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July 26, 2012

ITAD BIR RULING NO. 294-12

Articles 5 (Permanent Establishment),


7 (Business Profits) and 23
(Non-discrimination)
Philippines-Singapore tax treaty

Sycip Gorres Velayo and Co.


6760 Ayala Avenue
1226 Makati City

Attention: Fidela I. Reyes


Partner, Tax Services

Gentlemen :

This refers to your tax treaty relief application filed on September 7, 2011
requesting confirmation that service fees paid by Globe Telecom, Inc. ("Globe") to
A.T. Kearney Pte. Ltd. ("A.T. Kearney") are exempt from income tax pursuant to the
Convention between the Republic of the Philippines and the Republic of Singapore for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income ("Philippines-Singapore tax treaty").

Facts

A.T. Kearney is a corporation organized and existing under the laws of


Singapore and is a resident thereof based on its Certificate of Incorporation issued by
the Registrar of Companies and Businesses in Singapore on December 14, 1995, and
on the Certificate of Residence issued by the Inland Revenue Authority of Singapore
on August 8, 2011. A.T. Kearney is situated at 438 Alexandra Road, 05-03 Alexandra
Point, Singapore. A.T. Kearney is not registered as a corporation or partnership in the
Philippines based on the Certification of Non-Registration of Company issued by the
Securities and Exchange Commission on September 12, 2011. On the other hand,
Globe is a domestic corporation situated at Globe Telecom Plaza, corner Pioneer and

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Madison Streets, Mandaluyong City, Philippines.

On June 29, 2011, Globe and A.T. Kearney entered into a Service Agreement
where A.T. Kearney agreed to provide consultancy services to Globe for the B/OSS
Transformation Program and Global Cost Benchmarking. The Program seeks to align
or re-engineer the information technology structure of Globe for business
acceleration, bottom-line performance increase and improving customer service. The
specific business objectives of the Program are:

1. Establishing retention and loyalty initiatives for customers,


representatives and dealers of Globe.

2. Meeting and exceeding desired customers' expectations across


every channel and every interaction with Globe.

3. Adopting first-mover initiatives to capture market and ensuring


lean processes are in place, supported by convergent system
automation and waste elimination.

4. Driving stickiness through bundling, innovative products and


services, which customers will find to be value-for-money and be
proud to recommend. cETDIA

The contract price of the Program is US$1,050,000.00, payable based on the


amount of progress A.T. Kearney has done on the Program. A.T. Kearney will invoice
Globe supported by a Certificate of Completion and Acceptance and such other
documents required by the latter. Globe will pay the amount indicated in the invoice
within thirty days from receipt thereof. The Agreement will take effect on March 28,
2011 to August 19, 2011.

Based on the Certification issued by the Vice President of A.T. Kearney on


August 17, 2011, the following personnel were sent by A.T. Kearney to provide
consultancy services to Globe related to the Program:

Personnel Date of Arrival Date of Departure

Cristophe Firth May 23, 2011 July 22, 2011


Keat Yap March 28, 2011 September 2, 2011
Naveen Menon February 24, 2011 July 13, 2011
Samantha Lim July 26, 2011 August 12, 2011

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Taarif Jafferi April 4, 2011 July 27, 2011
Total 191 days

Ruling

In reply, please be informed that payments made by Globe to A.T. Kearney


under the Service Agreement may be taxed in the Philippines if A.T. Kearney has a
permanent establishment in the Philippines to which such payments are attributable,
pursuant to paragraph 1, Article 7 of the Philippines-Singapore tax treaty provides:

"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."

In relation to a permanent establishment involving the furnishing of services,


including consultancy services, under paragraph 2 (j), Article 5 of the treaty, this
activity constitutes a permanent establishment if undertaken for an aggregate period of
183 days, to wit:

"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:

xxx xxx xxx

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
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nature continue (for the same or a connected project)
within the other Contracting State for a period or periods
aggregating more than 183 days."

Accordingly, since A.T. Kearney (through personnel thereof) furnished


consultancy services in the Philippines for an aggregate period of 191 days, A.T.
Kearney is deemed to have a permanent establishment with respect to this activity,
under paragraph 2 (j), Article 5 of the treaty. This being the case, payments for such
services made by Globe to A.T. Kearney are subject to income tax in the Philippines,
under paragraph 1, Article 7 of the Philippines-Singapore tax treaty.

Considered to have a permanent establishment, the service fees paid to A.T.


Kearney shall be subject to income tax at the rate of 30 percent based on the taxable
amount 1(1) thereof under Section 28 (B) (1) of the Tax Code, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

(A) Tax on Resident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code,


a foreign corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from
all sources within the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty
percent (30%)" SaAcHE

This treatment is in accordance with paragraph 3, Article 7, and paragraph 2,


Article 23, of the Philippines-Singapore tax treaty, where A.T. Kearney, as having a
permanent establishment in the Philippines, shall be allowed to deduct certain
expenses on the service fees received from Globe and connected to the Program, and
where such allowance is available to domestic corporations in the Philippines carrying
on the same activities, to wit:

"Article 7

BUSINESS PROFITS

xxx xxx xxx

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3. In the determination of the profits of a permanent establishment,
there shall be allowed as deductions expenses which are incurred
for the purposes of the permanent establishment including
executive and general administrative expenses so incurred,
whether included in the State in which the permanent
establishment is situated or elsewhere."

"Article 23

NON-DISCRIMINATION

xxx xxx xxx

2. The taxation on a permanent establishment which an enterprise of


a Contracting State has in the other Contracting State shall not be
less favourably levied in that other State than the taxation levied
on enterprises of that other State carrying on the same activities."

Finally, under Section 108 (A) of the Tax Code, the service fees in question are
subject to value-added tax ("VAT"), thus:

"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: Provided, that the
President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, 2(2) raise the rate of value-added
tax to twelve percent (12%) . . ."

Relative thereto, Globe shall withhold VAT on the payments at the rate of 12
percent before remitting them to A.T. Kearney. Globe shall use BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). The duly filed BIR Form and its accompanying proof of payment shall
serve as documentary substantiation Globe's claim of input tax on the fees. Otherwise,
if Globe is not a VAT-registered taxpayer, it may treat such VAT as an asset or
expense, whichever is applicable. VAT withheld shall be remitted within 10 days
following the end of the month the withholding was made. 3(3)

Please be guided accordingly.


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Very truly yours,

(SGD.) KIM S. JACINTO-HENARES


Commissioner
Bureau of Internal Revenue
Footnotes
1. "SEC. 31. Taxable Income Defined. — The term 'taxable income' means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws."
2. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance
with the Memorandum of the Executive Secretary to the Secretary of Finance dated
January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006
(Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R.
Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of
Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent)
dated January 31, 2006.
3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No.
4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of
2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments
to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions, instrumentalities or agencies
including GOCCs, as well as private corporation, individuals, estates and trust,
whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT,
starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Services rendered to local insurance companies with respect to reinsurance
premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 —
Remittance Return of VAT and Other Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form No.
1600), which VAT is passed on to the resident withholding agent by the non-resident
recipient of the income, may be claimed as input tax by said VAT-registered
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withholding agent upon filing his own VAT Return, subject to the rule on allocation of
input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR
Form No. 1600 is the proof or documentary substantiation for the claimed input tax or
input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on
VAT by the non-resident recipient of the income, evidenced by the duly filed BIR
Form No. 1600, shall form part of the cost of purchased services, which may be
treated either as an 'asset' or 'expense', whichever is applicable, of the resident
withholding agent.
VAT withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made."

March 30, 2012

ITAD BIR RULING NO. 146-12

Articles 5 (Permanent Establishment),


7 (Business Profits), 12 (Royalties) and
23 (Non-discrimination);
Philippines-Singapore tax treaty

Willimson, Inc.
Waltermart Building
8001A EDSA, Veterans Village
Quezon City

Attention: Ms. Florence D. Sacramed


Vice President for Finance

Gentlemen :

This refers to your tax treaty relief application ("TTRA") filed on December
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 7
10, 2010 requesting confirmation that service fees and royalties paid by Willimson,
Inc. ("Willimson") to Ascott International Management (2001) Pte. Ltd. ("Ascott")
(originally Liang Court Hospitality (Singapore) Pte. Ltd., then Somerset International
Management (Asia Pacific) Pte. Ltd.) are subject to preferential taxation pursuant to
the Convention between the Republic of the Philippines and the Republic of Singapore
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income ("Philippines-Singapore tax treaty").

Facts

Ascott is a corporation organized and existing under the laws of Singapore and
is a resident thereof based on its Certificate of Incorporation, as amended, issued by
the Registrar of Companies and Business in Singapore on July 12, 1993, and on its
Certificate of Residence issued by the Inland Revenue Authority of Singapore on
August 20, 2010. Ascott is situated at 8 Shenton Way, Singapore. Ascott is not
registered as a corporation or partnership in the Philippines based on the Certification
of Non-Registration issued by the Securities and Exchange Commission on August
23, 2010. On the other hand, Willimson is a domestic corporation situated at
Waltermart Building, 8001A EDSA, Veterans Village, Quezon City, Philippines.

On June 21, 2010, Willimson and Ascott entered into a Technical Advisory
Agreement where Ascott agreed to provide Technical Advisory Services to Willimson
relating to the Property. Property means that part of the land located at Fort
Bonifacio, Taguig City, Philippines, comprising the buildings erected or to be erected
thereon which shall include serviced residences, corporate leasing, commercial spaces
and all facilities, appurtenances and equipment in or servicing or relating to that part
of the land, including the heating system, air-conditioning chillers, cooling towers,
air-conditioning system, utilities, plumbing and electrical equipment, walk-in freezers,
cold rooms, air-handling units, water tanks, storage tanks, hot water boilers, steam
generators, outdoor and indoor signs and glass and service elevators. Technical
Advisory Services means — HIAESC

1. Services rendered for planning, design, engineering and


construction of the Property, which include, among others:

• Concept design review

• Space planning

• Interior design review

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• Structure cabling review (date, voice, broadband)

• Furniture, fittings and equipment requirements review

2. Services rendered for the pre-opening of the Property, which


include, among others:

• Provide guidelines on pre-opening systems, processes and


requirements for operational set up

• Assistance in preparation and review of detailed


pre-opening expenses

• Provide guidelines and review of human resources and


administration

• Provide guidelines and review of operations policies and


procedures on guest service housekeeping, Engineering, and
security crisis management

• Provide guidelines and review on the procurement of


cleaning services, laundry services, pest control, and
landscaping

3. Services relating to sales and distribution, which include, among


others:

• market and competitor analysis

• demand and supply study

• identifying of market segments

• distribution program set up and launch

• rate structure

• pricing strategies by channels

• third party commissions

4. Services relating to brand and marketing communications strategy,

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which include, among others:

• Objective and key communication parameters

• Marketing communication plan

• Media plan

• Public relation plan

5. Services relating to information technology systems, which


include, among others:

• Local servers and backup system ScTIAH

• Computers, printers and other hardware peripherals

• Telephony system

• Guest high speed internet access system

6. Services relating to finance such review of financial policies,


practices and internal controls.

Ascott-Singapore will provide the Technical Advisory Services during the


Pre-Opening Term of the Agreement, which commences on the date of signing the
Agreement on June 21, 2010, up to the Project Handover Date on July 1, 2014. In
consideration, Willimson will pay service fees to Ascott equivalent to US$280,000.00,
payable as follows:

Claim in Cumulative
percentage percentage

(i) Initial down payment of the service 20 percent 20 percent


fees upon the execution of the
Agreement or the first technical
meeting between Ascott and
Willimson, whichever is earlier.

(ii) Upon review of the conceptual 20 percent 40 percent


design by Ascott.

(iii) Upon completion of mock-up 20 percent 60 percent

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serviced residence unit.

(iv) The balance of 40 percent will be 10 percent x 4 100 percent


paid in four equal installments of 10
percent each at regular intervals in
the interim period commencing on
the completion of mock-up serviced
residence unit and ending on the
Project Handover Date on July 1,
2014. The fourth installment will be
paid within 14 days from that date.

Willimson has the right to develop, construct and operate the Property and the
exclusive and unconditional rights to the Property pursuant to an Agreement dated
June 21, 2010 between Willimson and WJGlobal, a domestic corporation which owns
the land where the Property will be constructed. Willimson intends that the Property
be operated as an 'Ascott' serviced residence and corporate leasing.

Based on the Certification issued by the Vice President for Finance of


Willimson on March 18, 2011, Ascott appointed Mr. Ong Kian Tiong Alfred to render
the Technical Advisory Services to Willimson under the Agreement. Mr. Alfred was
in the Philippines on September 14 to 17, 2010 to monitor, observe, make
recommendations, attend meetings and discussions, render technical assistance and
other services related to the Project.

Based on the letter issued by the Vice President for Finance of Ascott on
October 6, 2011, Ascott, to date, has not received any payment from Willimson under
the Agreement.

On June 21, 2010, Willimson and Ascott entered into a License Agreement
where Ascott granted Willimson a non-exclusive and non-transferable license to use
the Trade Marks at Fort Bonifacio, Taguig City, Philippines, where the Property (as
described above) is located, solely for the purpose of the Business. Trade Marks
means those registered and unregistered trademarks belonging to Ascott. Business
means operating, managing, promoting, marketing and maintaining the serviced
residences in the Property known as 'Ascott on Fifth' or such other derivative trade
names as may be selected and approved by Ascott. In consideration, Willimson will
pay royalties to Ascott equivalent to 0.5 percent (for the first three years) and 1
percent (for the fourth year and onwards) of the Total Revenue derived by Willimson
from the Business. STaCIA

Total Revenue means, in relation to the Property and to any fiscal year (or part
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thereof), all income accruing or resulting from the operation of the Property for that
fiscal year (or part thereof) calculated in accordance with the generally accepted
accounting practices in the Philippines and with the Uniform System of Accounts for
the Lodging Industry, 9th Revised Edition, or any subsequent revisions thereto. The
royalties will computed based on the Total Revenue of Willimson every month and
paid within 14 days after the end of the month and accompanied by a royalty
statement. The Agreement will remain in effect indefinitely unless terminated.

Ruling

In reply, please be informed that under Section 14 of Revenue Memorandum


Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications
(TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010"), effective
November 4, 2010, any availment of tax treaty relief (exemption from income tax or
reduction of tax) shall be preceded by an application filed at the International Tax
Affairs Division ("ITAD") of this Bureau before the first taxable event subject of the
TTRA, thus:

"Filing should always be made BEFORE the transaction. Transaction for


purposes of filing the TTRA shall mean before the occurrence of the first
taxable event.

Failure to properly file the TTRA with ITAD within the period prescribed
herein shall have the effect of disqualifying the TTRA under the RMO."
(Emphasis ours)

In view of the foregoing, since the Technical Advisory Agreement and the
License Agreement were signed on June 21, 2010, which thereafter give rise to the
payment of service fees and royalties by Willimson to Ascott, but since the subject
TTRA was filed only on December 10, 2010, this Office hereby DENIES relief on
those service fees and royalties (if any) paid on and before such date of filing on
December 10, 2010, pursuant to Section 14 of RMO 72-2010. Accordingly, these
payments shall be subject to income tax at the rate of 30 percent of the gross amount
thereof under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax
Code"), as amended, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

xxx xxx xxx

(B) Tax on Nonresident Foreign Corporation. —

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(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%)."

On the other hand, the taxation of service fees and royalties paid by Willimson
to Ascott on December 11, 2010 and thereafter will be decided if Ascott has a
permanent establishment in the Philippines to which such payments are attributable or
effectively connected. Paragraph 1, Article 7, and paragraph 4, Article 12, of the
Philippines-Singapore tax treaty 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 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." AETcSa

"Article 12
ROYALTIES

xxx xxx xxx

4. The provisions of paragraphs 1 and 2 of this Article shall not


apply if the recipient of the royalties, being a resident of a Contracting State,
carries on business in the other Contracting State in which the royalties arise
through a permanent establishment situated therein, or performs in that other
State professional services from a fixed base situated therein, and the right or
property in respect of which the royalties are paid is effectively connected with
such permanent establishment or fixed base. In such a case, the provisions of
Article 7 or Article 14 of this Agreement, as the case may be, shall apply."
(Emphasis ours)

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In relation to a permanent establishment, paragraphs 1 and 2, Article 5 of the
treaty mention:

"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."

With respect to the provision of technical advisory services by Ascott to


Willimson on the planning, design, engineering and construction of buildings in the
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Philippines for serviced residences, corporate leasing, and commercial spaces
("Project"), under subparagraph (i) above, Ascott will be deemed to have a permanent
establishment if it undertakes this activity or activities for more than 183 days. HCITcA

Relative thereto, since the Project will be completed by Willimson within 48


months, from June 21, 2010 to July 1, 2014 ("Project Handover Date"), and Ascott,
as contracted by Willimson, will supervise all activities on the Project (planning,
design, engineering, construction, operation, etc.) throughout the entire period where
it had already appointed its personnel, Mr. Ong Kian Tiong Alfred, for this purpose,
Ascott is deemed to have a permanent establishment in the Philippines with respect to
such supervisory activities, under paragraph 2 (i), Article 5 of the
Philippines-Singapore treaty.

Concerning the time when such a permanent establishment begins to exist, the
following commentaries of the Organisation for Economic Co-operation and
Development Model Tax Convention on Income and on Capital (Condensed Version,
July 2010) mention that Ascott begins to have a permanent establishment from the
date it begins its work in the Philippines, including any preparatory work where the
construction is to be established, until it completed such works or permanently
abandoned them, to wit:

"19. A site exists from the date on which the contractor begins his work,
including any preparatory work, in the country where the construction is to be
established, e.g., if he installs a planning office for the construction. In general,
it continues to exist until the work is completed or permanently abandoned. A
site should not be regarded as ceasing to exist when work is temporarily
discontinued. Seasonal or other temporary interruptions should be included in
determining the life of a site. Seasonal interruptions include interruptions due
to bad weather. Temporary interruption could be caused, for example, by
shortage of material or labour difficulties. Thus, for example, if a contractor
started work on a road on 1 May, stopped on 1 November because of bad
weather conditions or a lack of materials but resumed work on 1 February the
following year, completing the road on 1 June, his construction project should be
regarded as a permanent establishment because thirteen months elapsed between
the date he first commenced work (1 May) and the date he finally finished (1
June of the following year). If an enterprise (general contractor) which has
undertaken the performance of a comprehensive project subcontracts parts of
such a project to other enterprises (subcontractors), the period spent by a
subcontractor working on the building site must be considered as being time
spent by the general contractor on the building project. The subcontractor
himself has a permanent establishment at the site if his activities there last more

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than twelve months." (Page 100) (Emphasis ours)

Moreover, as stated in the commentaries, Ascott is not deemed to cease to have


a permanent establishment by reason of seasonal or other temporary interruptions
such as bad weather, shortage of material, or labour difficulties.

Considered to have a permanent establishment, the service fees and royalties


paid by Willimson to Ascott on December 11, 2010 and thereafter shall be subject to
income tax at the rate of 30 percent based on the taxable amount 1(4) thereof under
Section 28 (B) (1) of the Tax Code, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

(A) Tax on Resident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code, a


foreign corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%)
of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%)."

This treatment is in accordance with paragraph 3, Article 7, and paragraph 2,


Article 23, of the Philippines-Singapore tax treaty, where Ascott, as having a
permanent establishment in the Philippines, shall be allowed to deduct certain
expenses on the service fees and royalties it receives from Willimson and connected to
the Project, and where such allowance is available to domestic corporations in the
Philippines carrying on the same activities, to wit:

"Article 7
BUSINESS PROFITS

xxx xxx xxx

3. In the determination of the profits of a permanent establishment,


there shall be allowed as deductions expenses which are incurred for the
purposes of the permanent establishment including executive and general
administrative expenses so incurred, whether included in the State in which the
permanent establishment is situated or elsewhere." IcHEaA

"Article 23

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NON-DISCRIMINATION

xxx xxx xxx

2. The taxation on a permanent establishment which an enterprise of a


Contracting State has in the other Contracting State shall not be less favourably
levied in that other State than the taxation levied on enterprises of that other
State carrying on the same activities."

Finally, under Section 108 (A) of the Tax Code, as amended, the service fees
and royalties in question, being payments for the supply of services and the lease of
intangible property ('Ascott' related trademarks) in the Philippines, are subject to
value-added tax ("VAT"), thus:

"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: Provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, 2(5) raise the rate of
value-added tax to twelve percent (12%). . ."

"SEC. 105. Persons Liable. — Any person who, in the course of trade
or business, sells, barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.

The phrase 'in the course of trade or business' means the regular conduct
or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a non-stock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members
or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 17
defined in this Code rendered in the Philippines by nonresident foreign persons
shall be considered as being rendered in the course of trade or business."

Relative thereto, Willimson shall withhold VAT on the payments at the rate of
12 percent before remitting them to Ascott. Willimson shall use BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). If Willimson is a VAT-registered taxpayer, the duly filed BIR Form No.
1600 and its accompanying proof of payment shall serve as documentary
substantiation for Willimson's claim of input tax on the payments; otherwise, it may
treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall
be remitted within ten days following the end of the month the withholding was made.
3(6)

Please be guided accordingly.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES


Commissioner
Bureau of Internal Revenue
Footnotes
1. "SEC. 31. Taxable Income Defined. — The term 'taxable income' means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws."
2. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance
with the Memorandum of the Executive Secretary to the Secretary of Finance dated
January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006
(Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R.
Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of
Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent)
dated January 31, 2006.
3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No.
4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of
2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 18
Payments to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions, instrumentalities or
agencies including GOCCs, as well as private corporations, individuals, estates and
trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%)
VAT, starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Services rendered to local insurance companies with respect to reinsurance
premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600
— Remittance Return of VAT and Other Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form
No. 1600), which VAT is passed on to the resident withholding agent by the
non-resident recipient of the income, may be claimed as input tax by said
VAT-registered withholding agent upon filing his own VAT Return, subject to the
rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales.
The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the
claimed input tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said
passed-on VAT by the non-resident recipient of the income, evidenced by the duly
filed BIR Form No. 1600, shall form part of the cost of purchased services, which may
be treated either as an 'asset' or 'expense', whichever is applicable, of the resident
withholding agent.
VAT withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made."

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 19
Endnotes

1 (Popup - Popup)
1. "SEC. 31. Taxable Income Defined. — The term 'taxable income' means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws."

2 (Popup - Popup)
2. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance
with the Memorandum of the Executive Secretary to the Secretary of Finance dated
January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006
(Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R.
Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of
Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent)
dated January 31, 2006.

3 (Popup - Popup)
3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No.
4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of
2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments
to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions, instrumentalities or agencies
including GOCCs, as well as private corporation, individuals, estates and trust,
whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT,
starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Services rendered to local insurance companies with respect to reinsurance
premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 —
Remittance Return of VAT and Other Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form No.
1600), which VAT is passed on to the resident withholding agent by the non-resident
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 20
recipient of the income, may be claimed as input tax by said VAT-registered
withholding agent upon filing his own VAT Return, subject to the rule on allocation of
input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR
Form No. 1600 is the proof or documentary substantiation for the claimed input tax or
input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on
VAT by the non-resident recipient of the income, evidenced by the duly filed BIR
Form No. 1600, shall form part of the cost of purchased services, which may be
treated either as an 'asset' or 'expense', whichever is applicable, of the resident
withholding agent.
VAT withheld under this Section shall be remitted within ten (10) days following the
end of the month the withholding was made."

4 (Popup - Popup)
1. "SEC. 31. Taxable Income Defined. — The term 'taxable income' means the pertinent
items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or
other special laws."

5 (Popup - Popup)
2. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance
with the Memorandum of the Executive Secretary to the Secretary of Finance dated
January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006
(Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R.
Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of
Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent)
dated January 31, 2006.

6 (Popup - Popup)
3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No.
4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of
2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Payments to Non-Residents. —
xxx xxx xxx
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 21
(b) The government or any of its political subdivisions, instrumentalities or
agencies including GOCCs, as well as private corporation, individuals, estates and
trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT,
starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Services rendered to local insurance companies with respect to reinsurance
premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600
— Remittance Return of VAT and Other Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form
No. 1600), which VAT is passed on to the resident withholding agent by the
non-resident recipient of the income, may be claimed as input tax by said
VAT-registered withholding agent upon filing his own VAT Return, subject to the
rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales.
The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the
claimed input tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said
passed-on VAT by the non-resident recipient of the income, evidenced by the duly
filed BIR Form No. 1600, shall form part of the cost of purchased services, which may
be treated either as an 'asset' or 'expense', whichever is applicable, of the resident
withholding agent.
VAT withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made."

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia 2017 22