affiliates, which includes, among others, Murata Phil; that for this purpose, on July 1, 2003, Murata Singapore and Murata Phil entered into a Data Communication Line Agreement (Agreement) whereby the former will provide 128K BT MPLS data communication line services for data transmission and other on-line applications; that in consideration of the above services, Murata Phil shall pay Murata Singapore the latter's expenses in the amount of Two Thousand One Hundred Fifty Four and 03/100 Singapore Dollars (US$2,154.03) per month representing the actual charges of Starhub in the amount of One Thousand Three Hundred Fifty One (US$1,351.00) to Murata Singapore for said services; that the Agreement shall be effective from July 1, 2003 for a term of 1 year and shall be automatically renewable for another year unless either party gives 3 months written notice of termination prior to the expiration; and that none of the personnel of Murata Singapore or Starhub has arrived or stayed in the Philippines to comply with the provisions of the Agreement, instead, Murata Singapore engaged the services of British Telecoms and Unisys Philippines (BTUP) for the access, port and equipment installation in connection with the Agreement. CSTDEH In reply, please be informed that Articles 5 and 7 of the Philippines-Singapore tax treaty provide as follows: "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 in which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" 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 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 ." (emphasis supplied) "xxx xxx xxx" Based on the aforequoted provision, if a corporation which is a resident of Singapore carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. 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 by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as the payments by Murata Phil to Murata Singapore are, in fact, payments to Starhub effected through Murata Singapore for Starhub's data communication line services, said charges constitute business profits of Starhub and as such are taxable if Starhub has a permanent establishment in the Philippines. Such being the case, considering that Starhub does not have any fixed place of business in the Philippines, and that the actual services of providing 128K BT MPLS data communication line services for data transmission and other on-line applications are performed by Murata Singapore and not Starhub, and that, the installation of access, port and equipment is subcontracted to BTUP, Starhub is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Such being the case, this Office is of the opinion and so holds that the charges to be paid by Murata Phil to Starhub effected through Murata Singapore, under the Data Communication Line Agreement, are not subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5 of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-037-02 dated April 2, 2002) Moreover, as regards the payment of value-added tax (VAT), please be informed that Section 108(A) of the Tax Code of 1997 provides, viz : "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. cTESIa "The phrase ' sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors ; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include:" (emphasis supplied) Based on the afore-cited provision, only services actually performed in the Philippines are subject to VAT. Accordingly, inasmuch as the installation of access, port and equipment is subcontracted and performed in the Philippines by BTUP, it shall be directly liable for the payment of VAT. 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