ITAD Ruling No. 135-04

November 22, 2004 ITAD RULING NO. 135-04 Articles 5 & 7, Philippines-Singapore tax treaty BIR Ruling No. 077-84 BIR Ruling No. 566-88 Robert Bosch Inc. G/F Zuellig Building Sen. Gil Puyat Avenue Makati City 1200 Attention: Nilo C. Punzalan Financial Controller Mary Anne L. Mabalot Accounting Manager Gentlemen : This refers to your application for relief from double taxation dated February 23, 2004, on behalf of Robert Bosch (South East Asia) Pte. Ltd. (RBSI), pursuant to Article 7 of the Philippines-Singapore tax treaty. It is represented that RBSI is a nonresident foreign corporation duly organized and existing under the laws of Singapore, with principal address at 38C Jalan, Pemimpin, Singapore; that the former name of RBSI is Diesel Electric (Malaya) Pte. Ltd.; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated March 11, 2004 issued by the Securities and Exchange Commission; that Robert Bosch Inc. (RBPH) is a corporation duly organized and existing under Philippine laws, with office address at G/F Zuellig Building, Sen. Gil Puyat Avenue, Makati City 1200; that in 2004, RBSI and RBPH entered into a Management Service Agreement, wherein RBSI shall provide the following services: (1) general management consultancy/support, (2) regional financial and accounting support, (3) corporate advertising and public relations support, and (4) regional logistics support; that in consideration of the foregoing services, RBPH shall pay RBSI a yearly service fee in the amount of Seventy Five Thousand Singapore Dollars (S$75,000.00) not later than thirty days upon receipt of the invoice from RBSI; that the services referred to in the Agreement shall not exceed One Hundred Eighty Three (183) days; and that the duration of the said Agreement shall be from January 1, 2003 until further revised or revoked by mutual agreement of both parties. In reply, please be informed Article 7 of the Philippines-Singapore tax treaty provides: "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." In relation thereto, Article 5 of the same tax treaty also provides: "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. IcHAaS "2. The term 'permanent establishment' includes specially but is not limited to: (a) A seat 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 or 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, a Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees or other personnel continue for the same or a connected project within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as it is represented that the above services are to be performed in the Philippines by RBSI which shall not exceed 183 days during the term of the contract, then the furnishing of said services by RBSI through its employees or other personnel shall not constitute carrying of business through a permanent establishment in the Philippines, to which the yearly service fees could be attributable. Such being the case, the said yearly service fees to be paid by RBPH to RBSI are not subject to Philippine income tax and consequently, to withholding tax under the National Internal Revenue Code of 1997. ( BIR Ruling No. 077-84 dated April 25, 1984; BIR Ruling No. 566-88 dated November 29, 1988 ) However, the service fees to be paid by RBPH to RBSI covering the visits of the employees or other personnel of RBSI are subject to the 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, RBPH, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before any payment to RBSI. In remitting the VAT withheld, RBPH shall use 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 documentary substantiation for the claim of input tax by RBPH upon filing its own VAT, if it is a VAT-registered taxpayer. In case RBPH is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, RBPH is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of RBSI, the first three copies thereof to be given to RBSI and the fourth copy to be retained by RBPH as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR No. 8-2002; Section 7 of RR No. 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. cTIESa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service