ITAD Ruling No. 147-05

November 29, 2005 ITAD RULING NO. 147-05 Articles 5 & 7, Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD-53-02 Punongbayan & Araullo Unit 807, 8th Floor Ayala Life-FGU Center Mindanao Avenue corner Biliran Road Cebu Business Park, Cebu City Attention: Ms. Maria Victoria C. Espao Partner, Tax Advisory and Compliance Gentlemen : This refers to your letter dated August 5, 2005, on behalf of your client, Inchemcoat Philippines, Inc. (ICPI), requesting confirmation of your opinion that service fees paid by ICPI to Inchem Holdings International Ltd. (IHIL) under a Management and Administrative Support Services Agreement are not subject to Philippine income tax, pursuant to the provisions of the National Internal Revenue Code of 1997 (Tax Code) and the Philippines-Singapore tax treaty. It is represented that IHIL (formerly Inchem Holdings International Pte. Ltd.) is a nonresident foreign corporation duly organized and existing under the laws of Singapore with office address at 26 Ayer Rajah Crescent #07-01 Singapore 139944; that it is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines per certification issued by the Securities and Exchange Commission dated July 19, 2005; that ICPI is a corporation duly organized and existing under the laws of the Philippines with office address at Door 6A L.K. Building, Tipolo, Mandaue City, Cebu; that on January 1, 2005, ICPI and IHIL entered into a Management and Administrative Support Services Agreement (Agreement) wherein IHIL agreed to provide ICPI the following services outside the Philippines : (a) To train selected employees of ICPI to attain skills to improve productivity; (b) To assist in business development; (c) To assist in the marketing of ICPI's capabilities; (d) To assist in the review of Human Resource policies matters; (e) To assist in the review of insurance policies and requirements; (f) To provide guidance and accounting policies, procedures and systems based on International Financial Reporting Standards and Group policies; and (g) To provide guidance on day-to-day accounting and operational issues; aCSHDI that the employees and personnel of IHIL shall exclusively perform the services for ICPI in Singapore or in other countries outside the Philippines and should it be necessary for IHIL to send its employees to the Philippines, the stay of these individuals shall not in any case exceed six (6) months in a one year period; that the above-described offshore services shall in no case involve the transfer of IHIL's technology, know-how, or other intellectual property rights; that in consideration for the services rendered, ICPI agrees to pay to IHIL a fee of 1.5% of the value of ICPI's sales (less discount and return),exclusive of value-added tax (VAT),if any, for the period commencing on January 1, 2005 until December 31, 2007; and that the Agreement shall be effective for a 3-year term commencing on January 1, 2005 until January 31, 2007, subject to automatic renewal for another twelve-month term, unless one of the parties serves a written notice of non-renewal to the other party not later than one (1) month prior to the expiration of the current term. In reply, please be informed that Article 7(1) 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, paragraphs (1), (2) and (3) of Article 5 of the same treaty provide, 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 partly carried on. 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; IDSaEA 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) 3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise." xxx xxx xxx" Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the above-mentioned services will be performed by IHIL staff based in Singapore, and that in case it would be necessary for IHIL staff to conduct visits in the Philippines, their stay here will not be more than 183 days in any calendar year, IHIL cannot be considered to have a permanent establishment in the Philippines. Hence, the service fees paid by ICPI to IHIL under the Management and Administrative Support Services Agreement are not subject to Philippine income tax. (BIR Ruling No. 53-02 dated April 16, 2002) SDTIaE However, the fees paid by ICPI for the portion of the services to be rendered in the Philippines are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, ICPI, being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of IHIL by filing a separate VAT return for and on behalf of IHIL 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 ICPI if it is a VAT-registered taxpayer. In case ICPI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, ICPI is required to issue the Certificate of Creditable tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies thereof to be given to IHIL upon its request, and the fourth copy to be retained by ICPI as its file copy. [Sections 4 & 6, Revenue Regulations No. 4-2002] This ruling is issued on the basis of the foregoing 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service