ITAD Ruling No. 134-02

August 2, 2002 ITAD RULING NO. 134-02 RP-Netherlands, Arts. 5 & 7 NIRC, Sec. 128 BIR Ruling No. DA-ITAD-54-01 BIR Ruling No. DA-ITAD-02-02 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander B. Cabrera Partner, Tax Services Department Gentlemen : This refers to your letters dated May 31, 2001 and January 25, 2002 on behalf of your clients MARCO POLO HOTELS CONSULTANCY B.V. (MP) and HALIFAX DAVAO HOTEL, INC. (HDHI), requesting confirmation that income payments by HDHI to MP relative to the latter's services to the former are not royalties but business profits exempt from Philippine income tax under the RP-Netherlands tax treaty. It is represented that MP is a corporation duly organized and existing under and by virtue of the laws of Netherlands engaged in the business of providing marketing and promotional services to hotels throughout the world; 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 08, 2001; that HDHI is a corporation duly organized and existing under Philippine laws; that on May 16, 1996, HDHI entered into a Marketing and Promotional Services Agreement with MP whereby the latter will provide the former services in relation to the promotion, marketing and publicity of the hotel in international markets world-wide; that said services shall not relate to the promotion, marketing and publicity of the hotel within the territorial limits of Davao City; that in consideration for the said services, MP shall receive from HDHI a marketing fee equivalent to 2% of the hotel's gross revenue for the first two fiscal years and 1.5% of the hotel's gross revenue for the third fiscal year and onwards; that the said services are rendered outside the Philippines. In reply, please be informed that Article 7(1) of the RP-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 that permanent establishment. 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 carried on. "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 the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. "xxx xxx xxx" Under the aforequoted provisions, it is clear that if a resident corporation of Netherlands carries on business in the Philippines through a permanent establishment situated in the latter, 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 a connected project) within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Considering that the services of HDHI covered by the Marketing and Promotional Agreement 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, no permanent establishment is deemed established to which HDHI's business profits could be attributed. Hence, your opinion that the service fees to be paid by HDHI to MP are not subject to Philippine income tax, pursuant to the RP-Netherlands tax treaty, is hereby confirmed. ( BIR Ruling No. DA-ITAD-54-01 ) Moreover, the service fees to be paid by HDHI to MP relative to services performed here in the Philippines shall be subject to the ten per cent (10%) value-added tax (VAT) pursuant to Section 108(A) of the Tax Code of 1997. Accordingly, HDHI being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of MP by filing a separate VAT return for and on behalf of MP 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 HDHI. In addition, HDHI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of MP, the first three copies thereof to be given to MP and the fourth copy to be retained by HDHI as its file copy. ( Sections 4 and 6, Revenue Regulations 4-2002 ) This ruling is issued on the basis of the foregoing representations. However, if upon investigation it shall be disclosed or discovered 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