ITAD Ruling No. 147-02

August 23, 2002 ITAD RULING NO. 147-02 RP-Singapore (Articles 5, 7 & 12) NIRC-Sec. 28 (B) (A) BIR Ruling No. ITAD-33-01 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ma. Victoria A. Villaluz Tax Division Gentlemen : This refers to your letter dated May 11, 2000 requesting confirmation of your opinion that the rental fees of Pricon Microelectronics, Inc. (Pricon) to SB Leasing (Singapore) Pte. Ltd. (SB Leasing) are exempt from the withholding tax of seven and one-half percent (7 %) on the gross rental or fees imposed under Section 28(B)(4) of the Tax Code of 1997 on non-resident lessors of machinery and other equipment in accordance with Articles 7 and 5 of the RP-Singapore Tax Treaty. It is represented that SB Leasing is a nonresident foreign corporation duly organized and existing under the laws of Singapore with principal office at 1 Shenton Way, #19-05 Robina House, Singapore 068806; that it is not registered as a corporation or partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated June 21, 2000; that Pricon is a domestic corporation registered with the Board of Investment, with office address at Manacal Industrial Estate, Taguig, Metro Manila; that SB Leasing entered into a contract and agreed to lease out certain machinery to Pricon; that the machinery stated in the Lease Contract No. 2000-012 shall be used by Pricon in its business of processing various computer and inkjet printer parts; that the contract has a term of 39 months commencing on the date of receipt of the property; that in consideration thereof, Pricon shall pay SB Leasing the basic amount of US$2,421,600.00 and the amount to be reduced to US$151,800.00 quarterly in arrears. It is further represented that pursuant to Article 7(1), in relation to Article 5(1) & (2) of the RP-Singapore Tax Treaty which respectively provides, as follows: ) "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 carried on. "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 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." the rental payments by Pricon to SB Leasing are not subject to Philippine income tax and to the 7.5 withholding tax imposed under Section 28(B)(4) of the Tax Code of 1997, since SB Leasing does not have a permanent establishment in the Philippines to which its business profits are attributable, citing BIR Rulings DA-345-99 dated June 14, 1999. In reply, please be informed that Article 12 of the RP-Singapore Tax Treaty provides, viz : "Article 12 Royalties "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; "b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; "c) in all other cases, 25 per cent of the gross amount of the royalties. "3) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment , or for information concerning industrial, commercial or scientific experience. (Emphasis supplied) "xxx xxx xxx" Based on the foregoing, the subject rental payments are covered by the term "royalties" and as such are subject to a preferential rate not exceeding twenty-five (25%) per cent of the gross amount of royalties. Correlatively, Section 28(B)(4) of the Tax Code of 1997 provides, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx "(B) Tax on Nonresident Foreign Corporations. xxx xxx xxx "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rental, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 %) of gross rentals or fees." In view thereof, the rental income derived by SB Leasing from its lease transaction with Pricon is subject to seven and one-half percent (7 %) tax rate on gross rentals, the same not having exceeded the 25% rate imposed on the gross amount of royalties under the RP-Singapore Tax Treaty, contrary to your opinion that the said rental income may be exempted from income tax and consequently to the 7.5 % withholding tax imposed under Section 28(B)(4) of the Tax Code of 1997. ( BIR Ruling No. ITAD-33-01 ) Furthermore, the said recital payments to be made by Pricon to SB Leasing for the lease of equipment are subject to the ten percent (10%) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. Accordingly, Pricon, being the lessee shall be responsible for the payment of VAT on such rentals on behalf of SB Leasing by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by Pricon as evidence in claiming input tax credit ( Sec. 4.102-1(b), Revenue Regulation No. 7-95 ). 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service