ITAD Ruling No. 127-02

August 2, 2002 ITAD RULING NO. 127-02 RP-Singapore Tax Treaty Art. 7 & Art. 5 BIR Ruling No. 88-86 and ITAD 144-00 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Center 1200 Makati City Attention: Atty. Marivic C. Espao Tax Partner Gentlemen : This refers to your application for relief from double taxation dated July 27, 2001, on behalf of your client, Becton Dickinson Philippines Inc. (BDPI), requesting confirmation of your opinion that the service fees to be paid by BCPI to Becton Dickinson and Company (BDC) are not subject to Philippine income tax, pursuant to the RP-Singapore tax treaty. It is represented that BOC is a branch of Becton Dickinson and Company, a corporation organized and existing under the laws of the State of New Jersey, USA, duly licensed to do business in Singapore with business address at 30 Tuas Avenue 2, Singapore 639461; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 4, 2001; that BDPI is a corporation organized and existing under the laws of Philippines with business address at 11th Floor, 6750 Ayala Avenue, Makati City; that BDPI entered into a Non-Technical Support Services Agreement with BDC effective January 1, 1998; that under the said Agreement, the prescribed services to be rendered by BDC to BDPI are the following: (1) BDC shall provide BDPI information that it may use for the formulation and development of its business strategy, (2) BDC shall conduct and complete an appraisal of BDPI's business and identify the strategies that the latter may pursue in the furtherance of its operations in the Philippines, (3) BDC shall produce a report on the results of its study together with recommendations for delivery of the same to the company, (4) BDC shall review the progress of BDPI and for this purpose, BDPI shall submit regular progress reports on the basis of which BDC shall compare the planned program of action with the activities actually performed and the expected benefits and the benefits actually achieved, and (5) BDC shall train personnel of BDPI which it may send to the United States of America or some other designated venue outside the Philippines, to develop their selling and marketing skills; that BDC shall perform the prescribed services either in Singapore or in the United States; that if it is necessary for BDC to send its employees to the Philippines, the length of stay of these individuals shall not, in any case, exceed 183 days; and that in consideration for the services to be provided, BDPI shall pay BDC an annual fee in the amount of US$177,000.00, subject to yearly adjustments. In reply, please be informed that Articles 7 and 5 of the RP-Singapore tax treaty provide: "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 carries on. "2. The term 'permanent establishment' includes especially but is not limited to: "a) A seal 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 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. (emphasis supplied) "xxx xxx xxx" Based on the foregoing, a corporation which is a resident of Singapore and does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, Singaporean corporation 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 BDC's staff either in Singapore or in the US, and should it be necessary for BDC to send its employees to the Philippines, the length of stay shall not exceed 183 days, then BDC cannot be considered to have a permanent establishment in the Philippines. Hence, the fees paid by BDPI to BDC pursuant to their Non-Technical Support Services Agreement are not subject to Philippine income tax. ( BIR Ruling No. 88-86, ITAD 144-00 ) However, the fees paid by BDPI for services rendered in the Philippines are subject to the 10% value-added tax pursuant to Section 108 of the Tax Code of 1997. Accordingly, BDPI, being the payor in control of the payment, shall be responsible for the withholding of VAT on such fees on behalf of BDC by filing a separate VAT return for an on behalf of BDC 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 BDPI if it is a VAT-registered taxpayer. In case BDPI is 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, BDPI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of BDC, the first three copies thereof to be given to BDC and the fourth copy to be retained by BDPI as its file copy. [ Section 4 & 6, Revenue Regulations 4-2002 ] 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