ITAD Ruling No. 143-02

August 20, 2002 ITAD RULING NO. 143-02 Article 5 & 7 RP-Singapore Section 108 of 1997 Tax Code BIR Ruling No. ITAD 64-02 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 letter dated September 17, 2001, requesting confirmation of our opinion that the service fees to be paid by your client, Zeller Plastik Philippines, Inc. (ZPPI) to Zeller Plastik (S.E. Asia) Pre Ltd (ZPSEAPL) are not subject to Philippine taxes. It is represented that ZPSEAPL is a corporation organized and existing under the laws of Singapore with office address at 750D Chai Chee Road, #08-02/03 Technopark @ Chai Chee, Singapore; that ZPSEAPL is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated September 13, 2001; that it is engaged in manufacturing moulds used in the production of plastic closure products and trades in plastic closures and other packaging materials; that on July 1, 1999, ZPSEAPL entered into an Equipment Support Services Agreement with ZPPI; that ZPPI is a corporation organized and existing under the laws of the Philippines with office address at Philcrest Compound Building, #3 Km 23 West Service Road, Cupang, Muntinlupa; that according to the Service Agreement, ZPSEAPL shall render the following support services to ZPPI: 1) Maintenance services to the equipment (the Equipment) found in the list appended to the Support Services Agreement; 2) Assistance in the operation of the Equipment from time to time; 3) Assistance, at client's cost, in procuring equipment spares, including obtaining quotations and negotiating prices on behalf of the client; 4) Examination of any quality control complaint arising from the malfunctioning of the equipment; 5) Other support services as the customers may require in modifications to equipment. that the services shall generally be rendered outside the Philippines and in case services will be rendered in the Philippines, the aggregate stay of the employees of ZPSEAPL in the Philippines shall not exceed three months; and that in consideration of the services, ZPPI shall pay ZPSEAPL a service fee of Three Hundred Thousand US Dollars (US$300,000) per annum. In reply, please be informed that Article 7(1) and Article 5 of the RP-Singapore tax treaty respectively provide, viz : cCSDTI "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." xxx xxx xxx" Based on the aforequoted provisions, this Office is of the opinion and so holds that the service fees paid by ZPPI to ZPSEAPL are not subject to income tax and withholding tax considering that the stay of ZPSEAPL personnel in the Philippines to render maintenance and assistance services to ZPPI, as stipulated in the Equipment Support Agreement, shall not exceed six months or 183 days and, therefore, shall not constitute a permanent establishment for ZPSEAPL in the Philippines to which any profits may be attributed to. ( BIR Ruling No. DA-ITAD-64-02 dated April 24, 2002 ) However, the payments of service fees to ZPSEAPL covering that portion of the services rendered in the Philippines shall be subject to the ten per cent (10%) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, ZPPI paying the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of ZPSEAPL by filing a separate VAT return for and on behalf of ZPSEAPL 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 ZPPI. In addition, ZPPI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) a quadruplicate upon request of ZPSEAPL, the first three copies thereof to be given to ZPSEAPL and the fourth copy to be retained by ZPPI as its file copy. This ruling is issued on the basis of the foregoing facts as presented. However, upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service