DOF OPINION NO. 007-19
Subject: Request for Review of Bureau of Internal Revenue International Tax Affairs Divisions Ruling No. ITAD 048-18
Principle: A resident foreign corporation, engaged in trade and business within the Philippines through its personnel for more than 183 days, is liable to pay income taxes for income attributable to the permanent establishment.
FACTS:
RP International Resources Pte. Ltd. (RPIR), a foreign corporation organized and existing under the laws of Singapore, is a specialist recruiter to global telecommunication, media, and technology industries, and provides specialist executive search, contingent, contract and launch and transformations resource solutions. RPIR is not licensed to do business in the Philippines. On the other hand, Amdocs Philippines, Inc. (API) is a domestic corporation organized and existing under the laws of the Philippines. API is an affiliate of Amdocs Singapore Pte. Ltd. (ASPL), a foreign corporation organized and existing under the laws of Singapore. RPIR and ASPL entered into a 2- year Professional Service Agreement (PSA) wherein the former agreed to provide professional services to the latter and its affiliates, including API, (collectively hereinafter referred to as the Amdocs Group). The PSA was renewed several times.
Procurement of experts by the Amdocs Group is done through the submission to RPIR of a "Professional Services Order." Compensation rates, the duration of the assignment, payment instructions, and other terms and conditions of an expert's deployment are embodied in a "Work Order" issued by RPIR. During the life of the PSA between RPIR and ASPL, there were also personnel assigned to API with their respective deployments. Based on the start dates and end dates of each respective expert's Work Order, the aggregate service period in the Philippines by RPIR personnel from 15 December 2015 to 11 June 2018 was 909 days for the duration of the PSA, with each deployment lasting for more than 183 days per expert.
RPIR, through counsel, Gorriceta Africa Cauton & Saavedra, filed for Tax Treaty Relief Application (TTRA) with the BIR requesting for confirmation that the service fees paid by API to RPIR are exempt from income tax pursuant Article 7 in relation to Article 5 of the Philippines- Singapore Tax Treaty (RP-SG Tax Treaty). However, the TTRA for tax exemption was denied by the BIR in BIR Ruling No. ITAD No. 048-18, reasoning that RPIR carried on its business in the Philippines through a permanent establishment (PE), thereby effectively negating the exemption invoked by RPIR.
The BIR maintains that the performance of services by RPIR employees in the Philippines for more than 183 days, specifically, for 909 days from 2015 to 2018, created a PE therein. Hence, the BIR ruled that the service fees paid by API to RPIR are subject to income tax in the Philippines under paragraph 1, Article 7 of the treaty; specifically, the fees are subject to the rate of 30% under Section 28(B)(1) of the Tax Code. Moreover, the service fees are likewise subject to VAT since the services were rendered in the Philippines under Section 108(A) of the Tax Code. Aggrieved, RPIR filed the instant Request for Review.
ISSUE: Whether or not RPIR is exempt from Philippine taxes under Article 7 of the RP-SG Tax Treaty, if it does not deploy its own employees or other personnel, and not deemed to be maintaining a permanent establishment in the Philippines.
RULING:
No. RPIR carried on its business in the Philippines through a permanent establishment (PE) by furnishing services in the Philippines through its personnel for more than 183 days.
The Commentaries of the Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital define "personnel'' to refer to "entrepreneur or persons who are in a paid-employment relationship with the enterprise. These personnel include employees and other persons receiving instructions from the enterprise (e.g., dependent agents)."
As such, we agree with the BIR that the services performed by these personnel-experts for more than 183 days in the Philippines created a PE herein. Accordingly, income attributable to that PE is not exempt from Philippine taxation.
We held also that RPIR is engaged in trade and business within the Philippines. Hence, for income tax purposes, it is considered a resident foreign corporation. Through its personnel, RPIR established a PE in the Philippines thus, doing business therein. Its non-registration with the Securities and Exchange Commission (SEC) does not affect the fact that it is a resident foreign corporation for income tax purposes. The extension of RPIR's service contract (PSA) with ASPL to API and RPIR's act of deploying its personnel to API allowed it to engage in trade and business in the Philippines. Its personnel performed acts or works or exercises functions that are incidental and beneficial to the purpose of RPIR's business. Likewise, the activities or works of RPIR personnel bring profits to RPIR.
However, in determining the profits of RPIR which will be subjected to income tax, the provisions of the treaty will govern. Article 7 (par. 3) of the RP-SG Treaty provides that: "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."
Finally, as regards the value added tax aspect of the subject ruling, the same was not raised as an issue by RPIR. Nevertheless, there is no denying that the services were rendered in the Philippines. However, we refer the same to the BIR for proper adjudication as to whether the applicable thresholds were met.
In view of the foregoing, we regret to deny the request for review and hold that RPIR established a permanent establishment in the Philippines thus, income attributable to that permanent establishment is not exempt from Philippine taxation.
