ITAD Ruling No. 144-00

September 28, 2000 ITAD RULING NO. 144-00 RP-Singapore Article 5 & 7 ITAD No. 100-00 BIR Ruling No. ITAD 144-00 Luxasia Incorporated 16th Floor PCIB Tower 2 Makati Avenue, Makati City Attention: Mr . Jose F . Montana Finance & Administration Manager Gentlemen : This refers to your letter dated July 21, 2000 requesting confirmation of your opinion that the management and consultancy service by Singabell Pte. Ltd. (Singabell) to Luxasia Inc. (Luxasia) is exempt from Philippine income tax pursuant to the RP-Singapore Tax Treaty. It is represented that Singabell is a non-resident corporation duly organized under the laws of Singapore with official address at 13 Tai Seeing Drive, Singapore; that it is not registered as a corporation or partnership licensed to do business in the Philippines as per certification dated June 13, 2000 issued by the Securities and Exchange Commission; that on the 2nd day of December 1998, Singabell, as represented by Mr. Patrick Chong, entered into a Management Service Agreement with Luxasia, a corporation organized and existing under the laws of the Philippines with office address at 16th Floor PCIB Tower 2, Makati Avenue, Makati City which is engaged in selling imported products such as Calvin Klein, Davidoff, Issey Miyake, Jean Paul Gaultier, Bvlgari, Salvatore Ferragamo, Moschino, Dolce & Gabbana and Tiffany; that Luxasia shall pay Singabell management fee in the amount of 12.5% of net sales less VAT; and that as per Luxasia's certification, Mr. Patrick Chong of Singabell rendered said management and consultancy services for a period of nine (9) days during the taxable year 1999. In reply, please be informed that Article 7(1) in relation to Article 5(1) and (2)(j) of the RP-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 on the enterprise may be taxed in the other State but only so much of them is attributable to that permanent establishment. Moreover, paragraphs (1) and (2)(j) of Article 5 of the aforesaid treaty provide, viz: xxx xxx xxx "Article 5 Permanent Establishment (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. TAacIE (2) The term "permanent establishment" includes especially 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 supervisory activities in connection therewith provided such site project or activity continues for a period of 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 . xxx xxx xxx" Based on the foregoing, the management and consultancy services rendered by Singabell in the Philippines through its representative, Mr. Patrick Chiong, cannot qualify to constitute a permanent establishment for Singabell, the same not having exceeded the aggregate period of 183 days provided in the RP-Singapore tax treaty. Thus, the management and consultancy fees paid by Luxasia to Singabell under their Management Service Agreement are not subject to Philippine income tax. However, the fees paid by Luxasia to Singabell for the management and consultancy service rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Luxasia shall be responsible for the payment of VAT on the said services on behalf of Singabell by filing a separate VAT declaration/return using BIR Form 1600 and the said VAT declaration/return can be used by Luxasia as evidence in claiming input tax credit. (Sec. 4.102-1 (b). Revenue Regulations No. 7-95 [ITAD Ruling 100-00]. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group