ITAD Ruling No. 120-04

November 2, 2004 ITAD RULING NO. 120-04 Art. 5 & 7, Philippines-Netherlands tax treaty Sec. 108 of the NIRC of 1997 BIR Ruling No. ITAD-038-02 BIR Ruling No. 038-99 BIR Ruling No. DA-ITAD-80-03 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Ms. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated August 12, 2004, on behalf of your clients Jimenez Basic Advertising (Jimenez Basic) and Publicis Manila, Inc. (Publicis Manila), requesting confirmation of your opinion that the advisory fees paid by Jimenez Basic and Publicis Manila to Publicis Worldwide BV (PWW) are in the nature of business profits under Article 7 of the Philippines-Netherlands tax treaty, and therefore not subject to Philippine income tax and the ten percent (10%) value-added tax (VAT). It is represented that PWW is a nonresident foreign corporation organized and existing under the laws of the Netherlands with principal office at 1183 DJ Amstelveen, Prof. W.H. Keesomlaan 12, The Netherlands; that it 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 June 3, 2004; that Jimenez Basic and Publicis Manila are both domestic corporations organized and existing under the laws of the Philippines with principal office at 23rd Floor, The Pacific Star Building, Sen. Gil Puyat Avenue, Makati City and Zaragoza Building, 102 Gamboa Street, Legazpi Village, Makati City, respectively; that PWW entered into a separate Advisory Service Contract for shared advisory services with Jimenez Basic and Publicis Manila; that under the said contract, PWW, directly or through other Publicis Group Service Providers, will provide certain advisory services to Jimenez Basic and Publicis Manila; that the scope of services to be rendered by PWW throughout the term of the agreement, are in relation to, but are not limited to the following: commercial and creative development, media and research, finance and administrative, legal and tax and strategic areas to subsidiary, affiliate and related companies; that for the advisory services rendered by PWW, Jimenez Basic and Publicis Manila will pay a fee equal to the total direct and indirect costs of providing the services marked up to include a profit on such costs of 8%; that the contract is made effective as of January 1, 2003 and shall remain in force and effective until terminated for any reason for either party with an effect on December 31 of the year after giving not less than sixty (60) days written notice to the other party; that PWW will perform these services outside the Philippines, except for specific services which require the presence of its personnel in the Philippines for period of time not exceeding 180 days. In reply, please be informed that Article 7(1) of the Philippines-Netherlands tax treaty provides, viz : "Article 7 "Business Profits "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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 the permanent establishment. cSTHaE Moreover, Article 5 of the said treaty provides, 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. aDSHCc "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, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a resident corporation of Netherlands carries on business in the Philippines through a permanent establishment situated therein, the profits of the said corporation attributable to such permanent establishment shall be subject to Philippine income tax. For this purpose, a Netherlands corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation through its personnel, continue (for the same or connected project) within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Based on the foregoing, services rendered by PWW (through its employees) for Jimenez Basic and Publicis Manila under their respective agreements, will each constitute a permanent establishment if such services were performed in the Philippines and were undertaken for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Where a permanent establishment exists, business profits attributable to the same will be subject to Philippine income tax. (BIR Ruling DA-ITAD-53-04, dated May 21, 2004) Thus, service fees paid by Jimenez Basic and Publicis Manila to PWW for services rendered under their respective Agreements shall be subject to income tax if the same are attributable to a permanent establishment of the latter in the Philippines. Otherwise, said service fees shall be exempt from income tax. EcHAaS Moreover, services rendered by personnel of PWW in the Philippines shall be subject to 10% VAT, pursuant to Section 108 of the Tax Code of 1997. As regards your opinion that the service fees paid by Jimenez Basic and Manila Publicis to PWW qualify as deductible business expense under Section 34(A)(1)(a) 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. (ITAD Ruling No. 038-02 dated March 14, 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service