ITAD Ruling No. 202-02

November 25, 2002 ITAD RULING NO. 202-02 RP-Korea tax treaty Art. 5, Art. 7 & Art. 14, BIR Ruling No. ITAD 69-00 Samsung Electro-Mechanics Philippines Corporation Blk. 5, Calamba Premiere International Park Barangay Batino, Prinza Calamba, Laguna Attention: Mr. Dae Sik Choi General Manager Gentlemen : This refers to your application for relief from double taxation dated September 18, 2001, requesting confirmation of your opinion that the audit consulting fee paid by Samsung Electro-Mechanics Philippines Corporation (Samsung) for the audit services rendered by the Korean Management Association Quality Assurance Co., Ltd. (KMAQACL) are exempt from Philippine income tax, pursuant to Article 14 of the RP-Korea tax treaty. It is represented that KMAQACL is a corporation duly organized and existing under the laws of Korea with business address at 234-2, Gonduk-Dong, Mapo-ku, Seoul, Korea; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-Registration issued by the Securities and Exchange Commission dated September 18, 2001; that Samsung is a corporation organized and existing under the laws of the Philippines with business address at Blk. 5, Calamba Premier International Park, Barangay Batino, Prinza, Calamba, Laguna; that on September 5, 2001, a QS-9000/ISO9002 Certification Agreement (Audit Agreement) was executed by and between KMAQACL and Samsung wherein KMAQACL agreed to audit the overall system of Samsung, specifically the Production and Supporting Departments of Multi-Layer Chip Capacitor, Saw Filter, Crystal Oscillator, Chip Resistor and Tantallum Capacitor for the QS 9000/ISO 9002 Compliance Certification; that the Audit Agreement shall be effective for a period of six (6) days beginning on July 18, 2001 and ending on July 19, 2001 for the first audit engagement and to be continued on September 3, 2001 and will end on September 6, 2001 for the second and last audit engagement; that the audit team shall be composed of Mr. Dae Kyung Gwon, Soo Young Choi and Seong Dong Min, who are all employees of KMAQACL; and that the consulting fee for the audit services shall be Seven Million Seven Hundred Thousand Korean Won (W7,700,000) or Five Thousand Nine Hundred Ninety Eight and 29/100 US dollars ($5,998.29), and shall be paid directly to KMAQACL. In reply, in view of the representation that the subject audit consulting fee shall be paid directly to KMAQACL and not to its individual auditor; Article 14 of the RP-Korea tax treaty on Independent Personal Services which you are invoking is not applicable. Instead, please be informed of the applicable pertinent provisions of Article 7 and Article 5 of the same treaty which provide: "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 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 purpose 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 "(3) a) . . . b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitutes a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period." cEaACD Based on the aforequoted provisions, the profits of a corporation which is a resident of Korea is taxable only in Korea, unless the Korean corporation carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. A Korean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel is for a period or periods aggregating more than 183 days within any twelve-month period. Considering that the employees of KMAQACL had conducted their audit in the Philippines for a period not exceeding 183 days within a twelve-month period, such would not constitute a permanent establishment for KMAQACL in the Philippines to which its profits could be attributable. Such being the case, the profits of KMAQACL derived from the rendition of the said audit services shall not be subject to Philippine income tax, pursuant to Article 7(1) in relation to Article 5(3)(b) of the RP-Korea tax treaty. ( BIR Ruling No. ITAD 69-00 dated April 7, 2000 ) However, the fees to be paid by Samsung for that portion of the services rendered by KMAQACL in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Samsung, 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 KMAQACL. In remitting the VAT withheld, Samsung 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 Samsung upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case Samsung 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, Samsung is required to issue the Certificate to Final Tax Withheld at Source (BIR form 2306) in quadruplicate upon request of KMAQACL, the first three copies thereof to be given to KMAQACL and the fourth copy to be retained by Samsung as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 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. cAECST Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service