Modified Requirements for Lending and Financing Companies

January 6, 2020 ITAD BIR RULING NO. 005-20 Articles 5 (Permanent Establishment) and 8 (Business Profits) Philippines-United States of America tax treaty R.G. Manabat and Co. 9th Floor, The KPMG Center 6787 Ayala Avenue 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to the tax treaty relief application filed on June 11, 2014 requesting confirmation that income derived by Remington Outdoor Company, Inc. (" Remington ") from the supply and delivery of firearms to the Armed Forces of the Philippines (" AFP ") is exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (" Philippines-United States tax treaty "). cSEDTC FACTS Remington is a foreign corporation organized and existing under the laws of the United States and a resident thereof based on its Restated Certificate of Incorporation and Certificate of Residence issued by the Internal Revenue Service of the United States. Remington is engaged in the design, manufacture and marketing of firearms, ammunition and related products for hunting, shooting sports, law enforcement and military markets. 1 It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, AFP is the military forces of the Philippines, which consists of the Army, the Navy (including the Marine Corps) and the Air Force. 2 On October 23, 2013, AFP , as procuring entity, and Remington , as supplier, entered into a Contract Agreement (" Agreement ") where Remington agreed to supply and deliver 50,629 units of assault rifle to AFP . The contract price is US$_______________ or Php_______________. The supply was pursuant to the Notice of Award and Notice to Proceed issued by the Department of National Defense (" DND ") to Remington . DND is a government agency with mandate to safeguard the country against external and internal threats to national peace and security and to provide support for social and economic development. DND supervises the Armed Forces of the Philippines, the Government Arsenal, the Philippine Veterans Affairs Office, the National Defense College of the Philippines, and the Office of Civil Defense, and supervises and administers the AFP Modernization Program. 3 Based on a certification issued by DND, Remington conducted maintenance training in the Philippines on August 6-7, 2014 on the use of the procured firearms. The training was conducted by John Michael Iliff and Michael Duane Haugen of Remington , and attended by fifty students at the NCO Club House, Fort Bonifacio in Taguig City. AIDSTE Based on a sworn statement issued by Remington , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: " 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 subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). " However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." For this purpose, paragraph 1, Article 8 and paragraphs 1, 2 and 5, Article 5 of the Philippines-United States tax treaty provide as follows: " 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." " 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 in a trade or business. SDAaTC 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." Under Article 8, business profits derived by a resident of a Contracting State in the other Contracting State may be taxed in the other State if the resident has a permanent establishment in the other State and the profits are attributable to the permanent establishment. Under Article 5, a permanent establishment means a fixed place through which a resident of Contracting State engages in a trade or business. The term permanent establishment includes especially a seat of management, a branch, an office, a store or other sales outlet, and a factory. It also includes the furnishing of services by a resident of a Contracting State, through employees or other personnel thereof, where such activity continues in the other Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Remington is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or other fixed place of business in the country, and it did not furnish services in the Philippines for more than 183 days, but for a period of two days only on August 6-7, 2014, to conduct maintenance training on the use of the firearms it delivered to AFP , Remington shall not be deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-United States tax treaty. This being the case, income payments made by AFP to Remington for the supply and delivery of the said firearms shall be exempt from income tax pursuant to paragraph 1, Article 8 of the Philippines-United States tax treaty. With respect to value-added tax (" VAT "), the firearms imported by AFP is subject to VAT at the rate of 12% under Section 107 (A) of the Tax Code, unless the AFP can show a specific provision of law exempting it from VAT on importation of firearms. Section 107 (A) provides: AaCTcI " SEC. 107. Value-Added Tax on Importation of Goods. (A) In General . There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of the value-added tax to twelve percent (12%) . . ." 4 Moreover, the furnishing of services in the Philippines by Remington is also subject to VAT at the rate of 12% under Section 108 (A) of the Tax Code, unless the AFP can show a specific provision of law exempting it from VAT on procurement of services. Section 108 (A) provides: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . ." 5 Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 6 AFP shall withhold VAT on payments made to Remington , being a nonresident foreign corportion. In remitting the VAT withheld, AFP shall use BIR Form No. 1600 (Remittance Return of VAT and Other Percentage Taxes Withheld). VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made. acEHCD This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. https://www.remingtonoutdoorcompany.com/ . 2. http://www.afp.mil.ph/index.php . 3. http://www.dnd.gov.ph/transparency/about-dnd/mission-vision-and-core-values.html . 4. The recommendation of the Secretary of Finance to increase the VAT rate from 10% to 12% was approved by the President through a memorandum issued by the Executive Secretary on January 31, 2006. The increase in VAT from 10% to 12% took effect on February 1, 2006. 5. Ibid. 6. Consolidated Value-Added Tax (Regulations of 2005), as amended by Revenue Regulations No. 4-2007.