ITAD Ruling No. 229-02

December 27, 2002 ITAD RULING NO. 229-02 Article 5 & 8, RP-US BIR Ruling No. DA-ITAD-53-02 Bernaldo Mirador Law Offices U-1810-11 Cityland Condominium 10 Tower I 6815 Ayala Avenue North, Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your application for relief from double taxation dated November 8, 2001, on behalf of Cellstar Ltd. (Cellstar US), requesting confirmation that the income from consulting and technical service fees paid by Cellstar Philippines, Inc. (Cellstar Phil) are not subject to Philippine income tax pursuant to the RP-US tax treaty. HAICET It is represented that Cellstar US is a nonresident foreign corporation duly organized and existing under the laws of Australia with principal address at 1730 Briercroft Court, Carrolton, Texas 75006, U.S.A.; 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 certification issued by the Securities and Exchange Commission dated August 20, 2001; that Cellstar Phil is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at 30/F IBM Plaza Bldg., Eastwood Avenue, Bagumbayan, Quezon City; that it is engaged in buying, selling, distributing, importing and manufacturing at wholesale cellular telephones, pagers, personal telecommunication systems (PCS) products, radio communication products, and other related accessories; that on June 1, 2000, it entered into a Consulting and Technical Assistance Agreement with Cellstar US for a period of two (2) years wherein the latter will provide administrative consulting services such as accounting, tax, legal, risk management and treasury service, operational management services, information technology development services, information technology infrastructures and support services as well as perform related business management activities and most services will be performed outside the Philippines and if necessary, Cellstar US would send its representative to the Philippines to perform the services which usually will not entail more than fifty (50) days; and that in consideration of the services, Cellstar US will receive compensation in the form of "Consulting and Technical Service Fee" in addition to reimbursing the former all of its operating management services, 5% for administrative consulting services, 10% for IT development services and 10% for IT administrative services and support. TCacIA In reply thereto, please be informed that Article 8 of the RP-US tax treaty provides, viz: "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 States, 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 Moreover, paragraphs (1) and (2)(j) of Article 5 of the aforesaid treaty provide, viz: "Article 5 "Permanent Establishment "1. For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "2. The term "fixed place of business" includes 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; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of 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 ours) xxx xxx xxx Based on the aforequoted provisions, it is clear that if a corporation which is a resident of US 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 are attributable to that permanent establishment. For this purpose, a corporation which is a resident of US may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of consultancy or technical service 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. HcSETI Considering that the abovementioned services will be performed by Cellstar US outside the Philippines, and in case it would be necessary for Cellstar US to send its representatives to conduct regular visits in the Philippines, their stay here will not be more than 183 days in any calendar year, Cellstar US cannot be considered to have a permanent establishment in the Philippines. Hence, the service fees paid to Cellstar US under the Consulting and Technical Assistance Agreement are not subject to Philippine income tax, pursuant to the RP-US tax treaty. However, the fees to be paid by Cellstar Phil for that portion of the services rendered by Cellstar US in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Cellstar Phil, 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 Cellstar US. In remitting the VAT withheld, Cellstar Phil 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 Cellstar Phil upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Cellstar Phil 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, Cellstar Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Cellstar US, the first three copies thereof to be given to Cellstar US and the fourth copy to be retained by Cellstar Phil 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