ITAD Ruling No. 160-02

September 13, 2002 ITAD RULING NO. 160-02 RP-Singapore, Art. 5 & 7 BIR Ruling No. DA-577-99 Bonifacio Construction Management Corp. Bonifacio Centre 2, Bonifacio Global City Taguig, Metro Manila Attention: Ms. Marisa Duwady Chief Finance Officer Gentlemen : This refers to your letter dated September 7, 2001 requesting confirmation of your opinion that the fees paid by your company to Bovis Asia Pacific Pte., Ltd. (BAP) under your Management Advisory Services Agreement, are not subject to Philippine income tax pursuant to the RP-Singapore tax treaty. It is represented that BAP is a corporation organized and existing under the laws of Singapore with principal office address at 510 Thomson Road, #06-01 SLF Bldg.,Singapore 298135; that BAP is registered as a corporation licensed to do business in the Philippines through its Manila branch, Bovis Asia Pacific Pte.,Ltd.-Philippines Branch (BAP-Manila) as verified by the Securities and Exchange Commission (SEC) dated September 9, 2001; that Bonifacio Construction Management Corp. (BCMC) is a corporation organized and existing under the laws of the Philippines; that BAP and BCMC entered into a Management Advisory Services Agreement (Agreement) whereby BAP, through its Asia Pacific Regional Manager, Mr. Thomas Miller (Mr. Miller),will provide management services in all operations of BCMC; that in consideration of the management services, BCMC shall pay BAP a management fee in the amount of Twenty Four Thousand U.S. Dollars (US$24,000.00) per month for the period August 21, 1998 to December 31, 1999 and Twelve Thousand U.S. Dollars (US$12,000.00) per month from January 2000 onwards payable directly to BAP via telegraphic wire transfer; that BAP-Manila is not privy to the above Agreement between BAP and BCMC and no income derived by BAP from said transaction is attributable to BAP-Manila; that under the Agreement, there is no employer-employee relationship between BCMC and Mr. Miller; that Mr. Miller, being the Asia Pacific Manager of BAP, do not have to report nor be physically present in BCMC on a regular basis and only visits BCMC two or three days a week; and that since the Agreement only commenced on August 21, 1998 and pre-terminated last June 30, 1999, Mr. Miller did not stay in the Philippines for more than 183 days for the calendar years 1998 and 1999. In reply, please be informed that Article 5 and 7 of the RP-Singapore tax treaty provide 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. HTaIAC "xxx xxx xxx" "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 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 aforequoted provisions, it is clear that if a corporation which is a resident of Singapore 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. In the instant case, while the Singaporean corporation maintains a Philippine branch, it is represented that said branch does not have any participation whatsoever in the negotiation and implementation of the Agreement so that any income derived by BAP independently of its Philippine Branch shall be considered income of BAP alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989),pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside .The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Considering that the income derived by BAP under the Agreement is not attributable to BAP-Manila as the latter is not privy to the transaction, and that the duration of stay of Mr. Miller in the Philippines in the calendar year 1998 and 1999 is less than 183 days, BAP is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the income derived by BAP for the services it rendered to BCMC under the Agreement is not subject to Philippine tax pursuant to the RP-Australia tax treaty. (BIR Ruling No. DA-577-99 dated October 6, 1999) However, the gross receipts derived from the services rendered within the Philippines by BAP shall be subject to the 10 percent value added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code of 1997. Accordingly, BCMC being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of BAP by filing a separate VAT return for and on behalf of BAP 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 BCMC if it is a VAT-registered taxpayer. In case BCMC 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, whichever is applicable. In addition, BCMC is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of BAP, the first three copies thereof to be given to BAP and the fourth copy to be retained by BCMC as its file copy. Accordingly, BCMC shall, before making payments to BAP, withhold and remit to this Bureau the value-added tax at the rate of 10% of the contract amount. 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 without force and effect insofar as the herein parties are concerned. DTESIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service