ITAD Ruling No. 157-04

December 29, 2004 ITAD RULING NO. 157-04 Arts. 5 & 8, Philippines-United States tax treaty Arts. 5 & 8, Philippines-Canada tax treaty Arts. 5 & 7, Philippines-China tax treaty Arts. 5 & 7, Philippines-Malaysia tax treaty Arts. 5 & 7, Philippines-Indonesia tax treaty Arts. 5 & 7, Philippines-Australia tax treaty Arts. 5 & 7, Philippines-New Zealand tax treaty Arts. 5 & 7, Philippines-India tax treaty Arts. 5 & 7, Philippines-Japan tax treaty Arts. 5 & 7, Philippines-Thailand tax treaty Section 108, NIRC BIR Ruling No. DA-ITAD-186-00 BIR Ruling No. DA-ITAD-27-04 BIR Ruling No. DA-ITAD-16-01 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Romulo S. Danao Jr. Partner, Tax Services This refers to your letter dated December 15, 2004, on behalf of your client, Watson Wyatt Philippines, Inc. (WWPI), requesting confirmation of your opinion on the following: 1) that the service fees paid by WWPI to Watson Wyatt Offices (WWOs) enumerated below corresponding to services rendered outside the Philippines are not subject to Philippine income tax pursuant to Section 28(B)(1) in relation to Section 42(A)(3) of the Tax Code of 1997; and 2) that the service fees paid by WWPI to WWOs which are residents of countries where the Philippines has an existing tax treaty, corresponding to services rendered within the Philippines are also not subject to Philippines income tax since said WWOs do not have permanent establishment in the Philippines. It is represented that WWPI is a domestic corporation engaged in the business of providing human resources, actuarial consultancy and advisory services to its clients with principal office at 21/F Tower I, The Enterprise Center, Makati City; that to efficiently carry out its business operations, WPPI entered into individual Service Agreements with the WWOs whereby the WWOs have agreed to provide related services to WWPI; that the WWOs, with their respective country of residence, are as follows: Watson Wyatt Office Country Residence 1. Watson Wyatt & Company (WWC-US) USA 2. Watson Wyatt & Company-Taiwan Branch Taiwan; Head Office: WWC-US (WWC Taiwan Branch) 3. Watson Wyatt & Company (WWC-Canada) Canada 4. Watson Wyatt Hong Kong Ltd. (WWC-Hong Kong) Hong Kong 5. Watson Wyatt Shanghai China 6 Watson Wyatt (Malaysia) Sendirian Berhad Malaysia 7. Watson Wyatt Purbajaga Indonesia 8. Watson Wyatt Australia Pty Ltd Australia 9. Watson Wyatt New Zealand Ltd New Zealand 10. Watson Wyatt India Pvt. Ltd. India 11. Watson Wyatt K.K. Japan 12. Watson Wyatt Company Ltd., Korea Branch Korea; Head Office: WWC Canada (WWC Korea Branch) 13. Watson Wyatt (Thailand) Limited Thailand It is further represented that services to be provided under the respective Service Agreements by the WWOs include the following: Human Resources (HR) Consulting such as job position evaluation and pricing, conducting seminars on HR topics, compensation and benefit evaluation, and such other services related thereto; Actuarial Services which cover professional advice on general actuarial subjects, on the actuarial and consulting aspects of pension funds, provident funds and retirement gratuity schemes; and Data Services , which include providing reports on compensation surveys by industry, position, and other related services. that the abovementioned services being provided by the WWOs to WWPI are principally performed outside the Philippines; that representatives of the WWOs only make occasional visits to the Philippines in connection with the performance of the services and only when specifically requested by WWPI; that in the event that their presence is required in the Philippines, the representatives of the WWOs will not perform any services in the Philippines for a period exceeding an aggregate of one hundred and eighty days within any twelve-month period; and that WWPI and the WWOs are independent contractors such that the WWOs and their respective employees and representatives are not considered as employees or agents or representatives of the WWPI and vice versa; and that the WWOs have no authority or power to bind the WWPI or contract in the WWPI's name. CTcSIA In reply, this Office is of the opinion and so holds that: 1. The service fees being derived by WWOs from sources outside the Philippines shall be exempt from Philippine income tax. Section 28(B) and 42(A)(3) of the Tax Code of 1997 (Tax Code) provide, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . "xxx xxx xxx" "(B) Tax on Nonresident Foreign Corporation. "(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%), effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). "SEC. 42. Income from Sources Within the Philippines . "(A) Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: "xxx xxx xxx "(3) Services. Compensation for labor or personal services performed in the Philippines; "xxx xxx xxx" Under the aforecited provisions, a nonresident foreign corporation is taxable only on income derived from sources within the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income and not subject to income taxation. Accordingly, the service income from services rendered outside the Philippines paid by WWPI to the WWOs are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to withholding tax, pursuant to Section 28(B)(1) of the Tax Code. 2. The service fees derived by WWOs from sources within the Philippines shall be exempt from Philippine income tax. With the exception of WWC-Hong Kong with which the Philippines has no existing tax treaty, the income tax consequences of the services fees paid by WWPI to the WWOs from sources within the Philippines shall be governed primarily by the pertinent provisions of the applicable Philippine tax treaties, to wit : Philippines-United States tax treaty "Article 8: Business Profits (1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the 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 through which a resident of one of the Contracting States engages on a trade or business. (2) The term "fixed place of business" includes but is not limited to: xxx xxx xxx (j) The furnishing 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) "xxx xxx xxx" Philippines-Canada tax treaty "Article VII 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: (a) the permanent establishment; or (b) sales of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those affected, through that permanent establishment." xxx xxx xxx" "Article V Permanent Establishment 1. For the purpose 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. CSHcDT 2. The term "permanent establishment" shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, quarry or other place of extraction or natural resources; (g) a building or construction site or supervisory activities in connection therewith, where such activities continue for a period more than six months; (h) an assembly or installation project which exists for more than three months; (i) premises used as a sales outlet; (j) a warehouse, in relation to a person providing storage facilities for others. "xxx xxx xxx" Philippines-China tax treaty "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 Contacting 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" Article 5 Permanent Establishment 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "xxx xxx xxx" 3. The term "permanent establishment" likewise encompasses: "xxx xxx xxx" c) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 6 months within any twelve-month period ". (emphasis supplied) xxx xxx xxx" Philippine-Malaysia tax treaty "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 business as aforesaid, the profits of the enterprises may be taxed in the other State but only on so much thereof as is attributable to that permanent establishment." "xxx xxx xxx" "Article 5 Permanent Establishment 1. For the purpose of this Agreement, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. IEcDCa "xxx xxx xxx" 4. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if: (a) it carries on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State." (emphasis supplied) "xxx xxx xxx" Philippines-Indonesia tax treaty "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: (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment." "xxx xxx xxx" "Article 5 Permanent Establishment 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: "xxx xxx xxx" (m) 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 connected project) for a period or periods aggregating more than 183 days within any twelve-month period ." (emphasis supplied) "xxx xxx xxx" Philippines-Australia tax treaty "Article 7 Business Profits (1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contacting 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 (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in that other State." "xxx xxx xxx" "Article 5 Permanent Establishment (1) For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. (2) The term "permanent establishment" shall include especially xxx xxx xxx" (k) a place in one of the Contracting States through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or periods aggregating more than six months in any taxable year or year of income , as the case may be, in relation to a particular project, or to any project connected therewith. (emphasis supplied) xxx xxx xxx" (4) An enterprise shall be deemed to have a permanent establishment in one of the Contracting States and to carry on business through that permanent establishment if substantial equipment is being used in that State for more than six months by, for or under contract with the enterprise." (emphasis supplied) aETADI xxx xxx xxx" Philippines-New Zealand tax treaty "Article 7 Business Profits 1. The profits of an enterprise of one of the Contracting States 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 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 (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those being sold, or other business activities of the same or a similar kind as those being carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in that other State." "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. 2. The term "permanent establishment" includes especially: xxx xxx xxx" (k) a place for the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any twelve month period ." (emphasis supplied)" xxx xxx xxx" c "Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that 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 through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: xxx xxx xxx" (h) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months" xxx xxx xxx" Philippines-Japan tax treaty "Article 7 (1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." xxx xxx xxx" "Article 5 (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. xxx xxx xxx" (6) An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph (7) applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year . However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State." (emphasis supplied) xxx xxx xxx" Philippines-Thailand tax treaty "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 that 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 a business through which the business of the enterprise is wholly or partly carried on. xxx xxx xxx" 2. The term "permanent establishment" includes especially: xxx xxx xxx" (k) 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) xxx xxx xxx" Based on the above-quoted provisions, the income in the form of service fees of WWOs shall be taxable in the Philippines only if they are deemed to have a permanent establishment situated in the Philippines as defined under the above Philippine tax treaties. HTIEaS Moreover, it is clear that if a corporation which is a resident of the aforecited countries, more particularly, the United States, Canada, China, Malaysia, Indonesia, Australia, New Zealand, India, Japan and Thailand, carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. For this purpose, a resident corporation of the United States, Canada, Malaysia and India, may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of consultancy or supervisory services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days or 6 months, as the case may be. Moreover, with respect to resident corporations of China, Indonesia, Australia, New Zealand and Japan, the furnishing of consultancy or supervisory services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days or 6 months, as the case may be, must be within any twelve month period. With respect to WWC Taiwan Branch and WWC Korea Branch, Article 3 of the Philippines-United States tax treaty and Article 4 of the Philippines-Canada tax treaty read, viz : Philippines-United States tax treaty "Article 3 Fiscal Residence 1. In this Convention: xxx xxx xxx" (b) The term "resident of the United States" means: (i) A United States corporation, and (ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United State tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries. "xxx xxx xxx" Philippines-Canada tax treaty "Article IV Fiscal Domicile 1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." "xxx xxx xxx" It is clear from the aforequoted provision that the term "resident of the United States" includes a United States corporation while the term resident of Canada shall include any person who is liable to tax in Canada by reason of his domicile, residence, place of management or any other criterion of a similar nature. Since WWC Taiwan Branch and WWC Korea Branch are branches of WWC-US and WWC-Canada respectively, WWC Taiwan Branch and WWC Korea Branch are considered as residents of the United States and Canada, respectively. Accordingly, the service income derived by WWC Taiwan Branch and WWC Korea Branch from sources within the Philippines are subject to Philippines-United States tax treaty and the Philippines-Canada tax treaty. (BIR Ruling No. ITAD-DA-186-00 dated December 7, 2000) Considering that it has been represented that the furnishing of services under the Service Agreements shall be performed by the WWOs, through their respective employees for a period or periods not aggregating 183 days, the WWOs are not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, with the exception WWC-Hong Kong, the service fees to be paid by WWPI to WWOs for services within the Philippines under the Agreement are not subject to Philippine income tax pursuant to the aforecited tax treaties. Consequently, the said service fees are not subject to the Philippine withholding tax under Section 57(A) of the Tax Code. However, with respect service fees derived by WWC-Hong Kong from sources within the Philippines, WWC-Hong Kong shall be subject to income tax pursuant to Sections 28(B) and 42(A)(3) of the Tax Code. (BIR Ruling No. DA-ITAD-27-04 dated March 25, 2004; BIR Ruling No. DA-ITAD-16-01 dated February 19, 2001) However, the service fees payments for services done in the Philippines are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, WWPI being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to the WWOs. In remitting the VAT withheld, WWPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by WWPI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case WWPI is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset," whichever is applicable. In addition, WWPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of the WWOs, the first three copies thereof to be given to the WWOs and the fourth copy to be retained by WWPI as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] 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 without force and effect insofar as the herein parties are concerned. caTESD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service