ITAD Ruling No. 152-03

October 9, 2003 ITAD RULING NO. 152-03 RP-Netherlands, Art. 5 & 7 BIR Ruling No. ITAD-134-02 Quisumbing & Torres 11th Floor, Pacific Star Bldg. Makati City, Philippines Attention: Ms. Natividad B. Kwan Ms. Jose Jaime V. Cruz Gentlemen : This refers to your application for relief from double taxation dated December 20, 2002, on behalf of Guinness United Distillers & Vinters Amsterdam B.V. (GUDVA), requesting confirmation of your opinion that the business profits derived by GUDVA from services rendered to International Distillers Philippines, Inc. (IDP), now known as Diageo Philippines, Inc., are not subject to Philippine income tax pursuant to the RP-Netherlands tax treaty and under the pertinent provisions of the National Internal Revenue Code of 1997. It is represented that GUDVA is a non-resident foreign corporation organized and existing under the laws of the Netherlands with principal address at Molenwerf 10-12 1014 BG Amsterdam; that it is engaged in the business of sourcing and supplying raw materials, capital equipment, spare parts and the provision of other related services to distillery-related industries; that GUDVA obtained a license from the Securities and Exchange Commission in December 2000 to operate a branch in the Philippines with office address at 12/F Net One Center, 25th St.,cor 3rd Avenue Crescent Park West, Bonifacio Global City, Taguig, Metro Manila; that the branch was established to: a) import, export and trade in liquors, spirits, wines and other alcoholic and non alcoholic beverages, as well as in all other products, especially in food products; b) to acquire, alienate, license and otherwise exploit trademarks, licenses and distribution, production and other rights in relation to the products, mentioned hereinbefore; c) to participate in, to manage and to invest in other rights in relation to the products, mentioned hereinbefore; c) to participate in, to manage and to invest in other enterprises and companies and to provide security for the debts of third parties; d) to do all acts connected therewith or may be conducive thereto to the extent allowed by law and subject to the Negative List as may be promulgated under the Foreign Investment Act ;that IDP is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at 23rd Floor, Tower 2, the Enterprise Centre, 6776 Ayala Avenue, Makati City; that it is engaged primarily in the importation, manufacturing, marketing and distribution of all kinds of beverages and liquors; that GUDVA and IDP have entered into a Service Agreement which took effect on June 1, 1999 whereby the former would source and supply from outside the Philippines, raw materials, capital equipment, spare parts and provide other related services to IDP's bottling operations in the Philippines; that in consideration for GUDVA's services, IDP agrees to pay GUDVA a fixed amount annually as service fees; that under the said agreement, GUDVA also agrees to perform all the services to IDP abroad or outside the Philippines; that representative from GUDVA may make occasional visits to the Philippines in connection with the performance of services for IDP under the Agreement when necessary and for limited durations only; that the occasional visits shall in no case exceed an aggregate of 183 days within any 12-month period; that inasmuch as the services of GUDVA for IDP are done offshore, the Philippine branch of GUDVA does not intervene or participate in any manner, whether directly or indirectly, in the performance of such services; that GUDVA's Philippine branch has not commenced commercial operations per affidavit of non-operation executed by the directors of GUDVA in Amsterdam stamped received by SEC Corporate Registration and Monitoring Division on July 3, 2002. In reply thereto, please be informed that Article 7 of the RP-Netherlands tax treaty provides, viz : "Article 7 "BUSINESS PROFITS 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries 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" Moreover, paragraphs (1) and (2) of Article 5 of the aforesaid 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: a) a place of management; b) a branch; c) an office; d) a factor; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve month period. xxx xxx xxx." Based on the aforequoted provisions, it is clear that if a corporation which is a resident of The Netherlands carries on business in the Philippines through a permanent establishment situated therein, then the profits of the same shall be subject to Philippine income tax, but only so much of them as are attributable to that permanent establishment. For this purpose, a corporation which is a resident of The Netherlands may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, for the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. aTCAcI Considering that the abovementioned services are represented to be performed by GUDVA outside the Philippines, and should it be necessary for GUDVA to send its representatives to conduct regular visits in the Philippines, their stay here would not be more than 183 days in any twelve month period, then GUDVA cannot be considered to have a permanent establishment in the Philippines. This is despite the presence of its branch in the Philippines which, however, did not intervene nor participate in any manner, whether directly or indirectly in the performance of the subject services inasmuch as the said branch has not commenced commercial operation at all. Hence, the service fees received under the Service Agreement are not subject to Philippine income tax, pursuant to the RP-Netherlands tax treaty. It has to be emphasized, however, that once said branch commences operation, GUDVA's service fees shall then become taxable under Section 28(A) of the 1997 Tax Code in relation to paragraph 2 of Article 5 and paragraph 1 of Article 7 of the RP-Netherlands tax treaty. However, the fees to be paid by IDP for that portion of the services rendered by GUDVA in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, IDP, 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 making any payment to GUDVA. In remitting the VAT withheld, IDP 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 IDP upon filing its own VAT return, if it is a VAT-registered taxpayer. In case IDP 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, IDP is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of GUDVA, the first three copies thereof to be given to GUDVA and the fourth copy to be retained by IDP as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] This ruling is issued based on 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service