BIR ITAD Rulings Digest
TAX BENEFITS ARE GRANTED ONLY FOR GOODS & SERVICES DIRECTLY RELATED TO THE PROGRAM IMPLEMENTATION OF INTERNATIONAL GRANTS
BIR ITAD RULING NO. 027-25, MAY 6, 2025
Tetra Tech International Development Pty. Ltd. (TTIDP Ltd.), an Australian-registered company, was engaged by the Australian Government’s Department of Foreign Affairs and Trade (DFAT) as the managing contractor for the FAIR JUSTICE PROGRAM in the Philippines (2024–2029). The program, approved by the Philippine Supreme Court on January 30, 2024, is fully funded by the Government of Australia and aligns with the Philippine Development Plan (2023–2028) and the Supreme Court’s Strategic Plan for Judicial Innovations (2022–2027). The Australian Embassy requested confirmation that TTIDP Ltd.’s procurement of goods and services for the program is subject to 0% VAT or VAT-exempt under the General Agreement on Development Cooperation (GADC) between the Philippines and Australia. In reply, Article 7(1)(a) of the GADC, in relation to Sections 106(A)(2)(b), 108(B)(3), and 109(1)(K) of the Tax Code of 1997, as amended, provides that goods and services procured locally by TTIDP Ltd. for the FAIR JUSTICE PROGRAM are subject to 0% VAT, while direct importations are VAT-exempt. However, these VAT privileges are limited strictly to transactions necessary for the program's implementation and cannot be applied to TTIDP Ltd.'s other activities.
INCOME TAX & VAT APPLY TO CROSS-BORDER SERVICES WHEN A PERMANENT ESTABLISHMENT IS CREATED IN THE PHILIPPINES
REMUNERATION FOR SERVICES RENDERED IN THE PHILIPPINES BY EXPATRIATES IS TAXABLE UNDER ARTICLE 14 OF THE PH-SINGAPORE TAX TREATY IF IT IS PAID BY & BORNE BY A PERMANENT ESTABLISHMENT LOCATED IN THE PHILIPPINES
BIR ITAD RULING NO. 023-25, APRIL 24, 2025
M Energy Solutions Philippines, Inc. (MAN PH) is a domestic corporation, entered into an Inter-Entity Service Agreement with M Energy Solutions Singapore Pte. Ltd. (MAN SG), a resident foreign corporation based in Singapore. It is engaged in repairing ships, converting, demolition, altering ships, etc. As part of the agreements, MAN SG shall provide engineers and technicians, who will assist with the installation and commissioning of engines and render advice on technicalities. Further, the services will be performed in the Philippines and shall not exceed an aggregate period of 183 days. MAN PH is seeking confirmation that the service fee paid to MAN SG is exempt from income tax. In reply, Section 28(B)(1) of the Tax Code, as amended, provides that nonresident foreign corporations are generally subject to a 25% tax on gross income derived from Philippine sources. However, tax treaty provisions may override domestic laws. The PH-Singapore Tax Treaty limits the taxation rights of the Philippines to income attributable to a Permanent Establishment (PE). A PE is deemed to exist if services are provided in the Philippines for more than 183 days, regardless of whether contracts are separate. MAN SG was found to have a PE in the Philippines, providing services for 275 days. Therefore, its profits attributable to that PE are taxable in the Philippines, with deductions allowed for related expenses. Regarding employee remuneration, Article 14 of the Treaty provides that such income is taxable in the Philippines if the services are performed there and borne by a Philippine PE. Although the employees were in the country for less than 183 days and were paid by MAN SG, however, the third condition was not met. Thus, the employees' incomes are taxable in the Philippines under the Treaty, in relation to Section 25(B) of the Tax Code. Furthermore, the services rendered by MAN SG in the Philippines are subject to 12% VAT under the Tax Code. However, services performed outside the Philippines are not subject to VAT.
FOR FAILURE TO ESTABLISH FULL COMPLIANCE WITH THE CONDITIONS SET BY LAW, THE MOST-FAVORED-NATION CLAUSE CANNOT BE INVOKED
BIR ITAD RULING NO. 022-25, APRIL 14, 2025
Summit Publishing Company Inc. (Summit), a corporation organized and existing under the Philippine laws, is seeking confirmation that the royalties paid to Hearst Magazine Media Inc. (Hearst), a US-based corporation, should be subject to the preferential income tax rate of 10% pursuant to the Most-Favored-Nation (MFN) clause found in Article 13(2)(b)(iii) of the Philippine-United States (PH-US) Tax Treaty, in connection to Article 12(2) of the Philippines-United Arab Emirates (PH-UAE) Tax Treaty. This request stems from a Trademark and Copyright License Agreement entered into between Summit and Hearst, wherein Summit was granted the exclusive right and license to use Hearst’s trademark for the publication, printing, promotion, distribution, and sale of Cosmopolitan magazine in the Philippines. The agreement also granted Summit the exclusive rights to develop and operate a mobile domain site and use the domain name www.cosmo.ph. An amendment to the agreement later extended these rights to include the Esquire brand and the domain www.esquiremagazine.ph. In consideration of these rights, Summit pays royalties to Hearst. In reply, Section 28(B)(1) of the Tax Code of 1997, as amended, imposes a 25% income tax on income earned in the Philippines by non-resident foreign corporations not engaged in trade or business in the country. However, Section 32(B)(5) of the same Code provides for treaty-based exemptions or preferential rates when applicable. Summit seeks to apply the MFN clause under the PH-US Treaty, which allows for a reduced withholding tax rate if a Third Country is granted a more favorable rate under similar conditions, in relation to PH-UAE Tax Treaty. The BIR cited the Supreme Court ruling in Cargill Philippines Inc. vs Commissioner of Internal Revenue, which provides two (2) conditions that must be established for a successful invocation of the most favored nation clause, as follows: (1) similarity in subject matter, or the definition and treatment of royalties which must be consistent between the US and the third country-in this case, the UAE; and (2) similarity in circumstances in the payment of tax, or the similarity of the mechanisms employed by the US and the Third (3rd) State in mitigating the effects of double taxation. Here, the grant to Summit of the exclusive right and license to use Hearst trademark and domain name constitutes royalties, in compliance with the first (1st) requirement for invoking the MFN clause. However, the second (2nd) condition pertaining to the mechanism of relief from double taxation was not met. Specifically, the UAE uses the full credit method, allowing the full amount of tax paid in the Philippines to be credited in the UAE, whereas the US applies the ordinary credit method, which limits the credit based on U.S. tax rules. On the basis of the differences in the methods of granting relief from double taxation, the MFN clause cannot be invoked. Consequently, the royalties paid to Hearst for the rights granted shall be subject to the 25% tax rate under Article 13(2)(b)(i) of the PH-US Tax Treaty.
GENERALLY, MFN CLAUSE IN A TREATY PROVISION ALLOWS FOR A LOWER TAX RATE IF A THIRD COUNTRY RECEIVES A BETTER RATE UNDER SIMILAR CONDITIONS SUBJECT TO THE CONDITIONS IMPOSED UNDER THE TREATY
BIR ITAD RULING NO. 020-25, APRIL 14, 2025
Bistro Americano Corp. (BAC) is seeking confirmation that the royalties paid to DFO LLC, a U.S. resident, should be subject to a preferential rate of 10% under the Most-Favored-Nation (MFN) clause under Article 13(2)(b)(iii) of the Philippine-United States (PH-US) Tax Treaty. Under an International Multiple Unit Franchise Agreement, DFO granted BAC the rights to develop and operate Denny’s restaurants in the Philippines using Denny’s brand and system. In reply, under Section 28(B)(1) of the Tax Code of 1997, as amended, royalties paid to non-resident foreign corporations are generally taxed at 30%. However, Section 32(B)(5) provides an exemption where a tax treaty is applicable. The MFN clause in Article 13(2)(b)(iii) of the PH-US Treaty allows for a lower tax rate if a third country (e.g., UAE) receives a better rate under similar conditions. While the grant to operate Denny’s restaurants and use its trademarks qualifies as royalties in both the PH-US and PH-UAE Tax Treaties, satisfying the first condition, the second condition was not met. The two treaties provide differing mechanisms for addressing double taxation, thereby precluding the application of the MFN clause. Therefore, BAC’s royalties remain subject to the 25% tax rate under Article 13(2)(b)(i) of the PH-US Tax Treaty.
FAILURE TO COMPLY WITH THE BIR’S REQUEST FOR SUBMISSION OF REQUIRED DOCUMENTS TO SUBSTANTIATE THE CLAIM FOR PREFERENTIAL TAX TREATMENT MAY RESULT IN THE AUTOMATIC DENIAL OF THE TREATY BENEFIT APPLICATIONS
BIR ITAD RULING NO. 019-25, APRIL 14, 2025
I Co. is seeking confirmation that the royalties paid to IC, a U.S. corporation, should be subject to a preferential income tax rate of 10% pursuant to the Philippines-United States (PH-US) Tax Treaty. As represented, I Co., a corporation registered under Philippine laws, entered into an Intercompany Agreement with IC, with I Co. to pay a Transfer Price for product licensing and support services outlined in the agreement. In reply, the BIR denied the request for confirmation of entitlement to the 10% preferential tax rate under the “Most Favored Nation” Clause of the PH-US Tax Treaty for failure to comply with multiple Notices to Submit Additional Documents. Pursuant to Section 5 of Revenue Memorandum Order (RMO) No. 14-2021, taxpayers are required to submit both the prescribed and additional documents to support their claims for treaty benefits. As tax exemptions or reduced rates must be strictly construed, the burden of proof rests with the taxpayer. In this case, the applicant failed to discharge that burden, resulting in the denial of the application and the imposition of the regular 25% income tax rate under Section 28(B)(1) of the Tax Code of 1997, as amended.
THE PREFERENTIAL TAX RATE OF 10% UNDER THE PHILIPPINE-KOREA TAX TREATY APPLIES ONLY TO QUALIFYING DIVIDEND PAYMENTS; DIVIDENDS PAID TO INDIVIDUALS OR NON-QUALIFIED ENTITIES ARE SUBJECT TO THE HIGHER OF 25% TAX RATE
THE 10% PREFERENTIAL TAX RATE ON DIVIDENDS UNDER THE PHILIPPINE-KOREA TAX TREATY APPLIES ONLY TO CORPORATE SHAREHOLDERS FULFILLING OWNERSHIP REQUIREMENTS & THE LOCAL ENTITY IS EITHER BOI-REGISTERED OR BELONGING TO PIONEER AREAS OF INVESTMENT
BIR ITAD RULING NO. 013-25, APRIL 14, 2025
Y Co., a company incorporated under Philippine laws, is seeking confirmation that dividend payments paid to a resident of Korea are subject to a preferential tax rate of 10% under the PH-Korea Tax Treaty. As represented, the Board of Directors of Y Co. declared cash dividends, which entitles the Korean National to receive the entire dividends, who, according to the Secretary Certificate dated August 1, 2024, owns 100% of Y Co.’s outstanding common shares. In reply, Section 25(B) of the Tax Code of 1997, as amended, provides that income derived by a nonresident alien not engaged in trade or business within the Philippines is subject to income tax at 25%. However, under Section 32(B)(5) of the same code, such income is exempt insofar as any treaty obligation binds the Philippine government. In this connection, Article 10 of the PH-Korea Tax Treaty provides that the lower rate of 10% applies only in two instances: (i) where the beneficial owner of the dividends is a company that directly holds at least 25% of the capital of the company paying the dividends; or (ii) where the company paying the dividends is a resident of the Philippines, registered with the Board of Investments (BOI), and engaged in preferred pioneer areas of investment under the Philippine investment incentives laws. Given that neither condition is present, the beneficial owner being an individual, and the company paying the dividends not being BOI-registered nor engaged in preferred pioneer areas-a higher rate of 25% shall apply to the dividends paid.
RETRANSMISSION OF COPYRIGHTED AUDIOVISUAL CONTENTS QUALIFIES AS ROYALTY UNDER THE PH-US & PH-UAE TAX TREATIES, BUT NON-COMPLIANCE WITH ALL MFN CLAUSE CONDITIONS PRECLUDES ITS APPLICATION
BIR ITAD RULING NO. 011-25, APRIL 14, 2025
Cignal TV, Inc., (Cignal) a domestic corporation organized under the Philippine laws, is seeking confirmation on the proper tax treatment of royalty payments made to Turner Broadcasting System Asia Pacific Inc., a US-based corporation. Specifically, Cignal inquired on whether such payments qualify for the preferential 10% income tax rate under Article 13(2)(b)(iii) of the PH-US Tax Treaty, invoking the “Most Favored Nation” (MFN) clause in relation to Article 12(2) of the PH-UAE Tax Treaty. As represented, Cignal and Turner entered into a License Agreement, wherein Turner granted to Cignal a non-exclusive license to retransmit the 24-hour television programming services titled “CNN International”, “Cartoon Network”, “truTV”, “CNN International HD”, “Cartoon Network HD”, “Toonami”, and “Warner TV”. In consideration thereof, Cignal would pay monthly royalties to Turner. In reply, Section 28(B)(1) of the Tax Code of 1997, as amended, provides that royalties are generally subject to a 25% final withholding tax. However, in this case, Turner sought to apply the preferential 10% rate under the PH-US Tax Treaty, based on the MFN clause referencing the more favorable rate provided under the PH-UAE Tax Treaty. The BIR affirmed that the payments constituted "royalties" under both tax treaties and acknowledged the similarity in the subject matter—specifically, the retransmission of copyrighted audiovisual content. However, the BIR held that the second condition for invoking the MFN clause was not met. This condition requires similarity in the method of tax relief applied in the treaty partner's jurisdiction. While the UAE adopts a full foreign tax credit method without limitation, the United States applies an ordinary foreign tax credit method, subject to limitations under U.S. domestic law. Due to this fundamental difference in the method of granting tax relief, the MFN clause could not be validly invoked. Consequently, the royalties paid by Cignal to Turner are subject to a 25% Final Withholding Tax pursuant to Article 13(2)(b)(i) of the PH-US Tax Treaty. In addition, the transaction is subject to 12% VAT under Sections 105 and 108 of the Tax Code, as it involves the lease or use of intellectual property—specifically, television programs—within the Philippines. This constitutes a taxable sale or exchange of services. As such, Cignal is required to withhold and remit the 12% VAT to the BIR within ten (10) days following the end of the month in which the payment was made.
THE PREFERENTIAL TAX RATE OF 10% UNDER RP-SINGAPORE TAX RATE APPLIES ONLY TO INTEREST DERIVED FROM PUBLICLY ISSUED DEBT INSTRUMENTS, WHILE PRIVATE LOANS ARE SUBJECT TO A HIGHER TAX RATE OF 15%
BIR ITAD RULING NO. 002-25, JANUARY 7, 2025
Denso Philippines Corporation (Denso PH) a company registered under Philippine laws, entered into multiple loan agreements with Denso International Asia Pte. Ltd. (Denso SG), a Singaporean corporation. Denso SG, a resident of Singapore as certified by the Inland Revenue Authority of Singapore, provides advanced automotive technology and financial support within the Denso Group. As part of these agreements, Denso PH made interest payments to Denso SG and sought confirmation that such payments should be subject to the preferential tax rate of 10% under Article 11 (7) of the Philippine-Singapore (RP-SG) Tax Treaty. In reply, the treaty provides that the preferential 10% tax rate applies only to interest payments derived from public issues of bonds, debentures, or similar obligations. Since the loans extended by Denso SG to Denso PH were private and not publicly issued debt instruments, the 10% rate should not apply. Instead, the applicable rate of 15% is applicable, as provided under Article 11(2) of the Treaty, which limits the tax on interest to a maximum of 15% if the recipient is the beneficial owner of the interest. In addition, the loan agreements are subject to Documentary Stamp Tax (DST) under Section 179 of the Tax Code. Considering the presence of borrowing and lending transactions, the agreements fall within the definition of debt instruments subject to DST. Consequently, Denso PH, as the borrower, shall be responsible for paying the corresponding DST.
INTEREST MUST COME FROM PUBLICLY ISSUED BONDS, DEBENTURES, OR SIMILAR OBLIGATIONS TO QUALIFY FOR THE 10% PREFERENTIAL TAX RATE UNDER PHILIPPINE-SINGAPORE TAX TREATY
BIR ITAD RULING NO. 001-25, JANUARY 7, 2025
D Philippines Corporation (DPC) is seeking confirmation that the interest payments paid to D International Asia Pte. Ltd (DSG) are subject to a preferential tax rate of ten percent (10%) pursuant to the Philippines-Singapore (RP-SG) Tax Treaty. In reply, pursuant to Section 28(B)(5)(a) of the Tax Code of 1997, as amended, interest income derived by a non-resident foreign corporation is generally subject to a 20% income tax, unless a treaty obligation, as provided under Section 32(B)(5), grants an exemption or reduction. In this relation, Article 11 of the RP-SG Tax Treaty provides that the lower rate of 10% shall be applied only when the interest arising in the Philippines was paid by a company that is treated as a resident of the Philippines to a resident of Singapore and the interest was derived from publicly issued bonds, debentures or similar obligations. Given that the second requisite is absent since the loans were not issued to the general public but only to DSG, a higher rate of 15% shall be imposed on the interest paid. In addition, loan agreements are subject to Documentary Stamp Tax (DST), which shall be paid by DPC, the borrower, in accordance with the explicit provisions of the agreements.
NONRESIDENT CITIZENS ARE TAXED ONLY ON INCOME FROM PHILIPPINE SOURCES
THE "SOURCE" OF INCOME IS DETERMINED BY THE PLACE WHERE THE SERVICE IS PERFORMED, NOT BY THE PAYOR'S RESIDENCE OR PAYMENT LOCATION] [REMUNERATION PAID & BORNE BY THE PERMANENT ESTABLISHMENT SHALL BE TAXED UNDER ARTICLE 14 OF THE PH-SG TAX TREATY FOR SERVICES RENDERED IN THE PHILIPPINES
BIR ITAD RULING NO. 020-24, NOVEMBER 20, 2024
C Co. is seeking confirmation that the income payment for services rendered partly within the Philippines in 2023 is exempt from income tax pursuant to the Philippines-Singapore Tax Treaty. As represented, a Filipino citizen established residence in Singapore on December 31, 2020, and was classified as a tax resident of Singapore for the years 2021 to 2023. Notwithstanding her relocation, she retained her position as General Manager of C Co. a domestic corporation, rendering the majority of her services from Singapore in 2021 and partially from the Philippines in 2022 and 2023. In reply, under Sections 23(B) and 42(C) of the Tax Code, nonresident citizens are taxed only on income from Philippine sources, with services performed locally considered Philippine-sourced and those performed abroad deemed foreign-sourced. In relation, citing the Supreme Court case of Commissioner of Internal Revenue (CIR) v. Baier-Nickel, the Court clarified its ruling in CIR v. BOAC, emphasizing that the "source" of income is determined by the location where the activity or service generating the income is performed, rather than by the payor's residence or the place of payment. In addition, according to Article 14 of the PH-SG Tax Treaty, income from personal services by a resident of one Contracting State is taxable only in that State unless the services are performed in the other State. However, such income remains taxable only in the first State if the recipient's stay in the other State is limited to 90 days for professionals and 183 days otherwise, the payment is from a resident of the first State, and it is not charged to a permanent establishment in the other State. A perusal of documents submitted appears that the name is listed in C Co.'s "Alphalist of Employees", submitted to the BIR with the Annual Information Return (BIR Form No. 1604-CF) and received a Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) as proof of withholding taxes deducted from her salary. Thus, the individual’s remuneration, paid and borne by C Co. shall be taxed under Article 14 of the PH-SG Tax Treaty for services rendered in the Philippines.
THE ABSENCE OF THE APPLICABLE TAX TREATY NECESSITATES THE IMPOSITION OF FINAL WITHHOLDING TAX OF 25% ON DIVIDENDS PAYMENT
BIR ITAD RULING NO. 015-24, OCTOBER 18, 2024
TISI is requesting confirmation that the dividends paid to TUNII, a resident of the Netherlands, are subject to the preferential tax rate of 10% pursuant to the Philippines-Netherlands Tax Treaty. As represented, TUNII executed a Deed of Assignment with TML, a resident of Mauritius, transferring all its rights to common shares in TISI to TML in exchange for new ordinary shares. These shares represented 80% of TISI's outstanding shares. In reply, Section 28 (B)(1) of the 1997 Tax Code, as amended, provides that dividends derived by a non-resident foreign corporation from a domestic corporation are generally subject to income tax at the rate of 25%. However, under Section 32 (B) (5) of the same Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. In this relation, Article 10 of the PH-Netherlands Tax Treaty provides that the lower rate of 10% shall be applied only when the recipient is the beneficial owner, a company with share capital, and holds at least 10% of the paying company's capital directly. Although TUNII is a resident of the Netherlands, it is not the beneficial owner of the dividends, as it holds them in trust for TML. By transferring the shares to TML, TUNII also ceded its right to the dividends, making Article 10 of the PH-Netherlands Tax Treaty inapplicable. Due to the absence of a double tax treaty between the Philippines and Mauritius, dividends paid by TISI to TML through TUNII are subject to a 25% Philippine income tax.
IF THE BUSINESS OF A FOREIGN CORPORATION IS CONDUCTED THROUGH THE BRANCH OFFICE, THE INCOME BECOMES ATTRIBUTABLE TO THE BRANCH
THE PHILIPPINE BRANCH OF A FOREIGN CORPORATION POSSESSES A PERSONALITY SEPARATE & DISTINCT FROM THAT OF ITS HEAD OFFICE FOR INCOME TAX PURPOSES
THE INCOME CANNOT BE ATTRIBUTED TO THE BRANCH OFFICE WHEN A FOREIGN CORPORATION TRANSACTS BUSINESS IN THE PHILIPPINES DIRECTLY & INDEPENDENTLY OF ITS BRANCH
BIR ITAD RULING NO. 002-24, FEBRUARY 23, 2024
D. Co. is seeking confirmation that the income derived by Daewoo E&C, a non-resident foreign corporation (NRFC), from its transaction with the National Irrigation Administration (NIA), is exempt from income tax pursuant to the Philippine-Korea Tax Treaty. As represented, Daewoo E&C was issued a License to establish a Branch Office in the Philippines known as Daewoo E&C Manila Branch Office. In an agreement entered into by NIA and Daewoo E&C, the latter undertook the construction of various projects under the Jalaur River Multipurpose Project. In reply, the Bureau cited the Supreme Court case of Marubeni Corporation vs. Commissioner of Internal Revenue, G.R. No. 76573, dated September 4, 1989, which provides that a Philippine Branch of an NRFC possesses a personality separate and distinct from that of its head office for income tax purposes. Thus, when the NRFC transacts business in the Philippines directly and independently of its Branch, the transaction becomes that of the NRFC, and not of its Philippine Branch. In this case, Daewoo E&C conducted its business through the Daewoo E&C Manila Branch Office. Hence, any income derived from the project becomes attributable to the Branch and is liable to pay income tax equivalent to 30% [now 25% under CREATE Law) of its taxable income. In addition, the gross receipts derived by the Branch from the sale of services to NIA are also subject to a 12% Value-Added Tax. However, the loan agreement contains a tax assumption provision whereby the Government of the Philippines, through NIA, assumed the payment of all fiscal levies and taxes imposed in the Philippines on Korean suppliers, like Daewoo E&C in this case. Therefore, it is the Government of the Philippines, through the NIA, which should shoulder the payment of the Income Tax and VAT imposed on the profits and gross receipts attributable to the Branch.
PETROLEUM PRODUCTS ACQUIRED LOCALLY FOR US ARMED FORCES RELATED TO THE PH-US VISITING FORCES AGREEMENT ARE EXEMPT FROM TAX & DUTIES
BIR ITAD RULING NO. 007-23, APRIL 12, 2023
S Co., a foreign corporation, is requesting confirmation that the petroleum products it acquired from local manufacturers, producers, and suppliers on behalf of the United States Armed Forces (USAF) and in connection with the USAF’s activities in its military locations in the Philippines are exempt from all taxes pursuant to the Agreement between the Government of the United States of America (USA) and the Government of the Republic of the Philippines regarding the Treatment of United States Armed Forces Visiting the Philippines (PH-US Visiting Forces Agreement). In ruling, the following conditions must be satisfied when claiming exemption from the payment of taxes usually imposed on equipment, materials and supplies, and other property acquired in the Philippines: (1) the equipment, material, supplies, including but not limited to, petroleum products, and other property must be acquired from local manufacturers, producers or suppliers; (2) the acquisition must be made by or on behalf of the US Armed Forces; and (3) these equipment, materials and supplies, and other property must be used in connection with the activities covered by the Visiting Forces Agreement (VFA). Considering that the subject purchases meet the above conditions, the purchases of jet fuels, diesel, and gasoline by S Co. from local purchases for the use of the US Armed Forces, in connection with their activities in installations/bases, are exempt from Philippine taxes pursuant to the PH-US Visiting Forces Agreement.
DENIED TAX TREATY RELIEF APPLICATION ON DIVIDEND PAYMENTS SINCE THE BENEFICIAL OWNER IS AN INDIVIDUAL & NOT A CORPORATION IN SINGAPORE
BIR ITAD RULING NO. 006-23, MARCH 21, 2023
V Co. is requesting confirmation that the dividend payments made to BBB, a Spanish individual and a resident of Singapore, are subject to the preferential income tax rate of 15% pursuant to Article 10 (2) (a) of the Philippine-Singapore (PH-SG) Tax Treaty. In reply, Section 25 (B) of the 1997 Tax Code, as amended, provides that income derived by a nonresident alien not engaged in trade or business within the Philippines is subject to income tax at the rate of 25%. However, under Section 32 (B) (5) of the same Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. In this relation, Article 10 of the PH-SG Tax Treaty provides that the lower rate of 15% shall be applied only when the recipient is the beneficial owner of the dividends and a company that holds at least 15% of the outstanding shares of the voting stock of the paying company during the part of latter’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year, if any. Given that the second requisite is absent since the beneficial owner of the dividends is an individual resident of Singapore and not a company, a higher rate of 25% shall be imposed on the dividends paid.
DENIED DIVIDENDS RULING SINCE THE BENEFICIAL OWNER IS NOT A CORPORATION BUT AN INDIVIDUAL
BIR ITAD RULING NO. 005-23, MARCH 21, 2023
V Co. is requesting confirmation that the dividend payments made to BBB, a Spanish individual, and a resident of Singapore, are subject to the preferential income tax rate of 15% pursuant to Article 10 (2) (a) of the Philippine-Singapore (PH-SG) Tax Treaty. In reply, Section 25 (B) of the 1997 Tax Code, as amended, provides that income derived by a nonresident alien not engaged in trade or business within the Philippines is subject to income tax at the rate of 25%. However, under Section 32 (B) (5) of the same Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. In this relation, Article 10 of the PH-SG Tax Treaty provides that the lower rate of 15% shall be applied only when the recipient is the beneficial owner of the dividends and a company that holds at least 15% of the outstanding shares of the voting stock of the paying company during the part of latter’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year, if any. Given that the second requisite is absent since the beneficial owner of the dividends is an individual resident of Singapore and not a company, a higher rate of 25% shall be imposed on the dividends paid.
DIVIDENDS PAID BY A DOMESTIC CORPORATION TO A NON-RESIDENT FOREIGN CORPORATION ARE NOT DIVIDENDS QUALIFIED UNDER 15% BUT INTEREST SUBJECT TO 30% RCIT
BIR ITAD RULING NO. 004-23, MARCH 10, 2023
A Co. is requesting confirmation whether the dividends paid to M Co., a foreign corporation, are subject to income tax of 15% under Section 28 (B)(5)(b) of the 1997 Tax Code, as amended. In reply, to qualify for the lower rate, it requires that the country of residence of the Non-Resident Foreign Corporation (NRFC) shall allow a credit against its tax due taxes deemed to have been paid in the Philippines equivalent to 15%. Scrutiny of the Philippine Depository Receipts (PDR) Instruments revealed that M Co. cannot be considered a shareholder entitled to receive dividends. Citing Section 11 (1), Article XVI of the 1987 Philippine Constitution provides that ownership and management of mass media shall be limited to Filipino citizens, or to corporations, cooperatives, or associations wholly owned and managed by such citizens. However, the cash distributions are similar to interest payments. As such, the cash distributions made by A Co. to M Co. may properly be classified as or may take the form of, interest rather than dividends. Although the cash distributions received are not cash dividends subject to 15%, it is, however, classified as interest subject to 30% pursuant to Section 28 (B) of the 1997 Tax Code, as amended.
THE APPLICABILITY OF THE MOST-FAVORED-NATION CLAUSE IS NOT AUTOMATIC
THE SIMILARITY IN THE CIRCUMSTANCES OF PAYMENT OF TAXES IS A CONDITION FOR THE ENJOYMENT OF THE MOST- FAVORED-NATION TREATMENT
BIR ITAD RULING NO. 013-22, JULY 14, 2022
A Co., a foreign company based in Hungary, is requesting confirmation that the royalty payments made by F Co. to A Co. are subject to the preferential income tax rate of 10% pursuant to the “Most-Favored-Nation” (MFN) clause under the Convention between the Republic of the Philippines and the Republic of Hungary (PH-Hungary Tax Treaty), in relation to the Agreement between the Government of the Philippines and the Government of the United Arab Emirates (PH-UAE Tax Treaty). In ruling, the Bureau opined that the applicability of the MFN clause is not automatic but subject to certain conditions. Utmost, A Co. must be able to prove that the tax on royalties under both treaties is paid under similar circumstances. The BIR did not agree that the methods employed for eliminating or mitigating the effects of double taxation under the Tax Treaty with Hungary and UAE are the same. Both countries adopt the credit method for eliminating double taxation. The difference lies, however, in the amount that may be credited against the tax for which a nonresident taxpayer may be liable in Hungary and the UAE. While the UAE uses the full credit method, Hungary employs the ordinary credit method. Therefore, it cannot be said that the tax on royalties under the PH-Hungary Tax Treaty is paid under circumstances similar to the tax on royalties under the PH-UAE Tax Treaty. Consequently, the MFN clause under the PH-Hungary Tax Treaty cannot apply. Thus, the royalty income derived by A Co. from the Philippines is subject to 15% pursuant to the PH-Hungary Tax Treaty.
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
FURNISHING OF SERVICES BY A RESIDENT OF A CONTRACTING STATE THROUGH EMPLOYEES OR OTHER PERSONNEL WITHIN THE OTHER CONTRACTING STATE FOR A PERIOD OR PERIODS AGGREGATING MORE THAN 183 DAYS, ALSO CONSTITUTES A PERMANENT ESTABLISHMENT
BIR ITAD RULING NO. 050-21, DECEMBER 27, 2021
N. Co is seeking confirmation whether the transactions between AF Co. and AM Co. are exempt from income tax and value-added tax (VAT). As represented, AF Co. is a domestic corporation engaged in providing money and government securities, and specialized and independent brokering services. On the other hand, AM Co. is a foreign corporation organized and existing under the laws of Singapore, which is also engaged in providing money and government securities brokering services. In reply, transactions between AF Co. and AM Co. shall be subject to income tax due. As noted, AM Co. has deployed its employees in AF Co and has exceeded the duration of 183 days. Consequently, this has created a permanent establishment in the Philippines in accordance with the PH-Singapore Tax Treaty. Thus, the compensation of the employees of AM Co. who are in the Philippines for the fulfillment of services, may also be subject to tax for the third requisite in Article 14 of the PH-Singapore Tax Treaty (i.e., the remuneration or income is not borne directly by a permanent establishment) was not fulfilled. For VAT purposes, non-resident persons who perform services in the Philippines are deemed to be rendering services in the course of trade or business, even if the performance of services is not regular. Hence, the services shall also be subject to 12% VAT.
ROYALTY INCOME IS SUBJECT TO 25% TAX RATE FOLLOWING THE NON-APPLICABILITY OF THE MOST-FAVORED NATION CLAUSE
BUSINESS PROFITS OF AN NRFC ARE TAXABLE IF ATTRIBUTED TO A PERMANENT ESTABLISHMENT IN THE PHILIPPINES
BIR ITAD RULING NO. 044-21, SEPTEMBER 29, 2021
D-PH is seeking confirmation on whether the royalty payments made to D-US are subject to the 10% preferential income tax rate pursuant to the Most Favored Nation (MFN) Clause under Article 13(2)(b)(iii) of the Philippines-United States (PH-US) Tax Treaty, in relation to Article 12(2)(a) of the Philippines-United Arab Emirates (PH-UAE) Tax Treaty. In reply, Section 28(B)(1) of the 1997 Tax Code, as amended provides that the income of a non-resident foreign corporation is subject to 30% income tax (now 25% under CREATE Law). However, under Section 32(B)(5) of the same code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. Even if the royalty payments for licensed information, firmware, or software made by D-PH to D-US were able to qualify, as per the definition of royalties under the treaty provisions, the Bureau did not agree that the methods employed for eliminating or mitigating the effects of double taxation under the tax treaty with the US and UAE are the same. Thus, the MFN clause shall not be applicable, and the royalty income derived by D-US shall be subject to the 25% income tax rate. Further, Section 28 (B)(4) of the 1997 Tax Code, as amended provides that the rental payments for the use of test equipment made to D-US are subject to a tax rate of 7.5% on the gross rentals or fees. Article 8 of the PH-US Tax Treaty provides that business profits of D-US shall be taxable only in the US unless it has a permanent establishment in the Philippines. Further, gross receipts derived by D-US from all sales of services to D-PH are also subject to 12% VAT under Section 108(4), relative to Section 105 of the 1997 Tax Code, as amended.
TAX TREATY DOES NOT APPLY TO A PERSON WHO IS NEITHER A RESIDENT OF ONE OR BOTH OF THE CONTRACTING STATES
PROFITS ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING STATE ARE SUBJECT TO TAXES SITUATED THEREIN
FURNISHING SERVICES WITHIN THE PHILIPPINES FOR MORE THAN 183 DAYS CREATE A PERMANENT ESTABLISHMENT
A FIXED PLACE OF BUSINESS, THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON, IS CONSIDERED A PERMANENT ESTABLISHMENT
BIR ITAD RULING NO. 043-21, SEPTEMBER 29, 2021
L Co. is requesting confirmation that its service fee payment to A Co. is 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). In reply, Article 1 (Personal Scope) of the Philippines-Singapore Tax Treaty provides that the Convention shall apply to persons who are residents of one or both Contracting States. In this case, A Co. cannot claim any of the benefits provided under the Tax Treaty for taxable years 2014 to 2016 since it did not present a Tax Residency Certificate (TRC) duly issued by the taxing authority of Singapore. Even if A Co. was a resident of Singapore in such taxable years, still its claim for service fees to be income tax exempt under Article 7 of the Tax Treaty cannot stand due to the creation of a permanent establishment. Perusal of the documents submitted revealed that although A Co. may not have a fixed place of business in the Philippines, it, nonetheless, created a permanent establishment when it furnished services in the Philippines through its employee. The employee rendered the said services in the premises of L Co., where he occupies as the President or Managing Director. Certainly, the office of L Co. may likewise be said to be at his disposal where he could freely carry on the business of A Co. In addition, records revealed that A Co. furnished services in the Philippines through its employee for a period or periods aggregating more than 183 days. Hence, A Co. is not entitled to the benefits under the Tax Treaty. Consequently, the payment of service fees to A Co. is subject to income tax rate of 30% under Section 28(B)(1) of the 1997 Tax Code, as amended; and L Co. shall withhold 12% VAT pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, in relation to Section 105 of the 1997 Tax Code, as amended.
SERVICE FEES PAID TO AN NRFC WITH NO PERMANENT ESTABLISHMENT IN THE PHILIPPINES ARE EXEMPT FROM INCOME TAX PURSUANT TO RP-SINGAPORE TAX TREATY
TAXATION OF PAYMENT FOR SERVICES DEPENDS ON CLASSIFICATION OF SUCH AS BUSINESS PROFITS OR ROYALTIES
SERVICE FEES WHICH CONSTITUTE AS BUSINESS PROFITS ARE EXEMPT FROM INCOME TAX IF NOT ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT
SERVICES PERFORMED IN THE PHILIPPINES BY AN NRFC SHALL BE CONSIDERED AS RENDERED IN THE COURSE OF TRADE OR BUSINESS, HENCE, SUBJECT TO VAT
BIR ITAD RULING NO. 042-21, SEPTEMBER 29, 2021
E Co. is seeking confirmation on whether the service fees paid to E Ltd., a Singapore-based corporation, are exempt from income tax pursuant to the Philippines-Singapore (RP-Singapore) Tax Treaty. In reply, E Ltd. is not deemed to have a permanent establishment in the Philippines following that it has no fixed place of business and had not furnished services in the Philippines, through its employees or other personnel, for more than 183 days. As such, service fees paid by E Co. is exempt from the Philippine income tax pursuant to paragraph 1, Article 7 of the RP-Singapore Tax Treaty. Furthermore, classification of said fees was emphasized, distinguishing such payments as business profits which shall be exempt if not attributable to a permanent establishment, as against payments for know-how or royalties which shall be subject to income tax at reduced rate. The Organisation for Economic Co-operation and Development provides that in the supply of know-how, there would generally be minimal services done other than to supply existing information or reproduce existing material. Whereas in the performance of services, it mostly involves a greater level of expenditure by the supplier to perform his contractual obligations to the other party, such as salaries and wages for employees engaged in researching, designing, testing, drawing, and other associated activities or payments to subcontractors for the performance of similar services. Considering that the Service Agreement between E Co. and E Ltd. involves services covering various areas including regional management, human resources, IT, and marketing and branding, and by reason that a greater level of expenditure will be incurred by E Ltd. in relation to provision of such services, the fees paid by E Co. clearly constitute business profits and not royalties. Lastly, the service fees are likewise subject to 12% final withholding Value-Added Tax (VAT) pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005. The VAT withheld shall be filed through BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on the fees. In case that E Co. is not VAT-registered, it may treat the VAT as part of the cost of services, whichever is applicable.
CAPITAL GAINS TAX EXEMPTION ON TRANSFER OF SHARES BETWEEN TWO (2) NRFC OVER LOCAL SHARES OF STOCKS
DONOR’S TAX IS IMPOSABLE EVEN IN THE ABSENCE OF DONATIVE INTENT ON THE PART OF THE SELLER OF THE SHARES
BIR ITAD RULING NO. 041-21, SEPTEMBER 29, 2021
MHI, a foreign parent of MTSC, is requesting confirmation that the capital gains from the transfer of its shares in MTSC, a domestic corporation, to MHPS, a foreign corporation, are exempt from Capital Gains Tax (CGT) pursuant to the Philippines-Japan Tax Treaty. The MTSC shares were transferred by MHI in exchange for the MHPS shares. In ruling on the taxability of the capital gains, Section 28(B)(5)(c) of the 1997 Tax Code, as amended, provides that the net capital gains realized from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange, are subject to CGT, except when such income is exempt under any treaty obligation binding on the Government of the Philippines. Article 13(4) of the Philippines-Japan Tax Treaty allows the Philippines to tax the gains derived by a resident of Japan from the disposition of its shares in a domestic corporation if the latter’s assets consist principally of immovable property or real property interests situated in the Philippines. To determine whether the assets of the domestic corporation consist principally of immovable assets, reference may be made to Section 2(b) of Revenue Regulations (RR) No. 4-86, which defines the term "principally" as more than fifty percent (50%) of the entire assets in terms of value. Based on MTSC's Balance Sheet, the percentage of its real property interest over its total assets was only 29.84%. Since MTSC's assets do not consist principally of immovable property, the gains realized by MHI from the sale of its shares in MTSC to MHPS shall only be taxable in Japan. Hence, said gains are exempt from Philippine income tax. However, under Section 100 of the 1997 Tax Code, as amended, where property (other than real property located in the Philippines and classified as capital assets) is transferred for less than an adequate and full consideration in money or money's worth, the amount by which the Fair Market Value of the property exceeded the value of the consideration shall be deemed a gift subject to the Donor's Tax.
INCOME OF NRFC IS TAXABLE IF IT HAS PERMANENT ESTABLISHMENT IN THE PHILIPPINES
INCOME PAYMENT TO NRFC MAY BE SUBJECT TO 12% FVAT PURSUANT TO PHILIPPINE-JAPAN TAX TREATY
EMPLOYMENT, IF EXERCISED IN THE PHILIPPINES FOR MORE THAN 183 DAYS, IS A TAXABLE TRANSACTION IN THE PHILIPPINES
BIR ITAD RULING NO. 036-21, JULY 9, 2021
S Co. is seeking confirmation that payment of service fees to K Co. is exempt from income tax pursuant to Philippines-Japan Tax Treaty. In reply, paragraph 1, Article 7, and paragraphs 1, 2, and 6 of Article 5 of the Philippines-Japan Tax Treaty provide that the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein, and the profits are attributable to the permanent establishment. Upon perusal of the documents, K Co. is deemed to have had a permanent establishment in the Philippines since 2012. All service fees paid by S Co. to K Co. beginning 2012 to present for the provision of consultancy services in the Philippines, in relation to the operation and maintenance of the Multipurpose Power Facility, are subject to income tax. The remuneration derived by a resident of Japan in respect of an employment is generally taxable in Japan; however, if such employment was exercised in the Philippines for more than 183 days, the remuneration derived therefrom may be taxed in the Philippines. Thus, nonresident aliens not engaged in trade or business in the Philippines are subject to 25% income tax on gross income. Moreover, K Co., being a nonresident foreign corporation, is subject to 25% income tax under Section 28 (B)(1) of the 1997 Tax Code, as amended. Finally, since the services are performed by K Co. in the Philippines, the service fees paid are also subject to 12% VAT under Section 108(A) of the 1997 Tax Code, as amended. S Co. shall use BIR Form No. 1600 which shall serve as documentary substantiation for its claim of input tax on the fees. VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made.
SERVICE FEES PAID BY DOMESTIC CORPORATION TO NRFC ARE EXEMPT FROM FWT & FVAT UNDER THE TAX TREATY AGREEMENT
BIR ITAD RULING NO. 035-21, JULY 7, 2021
MCS Co. and MCCS Co. are requesting confirmation that their service fees payment to G Co. is exempt from income tax pursuant to the Philippines-Singapore Tax Treaty. In ruling, paragraph 1, Article 7 of the Philippines-Singapore Tax Treaty provides that profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment. Relative thereto, paragraphs 1 and 2 of Article 5, defines a permanent establishment as a fixed place in which the business of an enterprise is wholly or partly carried on, and includes, especially, a seat of management, a branch, an office, a store, or other sales outlet, a factory, and a workshop. A review of records revealed that G Co. is not engaged in trade or business in the Philippines, does not have a branch, an office, or other fixed place of business in that country, and did not render such services for more than 183 days. Therefore, the service fees paid by MCS Co. and MCCS Co. to G Co. are exempt from income tax pursuant to paragraph 1, Article 7 of the Tax Treaty. Furthermore, in accordance with the Cross-Border Doctrine or Destination Principle of the VAT system in Section 108(A) of 1997 Tax Code, as amended, the sale of services by G Co. is also exempt from VAT since the services are performed outside of the Philippines.
SUBSTITUTION FEES FROM LOANS EXTENDED IN THE PHILIPPINES ARE NOT SUBJECT TO INCOME TAX DUE TO ABSENCE OF PERMANENT ESTABLISHMENT BUT SUBJECT TO VAT UNDER SEC. 108 OF THE TAX CODE
BIR ITAD RULING NO. 034-21, JULY 7, 2021
MCS Co. and MCCS Co. are requesting confirmation that their service fees payment to G Co. is exempt from income tax pursuant to the Philippines-Singapore Tax Treaty. In ruling, paragraph 1, Article 7 of the Philippines-Singapore Tax Treaty provides that profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment. Relative thereto, paragraphs 1 and 2 of Article 5, defines a permanent establishment as a fixed place in which the business of an enterprise is wholly or partly carried on, and includes, especially, a seat of management, a branch, an office, a store, or other sales outlet, a factory, and a workshop. A review of records revealed that G Co. is not engaged in trade or business in the Philippines, does not have a branch, an office, or other fixed place of business in that country, and did not render such services for more than 183 days. Therefore, the service fees paid by MCS Co. and MCCS Co. to G Co. are exempt from income tax pursuant to paragraph 1, Article 7 of the Tax Treaty. Furthermore, in accordance with the Cross-Border Doctrine or Destination Principle of the VAT system in Section 108(A) of 1997 Tax Code, as amended, the sale of services by G Co. is also exempt from VAT since the services are performed outside of the Philippines.
SERVICE FEES PAID TO JAPAN NRFC WITH NO PERMANENT ESTABLISHMENT IS EXEMPT FROM FWT & FVAT THOUGH THERE IS SERVICE RENDERED IN THE PHILIPPINES IF THE WITHHOLDING AGENT IS PEZA-REGISTERED
BIR ITAD RULING NO. 033-21, JUNE 18, 2021
P Co., a PEZA export enterprise, is requesting confirmation that payment of service fees to J Co. is exempt from income tax pursuant to Philippines-Japan Tax Treaty. In reply, paragraph 1, Article 7, and paragraphs 1, 2, and 6, Article 5 of the Philippines-Japan Tax Treaty provide that the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein, and the profits are attributable to the permanent establishment. Considering that J Co. is not licensed to engage in trade or business in the Philippines, does not have an office, a branch, or a fixed place of business in the Philippines, and did not furnish services for more than six (6) months within any twelve-month period but for thirty-six (36) days only, J Co. shall not be deemed to have a permanent establishment. This being so, the service fees by P Co. to J Co. shall be exempt from Philippine income tax. Similarly, since the services were performed in the Philippines, the services, therefore, are subject to Value-Added Tax (VAT). However, since P Co. is a PEZA-registered enterprise, and as such, is exempt from national and local taxes, the sale of services is, therefore, exempt from VAT.
BRANCH PROFIT MAY BE SUBJECT TO LOWER 10% INCOME TAX PURSUANT TO PHILIPPINES-NETHERLANDS TAX TREATY
BIR ITAD RULING NO. 032-21, JUNE 18, 2021
S Co. is seeking confirmation that branch profits remitted to its head office, N Co., is subject to income tax of 10% pursuant to the Philippines-Netherlands Tax Treaty. N. Co. is a corporation organized and existing under the laws of the Netherlands and is a resident thereof based on its Articles of Association and Certificate of Residence issued by the Tax Administration Office of Rivierenland in the Netherlands. S Co. was granted a license to establish a branch to undertake exploration and production of hydrocarbons northwest offshore of Palawan. In reply, Section 28(A)(5) of the 1997 Tax Code, as amended provides that profits remitted by a branch office of a foreign corporation in the Philippines to its head office abroad are subject to income tax of 15%. However, such profits are subject to relief, which may either be in the form of tax exemption or reduction of tax, to the extent required by any treaty obligation binding upon the Philippine government. For this purpose, paragraph 7, Article 10 of the Philippines-Netherlands Tax Treaty provides that profits remitted by a permanent establishment situated in a Contracting State to its head office in the other Contracting State are subject to tax of 10%. Thus, profits remitted by S Co. to N Co. are subject to income tax of 10%.
SERVICE FEES PAID TO A CORPORATION WITHOUT A PERMANENT ESTABLISHMENT IN THE CONTRACTING STATE ARE EXEMPT FROM INCOME TAX PURSUANT TO A TAX TREATY
SERVICE FEES ARE VAT-EXEMPT IF THE SERVICES ARE PERFORMED OUTSIDE THE PHILIPPINES
BIR ITAD RULING NO. 031-21, JUNE 16, 2021
U Co. is seeking confirmation if service fees paid to N Co. are exempt from income tax pursuant to Philippines-Netherlands Tax Treaty. N Co. is a corporation organized and existing under the laws of the Netherlands. On the other hand, U Co. is a wholly-owned subsidiary of N. Co., and a domestic corporation engaged primarily in manufacturing janitorial and other household products. U Co. and N Co. entered into a Central Services Agreement to provide intercompany services to all members of the U Group of Companies worldwide. It is agreed that U Co. will pay a service fee to N Co. which shall not exceed 4% of the former's annual turnover or total net receivables from its customers. Based on a sworn statement and certification issued by U Co., all services under the Agreement are and will be performed by N. Co. outside the Philippines. In reply, Section 28 (B)(1) of the 1997 Tax Code, as amended provides that income derived by a non-resident foreign corporation is subject to income tax at the rate of 30% (now 25%). However, in reference to Section 32(B)(5) of the 1997 Tax Code, as amended such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. Moreover, paragraph 1, Article 7, and paragraphs 1 and 2, Article 5 of the Philippines-Netherlands Tax Treaty provide that the profits of a corporation of a Contracting State received from another Contracting State may be subject to tax in the other State if the profits are attributable to a permanent establishment which a corporation has in that State. In line with this, a permanent establishment means a fixed place of business through which a resident of one of the Contracting States engages or transacts in a business and furnishing of services must continue for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Since N Co. is not engaged in trade or business in the Philippines and is not deemed to have a permanent establishment, the service fees paid by U Co. to N Co. are exempt from income tax pursuant to paragraph 1, Article 7 of the Treaty. Moreover, the service fees are also exempt from Value-Added Tax ("VAT") under Section 108(4) of the 1997 Tax Code, as amended since these are not performed by N Co. in the Philippines.
LOWER DIVIDENDS TAX RATE ON DIVIDENDS PAID TO CAYMAN COMPANY
BIR ITAD RULING NO. 029-21, JUNE 8, 2021
C Co. is seeking confirmation whether the dividends paid to T Co., a Non-Resident Foreign Corporation (NRFC), are subject to an income tax of 15% under Section 28(B)(5)(b) of the 1997 Tax Code, as amended. In reply, to qualify for the lower rate, it requires that the country of residence of the NRFC shall allow a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to 15%. Revisiting the Tax Concessions Law of the counterparty showed that T Co. is exempt from any income tax, including any tax to be levied on profits, income, gains, or appreciations on or in respect of its shares, debentures, or other obligations. Since Cayman Islands did not impose any tax on the dividends it received from C Co. as confirmed by the Governor in Cabinet, the subject dividends are, therefore, subject to income tax at the rate of 15% pursuant to Section 28(B) (5) (b) of the 1997 Tax Code, as amended.
SERVICE INCOME IN THE PHILIPPINES OF A UAE CORPORATION IS EXEMPT FROM INCOME TAX IN THE ABSENCE OF A PERMANENT ESTABLISHMENT
MERE PERFORMANCE OF SERVICES IN THE PHILIPPINES SUBJECTS NRFC TO VAT DESPITE THE ABSENCE OF A PERMANENT ESTABLISHMENT
BIR ITAD RULING NO. 028-21, JUNE 8, 2021
F Co. is seeking confirmation whether service fees paid to N Co., a foreign corporation established under the laws of the United Arab Emirates (UAE), are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of the UAE for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital (Philippines-UAE Tax Treaty). As represented, N Co. is not registered as a corporation or partnership in the Philippines, and it carried out services in the Philippines for only 140 days. In reply, Article 7 of the Philippines-UAE Tax Treaty states that business profits of an enterprise shall be taxable only in the contracting state if there is a permanent establishment-Article 5 enumerates which are considered as such; and in the instance that it does have one, it will only be taxed on the income attributable to said establishment. With regard to the Value-Added Tax (VAT), the 1997 Tax Code, as amended, provides that for an NRFC to be liable to VAT, it is sufficient that the services are rendered in the Philippines regardless of regularity. From the facts mentioned, the ruling confirmed that while the service fees paid by F Co. to N Co. are exempt from income tax, the latter is still liable to VAT.
INCOME FROM RENDITION OF SERVICES OUTSIDE THE PHILIPPINES & THROUGH ONLINE DERIVED BY NRFC ARE EXEMPT FROM INCOME TAX & VAT
BIR ITAD RULING NO. 027-21, JUNE 8, 2021
S Co. is seeking confirmation on whether service fees paid to P Co., a Non-Resident Foreign Corporation (NRFC) established under the Laws of Thailand, are exempt from income tax. As represented, S Co. entered into an Agreement for Systems Engineering Service wherein P Co. agreed to provide services via internet for the maintenance of the Enterprise Resource Planning and Business Planning and Control System Software. In reply, Article 7 of the Philippine-Thailand Tax Treaty provides that profits of an enterprise shall be taxable only in the contracting state if there is a permanent establishment-Article 5 enumerates those considered as such; and in the instance, that it does have one, it will only be taxed on the income attributable to said establishment. With regard to the Value-Added Tax (VAT), the “Cross-Border” or “Destination Principle” is applied; this means that services rendered within the Philippines are subject to such, while those performed outside are exempt. Since the services are done purely online and outside the Philippines, the transaction is exempt from VAT. Thus, service fees are both exempt from income tax and VAT.
INCOME FROM PERSONAL SERVICES IN THE PHILIPPINES OF A RESIDENT OF SINGAPORE MAY BE EXEMPT FROM TAX UNDER THE RP-SINGAPORE TAX TREATY
BIR ITAD RULING NO. 025-21, JUNE 8, 2021
M Co. is seeking confirmation on whether the remuneration for personal services paid to a citizen and resident of Singapore is exempt from Philippine income tax pursuant to Article 14 of 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 (RP-Singapore Tax Treaty). The documents submitted showed that the income payee, a citizen, and resident of Singapore, is not engaged in trade or business in the Philippines and that the payee was present in the Philippines for a total of 50 days only. M Co., on the other hand, is a foreign company organized and existing under the laws of Hong Kong that was granted by the Securities and Exchange Commission (SEC) a license to establish its branch office in the Philippines. In reply, Article 14 of the RP-Singapore Tax Treaty provides that the income from personal services of a resident of Singapore shall be exempt from tax in the Philippines and shall only be taxable in Singapore provided that all of the following conditions are satisfied: (1) the recipient is present in the Philippines for a period or periods not exceeding the aggregate of 183 days in the calendar year concerned; (2) the remuneration or income is paid by, or on behalf, of a person who is a resident of Singapore; and (3) the remuneration or income is not borne directly by a Singaporean employer with a permanent establishment in the Philippines. Given that the employer in the instant case is M Co., a foreign corporation engaged in trade or business in the Philippines, the second requisite is not satisfied as the remuneration is not paid by, or on behalf of, a person who is a resident of Singapore. Thus, the remuneration for personal services paid by M Co. is subject to Philippine income tax at 25% Final Withholding Tax as imposed under Section 25(B) of the 1997 Tax Code, as amended.
CONDITIONS TO BE SUBJECTED TO A REDUCED RATE OF 15% TAX FOR DIVIDENDS PAYMENT
BIR ITAD RULING NO. 024-21, JUNE 8, 2021
C Co. is seeking confirmation on whether dividends paid to C Ltd., a Bermuda-based corporation, are subject to the reduced 15% income tax rate. In reply, Section 28 (B)(5)(b) of the 1997 Tax Code, as amended provides that dividends paid by a domestic corporation to a Non-Resident Foreign Corporation (NRFC) are subject to income tax of 15%, provided that the country of domicile of the foreign corporation shall allow a tax credit against the tax payable to the domiciliary country by the foreign corporation taxes deemed paid in the Philippines equivalent to 15%. Citing the case of Commissioner of Internal Revenue vs. Wander Philippines Inc., the Supreme Court held that the condition for the imposition of the preferred dividend tax rate of 15% is fully satisfied if the country of domicile of the NRFC exempts from taxation the dividends received from the Philippines. Since Bermuda does not impose any tax derived by C Ltd. from sources within and outside Bermuda, the dividends it received from C Co. are subject to a 15% tax.
VAT-REGISTERED SUPPLIERS & SUBCONTRACTORS OF JAPANESE COMPANIES INVOLVED IN OECF-FUNDED PROJECTS SHALL PASS ON 12% VAT
JAPANESE COMPANIES INVOLVED IN OECF-FUNDED PROJECTS SHALL INCLUDE IN THEIR BILLING THE PASSED-ON 12% VAT TO THE CONCERNED EXECUTING AGENCIES OF THE REPUBLIC OF THE PHILIPPINES
BIR ITAD RULING NO. 023-21, JUNE 7, 2021
SUT JV is seeking a confirmation ruling on the amount of Value-Added Tax (VAT) that the Department of Public Works and Highways (DPWH) should allocate to the contract price of a project funded by the Japan International Cooperation Agency (JICA) through the Japan Bank for International Cooperation (formerly Overseas Economic Cooperation Fund). It is represented that the DPWH proposed a change in the Detailed Unit Price Analysis Form of the project calling for a reduction in the VAT component of the project from 12% to 5%. Thus, in the Notice of Award of the project, only 5% of its contract price is allocated as a VAT component, which is below the 12% output VAT normally incorporated in the price of goods and services under Section 106(A) and 108(A) of the 1997 Tax Code, as amended and passed-on by VAT-registered suppliers to its customers. In reply, Revenue Memorandum Circular (RMC) No. 8-2017, which acknowledges the obligation of the Philippine Government to assume the payment of VAT under the Exchange of Notes executed by the governments of the Philippines and Japan, provides that the VAT-registered suppliers and subcontractors of Japanese companies involved in OECF-funded projects shall bill and pass on the 12% VAT to these Japanese companies, which in turn shall include in their billing and pass on the 12% VAT to the concerned executing agencies of the Republic of the Philippines. Lastly, Section 114(C) of the 1997 Tax Code, as amended, provides that the government shall no longer impose the 5% Final Withholding VAT on payments for the purchase of goods and services arising from OECF-funded projects.
RESIDENT OF MALAYSIA WHO PERFORMED THE AGREED SERVICES IN THE PHILIPPINES WILL BE SUBJECT TO 25% FINAL WITHHOLDING TAX ON CONSULTANCY FEES & PROFIT SHARE DERIVED IN THE PHILIPPINES
DIRECTORS' FEES DERIVED BY A RESIDENT OF MALAYSIA IN HIS CAPACITY AS A MEMBER OF THE BOARD OF DIRECTORS OF A PHILIPPINE COMPANY IS TAXED AT 25% IN THE PHILIPPINES
CONSULTANCY FEES & PROFIT SHARED DERIVED FROM THE SALE OF SERVICES IN THE PHILIPPINES, AS WELL AS THE DIRECTOR'S FEES DERIVED ARE SUBJECT 12% VAT
BIR ITAD RULING NO. 026-21, JUNE 6, 2021
Malaysian individual residents are requesting confirmation that the consultancy fees, profit shares, and director’s fees paid by IPI, a domestic corporation, to Malaysians are exempt from income tax pursuant to the RP-Malaysia Tax Treaty. In reply, for consultancy fees and profit share paid to Malaysian, Article 14 of the Treaty states that salaries, wages, and similar remuneration or income derived by a resident of Malaysia in respect of professional services or other activities of a similar character are generally taxable in Malaysia; however, if said services or activities are exercised or performed in the Philippines, such income derived therefrom may be taxed in the Philippines. Considering that the resident of Malaysia performed the agreed services in the Philippines for 90 days and 103 days in 2016 and 2015, respectively, the consultancy fees and profit shares derived therefrom are, therefore, taxable in the Philippines at the rate of 25%. Similarly, in the case of director's fees, Article 15 of the Treaty provides that directors' fees and other similar payments derived by a resident of Malaysia in his capacity as a member of the Board of Directors (BOD) of a company, which is a resident of the Philippines, may be taxed in the Philippines. Since he is a member of the BOD of IPI, the director's fees paid to him are likewise subject to income tax in the Philippines at 25%. Finally, the consultancy fees and profit shares derived from the sale of services in the Philippines and director's fees derived and on behalf of IPI, are subject to 12% VAT.
VAT LIABILITY RELATED TO THE PROJECT ULTIMATELY FALLS UPON THE EXECUTING AGENCY OF THE PHILIPPINE GOVERNMENT
BIR ITAD RULING NO. 022-21, MAY 25, 2021
The Department of Health (DOH) is requesting an opinion on the taxability of its transaction with S Co., a company based in Japan, relative to the construction of a hospital (the Project) funded by the Japan International Cooperation Agency (JICA). In ruling, Revenue Memorandum Circular (RMC) No. 8-2017 provides that DOH should not withhold tax on the counterpart fund payable to S Co. and shall reimburse the 12% VAT in full. The DOH’s reimbursement to S Co. of the 12% VAT billed and passed on to the latter by its supplier fulfills its obligations to the Japanese Government under the Memorandum. DOH, being the executing agency, shall be responsible for the liquidation or settlement of all fiscal levies, duties, taxes, and other similar charges imposed in the Philippines on the Japanese companies operating as suppliers, contractors, or consultants in relation to the implementation of the Project. The Exchange of Notes only provides a tax assumption mechanism (i.e., the obligation or liability to pay tax remains but the burden of paying the same is merely passed on to DOH). Also, an RMC does not have a prospective application, thus, it applies retroactively.
IF RESIDENT OF NETHERLANDS HAS AS A PERMANENT ESTABLISHMENT IN THE PHILIPPINES, IT IS SUBJECT TO BRANCH PROFITS REMITTANCE TAX NOT EXCEEDING 10% OF REMITTED PROFITS
PERMANENT ESTABLISHMENT UNDER RP-NETHERLANDS TAX TREATY IS A FIXED PLACE OF BUSINESS OF THE ENTERPRISE WHOLLY OR PARTLY CARRIED ON WHICH INCLUDES A BRANCH
BIR ITAD RULING NO. 021-21, MAY 25, 2021
SPEX PH Branch, a domestic corporation, is requesting confirmation that the profits remitted to SPEX BV, a foreign corporation and a resident of the Netherlands, are subject to the preferential tax rate of 10% pursuant to the RP-Netherlands Tax Treaty. In reply, any profits remitted by a branch of a foreign corporation in the Philippines to its head office abroad shall be subject to a tax of 15%, based on the total profits applied or earmarked for remittance without any deduction of the tax component. However, Article 10 of the RP-Netherlands Treaty provides that where a resident of the Netherlands has a permanent establishment in the Philippines, it may be subject to the branch profits remittance tax withheld at source under Philippine laws but shall not exceed 10% of the amount of the remitted profits. Since the branch is considered a permanent establishment under the RP-Netherlands Tax Treaty, profits remitted by SPEX PH Branch to its head office, SPEX BV, are subject to a 10% preferential rate.
EXCHANGE OF NOTES IS CONSIDERED AS AN EXECUTIVE AGREEMENT, WHICH IS BINDING ON THE STATE EVEN WITHOUT SENATE CONCURRENCE
VAT LIABILITY RELATED TO THE PROJECT ULTIMATELY FALLS UPON THE EXECUTING AGENCY
BIR ITAD RULING NO. 020-21, MAY 25, 2021
J Co., a foreign corporation established in Japan, is requesting the BIR’s assistance on its pending deficiency assessment pursuant to a valid Exchange of Notes. In reply, an Exchange of Notes is considered as Executive Agreement, which is binding on the State even without Senate concurrence. The subject Exchange of Notes provides that the Philippine government, by itself or through its executing agency, such as the Department of Transportation (DOTr) in this case, shall assume all fiscal levies and taxes imposed in the Philippines on Japanese companies operating as suppliers, contractors, or consultants to the Project including their employees involved in the Project. Revenue Memorandum Circular No. 8-2017 clearly provides that the VAT liability related to the Project ultimately falls upon the DOTr, the executing agency, and not upon J Co. However, before the latter could be made liable for the VAT on purchases of goods and services related to the Project, J Co. should inform the DOTr first that the VAT was paid by it on such purchases, which can be done by including the VAT in its billings and presenting proof of payment to the DOTr.
SERVICE FEE PAID TO NRFC WITH NO PERMANENT ESTABLISHMENT IN THE PHILIPPINES IS EXEMPT FROM INCOME TAX
SOFTWARE SUPPORT SERVICE PERFORMED ABROAD IS EXEMPT FROM VAT
BIR ITAD RULING NO. 019-21, MAY 25, 2021
S Co, a domestic corporation, is seeking confirmation whether the service fee paid to P Ltd., an NRFC, is exempt from income tax pursuant to the old Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (RP-Thailand Tax Treaty). In reply, since P Ltd. does not have a branch, office, or other fixed place of business in the Philippines and did not furnish services in the Philippines through its employees or other personnel for a period or periods aggregating more than 183 days, it shall be deemed to not have a permanent establishment in the Philippines from which the profits derived from the provision of services to S Co. Thus, the service fee paid by the domestic corporation is exempt from Philippine income tax under paragraph 1, Article 7 of the RP-Thailand Tax Treaty. On business tax, only services performed in the Philippines are subject to Value-Added Tax (VAT), while those performed abroad are exempt. Since the software support services were all performed in Thailand, the service fee paid by S Philippines is also exempt from VAT.
FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES, WHICH DOES NOT HAVE A BRANCH, AN OFFICE, OR OTHER FIXED PLACE OF BUSINESS IN THE PHILIPPINES & DOES NOT FURNISH SERVICES IN THE PHILIPPINES FOR MORE THAN 183 DAYS IS NOT DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE PHILIPPINES
SERVICE FEE PAID BY DOMESTIC CORPORATION TO FOREIGN CORPORATION RESIDENT OF THAILAND WITH NO PERMANENT ESTABLISHMENT IN THE PHILIPPINES IS EXEMPT FROM INCOME TAX BUT SUBJECT TO VAT
BIR ITAD RULING NO. 018-21, MAY 25, 2021
MJ TH, a foreign corporation and a resident of Thailand is requesting confirmation that the services paid by MJ PH, a domestic corporation, to MJ TH are exempt from income tax under the RP-Thailand Tax Treaty. In reply, since MJ TH is not engaged in trade or business in the Philippines and does not have a branch, an office, or other fixed places of business in the Philippines, and does not furnish services in the Philippines for more than 183 days, but for 151 days only during the term of the Service Agreement from 2009 to 2011, it is not deemed to have a permanent establishment in the Philippines. Thus, the service fee paid for such services rendered is exempt from income tax. However, a service fee for such services performed in the Philippines is subject to Value-Added Tax (VAT) under Section 108(A) of the 1997 Tax Code, as amended.
SALE BY A US COMPANY OF DOMESTIC SHARES OF STOCK IS NOT SUBJECT TO CGT IF THE REAL PROPERTY INTEREST OF THE DOMESTIC CORPORATION IS NOT MORE THAN 50%
TRANSFER FOR LESS THAN ADEQUATE & FULL CONSIDERATION IS SUBJECT TO DONOR’S TAX
BIR ITAD RULING NO. 016-21, MAY 25, 2021
C Co.- US, a nonresident foreign corporation, is requesting confirmation that the capital gains derived from the sale of its shares of stock in C Co.-PH to C Co.-NL are not subject to 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 (RP-US Tax Treaty). Documents submitted revealed that the real property interest (i.e., real assets over total assets of C Co.-PH) is 12.63% while the fair market value of the subject shares is higher than the consideration received by C Co.-US. In reply, capital gains derived by a non-resident foreign corporation from the disposition of shares of stock not traded in the stock exchange in a domestic corporation are subject to Capital Gains Tax (CGT) under Section 28(B)(5)(c) of the 1997 Tax Code, as amended. However, such gains may be exempt to the extent required by any treaty obligation binding upon the Philippine government. In relation, Article 14 of the RP-US Tax Treaty provides that gains derived by a US resident from the alienation of shares of stock in a domestic corporation shall be taxable only in the US provided that the assets of such domestic corporation do not consist principally of immovable property situated in the Philippines. Given that the assets of C Co.-PH do not consist principally of immovable property situated in the Philippines as its real property interest is only 12.63%, the capital gains derived by C Co.-US are exempt from income tax in the Philippines. Although the sale is not subject to income tax, it is, however, subject to Donor’s Tax pursuant to Section 100 of the 1997 Tax Code, as amended, as the shares were sold for less than fair market value.
CAPITAL GAINS FROM SALES OF SHARES ARE EXEMPT TO THE EXTENT REQUIRED BY ANY TREATY OBLIGATION BINDING UPON THE PHILIPPINE GOVERNMENT
ON GAINS FROM THE ALIENATION OF SHARES OF A COMPANY, THE PROPERTY OF WHICH CONSISTS PRINCIPALLY OF IMMOVABLE PROPERTY SITUATED IN A CONTRACTING STATE, MAY BE TAXED IN THAT STATE
BIR ITAD RULING NO. 014-21, MAY 19, 2021
S SG is seeking confirmation whether the capital gains derived from the sale of its shares of stock in S PH to S KR are exempt from income tax pursuant to the RP-Singapore Tax Treaty. In reply, Section 28(B)(5)(c) of the 1997 Tax Code, as amended provides that capital gains derived by a Non-Resident Foreign Corporation (NRFC) from the disposition of shares in a domestic corporation not listed and traded in stock exchange are subject to income tax at the rate of 5% to 10%. However, under Section 32(B)(5) of the 1997 Tax Code, as amended, such gains are exempt to the extent required by any treaty obligation binding upon the Philippine government. A perusal of records showed that S SG derived no capital gains from the disposition of its shares in S PH since the cost of the said shares was greater than the consideration, and even assuming that S SG derived capital gains from the subject transaction, still, the said gains are not taxable in the Philippines when the gains from the alienation of an interest in a partnership or a trust, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. Scrutiny of the Audited Financial Statements (AFS) of S PH revealed that the real property components of its Property, Plant and Equipment (PPE) comprise of less than 50% of its assets. Thus, the capital gains derived by S SG from the sale of its shares in S PH to S KR are exempt from income tax pursuant to paragraph 3, Article 13 of the RP-Singapore Tax Treaty. On Donor’s Tax, Section 10(B) of Revenue Regulations No. 2-2003 provides that donation made between business organizations is considered donation made to a stranger and is, therefore, subject to Donor's Tax of 30%. Hence, the excess of the Fair Market Value of the subject shares over the consideration is deemed a gift subject to Donor's Tax.
PROFITS OF AN ENTERPRISE THAT IS A RESIDENT IN ITALY SHALL BE TAXABLE IN THE PHILIPPINES ONLY IF THE PROFITS ARE ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE PHILIPPINES, BUT SAID INCOME SHALL BE EXEMPT IF A VALID & EFFECTIVE TAX TREATY PROVIDES FOR SUCH EXEMPTION
BIR ITAD RULING NO. 010-21, MAY 18, 2021
DAR is requesting confirmation that income payments made to E Foundation, a foundation organized and existing under the laws of Italy, are exempt from income tax pursuant to the RP-Italy Tax Treaty. In reply, income derived by a non-resident foreign corporation from sources within the Philippines is subject to 30% income tax. However, said income shall be exempt from income tax if a valid and effective tax treaty provides for such exemption. Under Article 7 of the RP-Italy Tax Treaty, the profits of an enterprise that is a resident of Italy, like E Foundation, in this case, shall be taxable in the Philippines only if the profits are attributable to a permanent establishment in the Philippines. In the instant case, the rented office space of E Foundation in General Santos City, South Cotabato constitutes its permanent establishment in the Philippines. It is a fixed place of business through which the business of E Foundation is wholly or partly carried on. Moreover, the lease period of two (2) years indicates some degree of permanency and the intention of E Foundation to continuously carry out its business in the Philippines over such a period of time. Thus, income payments made by DAR to E Foundation in connection with the Project are subject to income tax in the Philippines under paragraph 1, Article 7 of the Tax Treaty. Finally, since the services are performed in the Philippines, payments, therefore, are subject to 12% VAT.
TAXES ASSUMED BY THE PHILIPPINE GOVERNMENT PURSUANT TO THE EXCHANGE OF NOTES EXECUTED BY THE GOVERNMENTS OF THE PHILIPPINES & JAPAN
BIR ITAD RULING NO. 004-21, MARCH 4, 2021
S Co., a contractor for a project funded by the Japan International Cooperation Agency (JICA) through the Japan Bank for International Cooperation (JBIC), is requesting comments on its tax obligations. S Co. was granted a License to establish a branch office in the Philippines to undertake the construction of the Second Mandaue-Mactan Bridge Project Contract Package 1 as part of a joint venture and of other government projects funded by JBIC. In reply, Section 7 of the Exchange of Notes executed by the governments of the Philippines and Japan on November 9, 2015 provides that the Philippine Government or its executing agency shall be responsible for the liquidation or settlement of: (1) all duties and related charges imposed in the Philippines on the Japanese companies operating as suppliers, contractors, or consultants with respect to the import and re-export of their own materials and equipment needed for the implementation of the project; (2) all fiscal levies and taxes imposed in the Philippines on the Japanese companies operating as suppliers, contractors, or consultants with respect to the payment carried out for the income accruing from the supply of products or services required for the implementation of the Project; and (3) all fiscal levies and taxes imposed in the Philippines on the Japanese employees engaged in the implementation of the Project with respect to their personal income derived from Japanese companies operating as suppliers, contractors, or consultants for the implementation of the Project. As to income taxes, which include corporate income tax, personal income tax of Japanese employees engaged in the implementation of the Project, fringe benefits tax of qualified Japanese employees, and branch profit remittance tax, among others, the Bureau opined that while the payment of these taxes is assumed by the Philippine Government or the Department of Transportation (DOTr) pursuant to the Exchange of Notes, the computation thereof, the filing of a return, and remittance to the BIR shall still be the duty of S Co. To implement the tax assumption scheme as provided under the Exchange of Notes, S Co. shall immediately prepare the returns and necessary documents after the determination of the amount of income taxes and proceed to the DOTr to secure payment of these taxes. As to the Value-Added Tax (VAT), Revenue Memorandum Circular (RMC) No. 8-2017 provides that VAT-registered suppliers and subcontractors of Japanese companies involved in JBIC-funded projects shall bill and pass on the 12% VAT to these Japanese companies, which in turn shall include it in their billings and pass on the 12% VAT to the concerned executing agencies of the Government of the Philippines.
IT IS INDISPENSABLE FOR THE SENDING STATE THAT PROPERTY SUBJECT FOR SALE FORMS PART OF THE PREMISES OF THE MISSION & IS USED FOR THE FUNCTION OF THE MISSION AT THE TIME OF SALE TO BE EXEMPT FROM TAXES
THE AUSTRALIAN GOVERNMENT IS LIABLE TO PAY CGT & DST, BUT NOT LIABLE TO PAY VAT ON THE SALE OF REAL PROPERTY
BIR ITAD RULING NO. 061-20, SEPTEMBER 23, 2020
Australian Government is requesting confirmation if the sale of its parcel of land with all the improvements thereon is exempt from Capital Gains Tax (CGT), Documentary Stamp Tax (DST), and Value-Added Tax (VAT). In ruling, Article 23 of the Vienna Convention on Diplomatic Relation, in relation to Article 1 (i), states that the sending State and Head of the Mission shall be exempt from all the taxes in respect of the buildings or part of the buildings and land ancillary thereto, which are used for the official purposes of the foreign diplomatic mission. Hence, for tax exemption to attach to the sending state, it is indispensable that the property subject of the sale forms part of the "premises of the mission” and is used for any of the functions of the mission at the time of sale. In this case, the subject property did not meet the requisite, because it was neither used in furtherance of the functions of the mission nor was it used as the residence of the Head of the Mission at the time of the sale. The subject property ceased to be a premise of the Mission after the Australian Government vacated or discontinued the use of such property for purposes of the Mission or as a residence of the Head of the Mission. Thus, the Australian Government is liable for the payment of taxes arising from the sale of the subject property. The subject property is not a real property used in trade or business of the taxpayer, hence, a capital asset subject to 6% CGT. Considering that the Australian Government is not exempt from national taxes with regard to the sale of the subject property, it may be held liable for the payment of the DST imposed herein. The liability for the DST may, however, be shifted to the buyer if so agreed upon by the parties. Finally, the sale was not made in the course of trade or business since it does not regularly sell properties; hence, the Australian Government is not liable to VAT.
EXTENT OF TAX EXEMPTION OF THE SUBJECT ENTITY ORGANIZED PURSUANT TO AN INTERNATIONAL AGREEMENT
BIR ITAD RULING NO. 059-20, JULY 24, 2020
The Department of Foreign Affairs, acting for the ASEAN Centre for Biodiversity (ACB), is seeking confirmation that the assets, property, income, operations, and transactions of the ACB are exempt from taxes pursuant to the PH-ACB Host Country Agreement. In ruling, Section 32(B)(6) of the 1997 Tax Code, as amended, provides that income is excluded from gross income if it is exempt under any treaty obligation binding upon the Government of the Philippines. Sections 106(A)(2)(b) and 108(B)(3) of the same Code also provide that the sales of goods and services to persons or entities, who are exempt under special laws or international agreements to which the Philippines is a signatory, are subject to Value-Added Tax (VAT) at zero rate. In relation thereto, Sections 1 and 4, Article VIII (D) of the PH-ACB Host Country Agreement provide that the ACB is exempt from direct taxes and from VAT on its purchases of goods, materials, equipment, vehicles, and services for its official use. Thus, ACB is exempt from direct taxes. Likewise, its purchases of goods and services for its official use from VAT-registered taxpayers are subject to zero percent VAT.
ROYALTY PAYMENTS TO NRFC INCORPORATED & DOMICILED IN HUNGARY ARE SUBJECT TO A LOWER PREFERENTIAL RATE
BUSINESS PROFITS EARNED BY A NRFC INCORPORATED & DOMICILED IN HUNGARY ARE EXEMPT FROM INCOME TAX IN THE ABSENCE OF PERMANENT ESTABLISHMENT
PAYMENTS TO NRFC FOR THE LEASE OF PROPERTY IN THE PHILIPPINES ARE SUBJECT TO VAT
BIR ITAD RULING NO. 056-20, JULY 15, 2020
V Co., a domestic corporation, is seeking confirmation if income payments to F Co., a resident of Hungary, are subject to relief under the Philippines-Hungary Tax Treaty. In ruling, income derived in the Philippines by a NRFC is subject to an income tax rate of 30% under Section 28(B)(1) of the 1997 Tax Code, as amended. However, such income may be exempt to the extent required by any treaty obligation binding upon the Philippine Government. Under Article 11 of the Philippines-Hungary Tax Treaty, the channel net revenues, being royalties, for meeting the definition of royalties, are subject to the lowest rate of Philippine income tax that may, under similar circumstances, be imposed on royalties by a resident of a third State (so-called “Most Favored Nation Treatment”). In this connection, Article 12 of the Philippines-Hungary Tax Treaty provides that royalties arising in the Philippines and paid to a resident of the United Arab Emirates are subject to income tax at the rate of 10%; hence, F Co.’s share in the channel net revenue is subject to a lower income tax rate of 10%. On the other hand, the share of F Co. from the local ad net revenue and regional ad net revenue are not considered royalties but business profits since these are derived from providing commercial airtime to local and regional advertisers for the local commercials on the channel, which is in the ordinary course of business of F Co. Article 7 of the Philippines-Hungary Tax Treaty provides that business profits earned by an enterprise of Hungary shall only be taxable in the Philippines if the said enterprise carries on business in the Philippines through a permanent establishment. Given that F Co. does not have a permanent establishment in the Philippines, its share in the local ad net revenue and regional ad net revenue is exempt from income tax. Lastly, on the basis that F Co.’s share in the channel net revenue, local ad net revenue, and regional ad net revenue are payments for the lease of property in the Philippines, payments for such are subject to VAT under Section 108(A) of the 1997 Tax Code, as amended.
TRANSFER OF SHARES OF STOCK IN A DOMESTIC COMPANY BY A JAPANESE NRFC IS NOT SUBJECT TO INCOME TAX PURSUANT TO RP-JAPAN TREATY FOR AS LONG IT MEETS THE REQUIREMENTS UNDER THE “REAL PROPERTY INTEREST TEST”
TRANSFER OF PROPERTY FOR LESS THAN ADEQUATE & FULL CONSIDERATION IS NOT SUBJECT TO DONOR’S TAX IN THE ABSENCE OF DONATIVE INTENT
TRANSFER OF SHARES OF STOCK PURSUANT TO A TAX-FREE EXCHANGE IS SUBJECT TO DST IN THE ABSENCE OF A BIR RULING
BIR ITAD RULING NO. 055-20, JUNE 26, 2020
3D Auto-Japan, a Non-Resident Foreign Corporation (NRFC), is seeking confirmation whether the transfer of its shares of stock in 3D Auto-Philippines to ARKK Co. is exempt from tax pursuant to the Philippines-Japan Tax Treaty. As represented, the transfer of shares of stock is pursuant to an absorption-type merger agreement with 3D Auto-Japan as the extinct company and ARKK Co. as the surviving company, with no consideration to compensate or increase in capital. Further, 3D Auto Philippines’ Real Property Interest (RPI) is only 25.86% following the RPI Test stated in Revenue Regulations (RR) No. 4-86, and that RPI must not be more than 50% at the time of transfer. In ruling, capital gains from the disposition of shares of stock in a domestic corporation by NRFC is subject to tax under Section 28(B)(5)(c) of the 1997 Tax Code, as amended. However, such gains may be exempt pursuant to any treaty obligation binding upon the Philippine Government for as long as it meets the requirements provided in the RPI test. In the instant case, given that the requirement (i.e., the property of the domestic company consists principally of immovable property) for the exemption provided in the Philippines-Japan Treaty was met, the transfer of shares of stock to ARKK Co. is exempt from the Capital Gains Tax (CGT) as the RPI is less than 50% (i.e., 25.86%). On Donor’s Tax, the BIR cited the case of Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch wherein the Supreme Court held that one of the requisites of a valid donation is that there should be donative intent. Even though there was no consideration received in the transfer of shares of stock, it is likewise not subject to Donor’s Tax as this was carried out for purely business reasons and not motivated by any donative intent (i.e., Merger). On the Documentary Stamp Tax (DST), the BIR concludes that since it falls under a tax-free exchange transaction (i.e., merger or consolidation) under Section 40(C)(2) of the 1997 Tax Code, as amended, it needs a BIR confirmation ruling to be exempted from DST. Given that this is absent in the instant case, the transfer of shares of stock to ARKK Co. is subject to DST.
DIVIDENDS PAID BY A DOMESTIC CORPORATION TO A NRFC ARE SUBJECT TO 15% INCOME TAX RATE
TO QUALIFY FOR 15% INCOME TAX ON DIVIDENDS PAID, NRFC COUNTRY OF RESIDENCE MUST ALLOW TAX SPARING CREDIT EQUIVALENT TO 15% FOR TAXES DEEMED PAID IN THE PHILIPPINES
PHILIPPINE SUBSIDIARY MUST BE SUBJECT TO 30% RCIT TO WARRANT THE REDUCTION OF TAX ON DIVIDENDS IT PAID TO NRFC
BIR ITAD RULING NO. 054-20, JUNE 26, 2020
F PH, a domestic corporation owned and controlled by F US, is seeking confirmation that dividends paid to F US are subject to income tax at the rate of 15% under Section 28(B)(5)(b) of 1997 Tax Code, as amended. In ruling, F PH or the Philippine subsidiary which paid the dividends is subject to 30% Regular Corporate Income Tax on its taxable income which warrants the reduction of tax on dividends it paid to its non-resident corporation stockholders. Moreover, F US is a US resident, and under its tax law, it allows a ‘deemed paid’ or ‘tax sparing’ credit equivalent to at least 15% for taxes deemed paid in the Philippines against the US tax of F US. Thus, dividends paid are subject to 15% income tax rate.
VAT ZERO-RATING PRIVILEGE ON PURCHASES OF SERVICES PURSUANT TO AUSTRALIAN-FUNDED PROJECTS UNDER GADC IS ONLY LIMITED TO PURCHASES FROM INDIVIDUALS & GENERAL PARTNERSHIPS
BIR ITAD RULING NO. 019-20, FEBRUARY 7, 2020
C Co. is seeking a clarification on the extent of the Value-Added Tax (VAT) zero-rating privilege on purchases of services of Australian-funded projects under the General Agreement on Development and Cooperation (GADC) between the Philippines and Australia. In the earlier issued rulings, the BIR held that purchases of services of projects funded under the GADC shall only be subject to 0% VAT when the services are rendered by individuals or general partnerships registered in the Philippines. Such rulings are based on the definition of services as provided in the GADC. Thus, C Co. presumes that the term general partnerships, as used in the GADC, may have been used in the Australian context and that it actually includes ordinary corporations. In reply, the BIR recapitulated its earlier rulings that purchases of services shall only qualify for VAT zero-rating if the services are rendered by VAT-registered individuals or general partnerships. The BIR likewise denied C Co.’s presumption that the term general partnerships, as used in the GADC, may actually include ordinary corporations, as there is nothing in the GADC that reflects such intention.
EXEMPTION OF DIPLOMATS FROM THE REQUIREMENT OF SECURING A TIN DOES NOT EXTEND TO PURPOSES BEYOND OFFICIAL CAPACITIES AS DIPLOMATS
BIR ITAD RULING NO. 018-20, FEBRUARY 7, 2020
I Co. is requesting an exemption from securing a Tax Identification Number (TIN) in favor of BBB and CCC who are foreign trustees of I Co. and are employed by the Asian Development Bank (ADB) and the US Embassy, respectively. As represented, BBB and CCC are diplomats and are entitled to tax exemption privileges as evidenced by the Department of Foreign Affairs Certification. In reply, Section 1 of Executive Order (E.O.) No. 31, which amends E.O. No. 98, provides that diplomats identified by the DFA are exempted from securing a TIN when applying for any Government permit, license, clearance, official paper, or document. The same exemption does not, however, extend if the purpose for which they are required to secure a TIN is not connected with their official capacities as diplomats. Being trustees of I Co. is already beyond the duties of diplomats. Further, the tax exemption granted to BBB and CCC in the Vienna Convention on Diplomatic Relations and the ADB Headquarters Agreements as being employed by ADB and the US Embassy, respectively, does not extend to other types of income such as income received as trustees of I Co. Thus, BBB and CCC are required to secure their respective TINs.
BRANCH PROFIT REMITTANCE TO THE HOME OFFICE BASED IN NETHERLANDS IS SUBJECT TO A PREFERENTIAL RATE OF 10%
BIR ITAD RULING NO. 017-20, FEBRUARY 7, 2020
Q Co. Ph is seeking confirmation that its branch profit remittances to Q Co. Netherlands are subject to income tax at the preferential rate of 10%. As represented, Q. Co. Netherlands is a foreign corporation organized and existing under the laws of the Netherlands. In reply, Section 28(A)(5) of the 1997 Tax Code, as amended, provides that profits remitted by a branch to its head office abroad are subject to a rate of 15%. However, given that Q Co. Ph is a permanent establishment of Q Co. Netherlands pursuant to Article 5 of the Philippines-Netherlands Tax Treaty, Article 10 of the same Treaty provides that remittances of branch profits by a permanent establishment in the Philippines to its head office in the Netherlands are subject to tax at the lower rate of 10%. Thus, the profit remittances of Q. Co. Ph to Q Co. Netherlands are subject to tax at the lower rate of 10% pursuant to the Philippines-Netherlands Tax Treaty.
INCOME FROM INTEREST ON BANK DEPOSITS IN THE PHILIPPINES BY FOREIGN GOVERNMENT IS EXEMPT FROM TAX
BIR ITAD RULING NO. 014-20, JANUARY 15, 2020
The Consulate General of Japan is claiming a refund of the quarterly final tax withheld from its current bank account on the basis that it is entitled to tax exemption. In reply, Section 32(B)(7)(a) of the 1997 Tax Code, as amended, provides for the exclusion from gross income those income derived by a foreign government on income from investments in the Philippines in loans, stocks, bonds, or other domestic securities, or from interest on deposits in banks in the Philippines. Diplomatic or Consular Mission falls within the purview of a foreign government. Further, Article 11 of the RP-Japan Treaty also provides for the exemption from Philippine taxation of the interest income earned by the Government of Japan in the Philippines. Thus, interests derived by the Consulate General of Japan from its bank deposits in the Philippines are exempt from tax.
ELIGIBLE ADB NON-FILIPINO OFFICERS ARE EXEMPT FROM SECURING AN ATRIG ON THE IMPORTATION OF VEHICLE
BIR ITAD RULING NO. 010-20, JANUARY 9, 2020
Mr. M is seeking a ruling that eligible Asian Development Bank (ADB) non-Filipino officers are exempt from securing an Authority to Release Imported Goods (ATRIG) in connection with the letter of the Department of Finance (DOF) Secretary stating that the DOF has no objection to the restoration of the option to purchase an imported tax-exempt vehicle by ADB officers and staff, subject to certain conditions. One of the conditions set forth in the DOF letter is that the ADB must secure a one-time ruling from the BIR confirming the exemption from securing an ATRIG in connection with the importation of vehicles. In ruling, Revenue Regulations (RR) No. 4-2017 provides that under the provisions of effective international agreement, recognized international organizations such as the ADB are exempted from all taxes, hence, such organizations are exempt from the requirement of securing an ATRIG. In relation to RR No. 4-2017, the Philippine-ADB Headquarters Agreement recognizes the right of ADB officers and staff to import, free of duty and other levies, one (1) automobile for a replacement for three (3) years after the last importation. Thus, eligible ADB non-Filipino officers are exempt from securing an ATRIG, thereby, completing the said requirement set forth in the DOF letter.
GROSS PHILIPPINE BILLINGS UNDER RP-UAE TAX TREATY
BIR ITAD RULING NO. 007-20, JANUARY 9, 2020
E Co., an international air carrier from the United Arab Emirates (UAE), is seeking confirmation that its Gross Philippine Billings (GPB) is exempt from tax based on the reciprocity. In reply, Section 28 (A) of the 1997 Tax Code, as amended, provides that an international carrier doing business in the Philippines shall pay 2 ½% on its GPB. However, with the enactment of Republic Act (R.A.) No. 10378, or the “Act Recognizing the Principle of Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers,” an international carrier doing business in the Philippines may avail of a preferential rate or exemption from tax imposed on their gross revenue derived from the carriage of persons and their baggage based on the applicable tax treaty or international agreement or based on the reciprocity. Considering that the Philippine Airlines (PAL) does not pay any corporate income taxes to UAE, E Co. shall likewise be exempt from income tax on its gross revenue derived from the carriage of persons and excess baggage based on the reciprocity. Likewise, it is entitled to the preferential rate of 1 ½% on the gross revenues derived from carriage of cargo and mail pursuant to RP-UAE Tax Treaty. Further, it is liable to pay the 3% Common Carriers tax on its carriage of cargo. In relation to the exemption granted to E Co., its authorized representative is obliged to submit to the BIR International Tax Affairs Division (ITAD) a Sworn Certification stating that there is no change in the domestic laws of its home country granting income tax exemption to Philippine carriers before January 31 of each year. Failure to submit the Sworn Certification shall be a ground for the revocation of the ruling.
SUPPLY OF FIREARMS TO THE AFP IS EXEMPT FROM THE FWT UNDER THE RP-US TREATY BUT SUBJECT TO VAT
BIR ITAD RULING NO. 005-20, JANUARY 6, 2020
R Co., a non-resident foreign corporation, is seeking confirmation whether the income derived from the supply and delivery of firearms to the Armed Forces of the Philippines (AFP) is exempt from income tax pursuant to the Republic of the Philippines-United States (RP-US) Treaty. In reply, in general, gross income derived by a Non-Resident Foreign Corporation (NRFC) from all sources within the Philippines is subject to 30% income tax. However, such income may be exempt when required by any treaty obligation binding upon the Philippine government. Article 8 of the RP-US Treaty states that branch profits are taxable only to the US, unless the Company has a permanent establishment in the Philippines. Upon perusal of documents, it was shown that R Co. has no permanent establishment though it conducted maintenance training on the use of the procured firearms for two (2) days in the Philippines. Thus, income derived by R Co. is exempt from the Final Withholding Tax (FWT) but subject to the Final Withholding Value-Added Tax (VAT) for the services rendered.
VAT-EXEMPT & ZERO-RATING PRIVILEGES ARE ONLY LIMITED TO NECESSARY PURCHASES TO IMPLEMENT AN INTERNATIONAL AGREEMENT FROM WHICH PRIVILEGES AROSE
BIR ITAD RULING NO. 001-20, JANUARY 6, 2020
The Australian Embassy is seeking confirmation that the purchases of C Co., the managing contractor of the ASEAN-Australia Counter-Trafficking (ASEAN-ACT), are exempt from Value-Added Tax (VAT). The ASEAN-ACT is pursuant to the General Agreement on Development Cooperation (GADC) between the Philippines and Australia. In ruling, the BIR referred to Article 7 of the GADC which provides that project supplies and services shall be subject to VAT at 0% rate while importation of goods shall be VAT-exempt. In relation to Article 7 of the GADC, Sections 106(A)(2)(b), 108(B)(3), and 109(1)(K) of the 1997 Tax Code, as amended, provide VAT zero-rating and exemption privilege on purchases and importations pursuant to an international agreement to which the Philippines is a signatory. It is emphasized, however, that the VAT privilege shall only be limited to the purchase of good and services and importation of goods necessary to implement the ASEAN-ACT and GADC.
SERVICE FEES PAID TO FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS MAY BE EXEMPTED FROM INCOME TAX & VAT BASED ON TAX TREATY AGREEMENTS
BIR ITAD RULING NO. 040-19, DECEMBER 9, 2019
P Co. is seeking confirmation whether service fees paid to Bet Shemesh Engines Ltd. (Bet Shemesh), a corporation existing under the laws of Israel, is exempt from Income Tax. As represented, P Co. and Bet Shemesh entered various contracts for the procurement of spare parts, repair, and overhaul the aircraft and engines of P Co. The aircraft and engines will be exported to Bet Shemesh in Israel for assessment, repair, and overhaul and will be returned to the Philippines after such services. In reply, income derived by foreign corporation not engaged in trade or business in the Philippines is subject to income tax. However, such income may be exempted based on RP-Israel Tax Treaty. Since Bet Shemesh has no permanent establishment in the Philippines, service fees will not be taxable for income tax purposes. Likewise, the service fee will be exempt from Value-Added Tax (VAT) based on Cross-Border Doctrine of the VAT system as there will be no services rendered in the Philippines since the repair and overhaul of aircraft will all be done in Israel.
GUARANTEE FEE PAID TO NRFC WITH NO PERMANENT ESTABLISHMENT IN THE PHILIPPINES IS EXEMPT FROM INCOME TAX
BIR ITAD RULING NO. 039-19, DECEMBER 9, 2019
TDC is seeking an opinion on whether the guarantee fee paid to Non-Resident Foreign Corporation (NRFC) is exempt from income tax pursuant to RP-Japan Tax Treaty. As represented, the guarantor NYK and the borrowers, NETI, NTPC, NYK-FIL and NTL entered into a Guarantee Fee Agreement with each other to obtain Joint Venture (JV) Loan from a foreign bank. In accordance with the agreement, the borrowers agreed to pay NYK a guarantee fee in the amount of 0.2% of the total outstanding liabilities as a consideration for the guarantee issued by the latter for the JV Loan. In reply, RP-Japan Tax Treaty provides that income of a resident of Japan whenever arising, except from income from immovable property, shall be taxable only in Japan unless the enterprise carries on business in the Philippine through a permanent establishment situated therein. Considering that NYK has no permanent establishment in the Philippines, the guarantee fee paid by NTPC and NETI under the Agreement shall be exempt from income tax.
GUARANTEE FEE PAID TO NRFC WITH NO PERMANENT ESTABLISHMENT IN THE PHILIPPINES IS EXEMPT FROM INCOME TAX
BIR ITAD RULING NO. 039-19, DECEMBER 9, 2019
TDC is seeking an opinion on whether the guarantee fee paid to Non-Resident Foreign Corporation (NRFC) is exempt from income tax pursuant to RP-Japan Tax Treaty. As represented, the guarantor NYK and the borrowers, NETI, NTPC, NYK-FIL and NTL entered into a Guarantee Fee Agreement with each other to obtain Joint Venture (JV) Loan from a foreign bank. In accordance with the agreement, the borrowers agreed to pay NYK a guarantee fee in the amount of 0.2% of the total outstanding liabilities as a consideration for the guarantee issued by the latter for the JV Loan. In reply, RP-Japan Tax Treaty provides that income of a resident of Japan whenever arising, except from income from immovable property, shall be taxable only in Japan unless the enterprise carries on business in the Philippine through a permanent establishment situated therein. Considering that NYK has no permanent establishment in the Philippines, the guarantee fee paid by NTPC and NETI under the Agreement shall be exempt from income tax.
VAT EXEMPTION PRIVILEGES OF NETHERLANDS EMBASSY ARE THROUGH REIMBURSEMENT/REFUND & NOT THROUGH POS BASIS
BIR ITAD RULING NO. 038-19, OCTOBER 18, 2019
The Embassy of the Kingdom of the Netherlands is requesting a BIR ruling to confirm Value-Added Tax (VAT) exemption on its local purchase of goods and services. In reply, under the Principle of Reciprocity, the BIR may grant tax privileges if they can submit proof that the foreign government of the concerned embassy allows similar tax privileges to the Philippine Embassy or its personnel in their country. Thus, as per the indorsement of DFA-OP, and the DFA Matrix of VAT Privileges Enjoyed by the Philippine Foreign Service Posts, the Philippine Embassy enjoys VAT exemption privileges through reimbursement/refund, subject to limitations. Therefore, the Embassy of the Netherlands, its diplomatic and non-diplomatic personnel are entitled to the same VAT exemption privileges through reimbursement/refund, and not through Point-of-Sale (POS) basis, subject only to the said limitations and guidelines set forth in Revenue Memorandum Order (RMO) No. 10-2019.
EXPIRED VEC OF DIPLOMATIC PERSONNEL CANNOT BE RENEWED
DIPLOMATIC & NON-DIPLOMATIC PERSONNEL MAY PROCEED TO SECURE THE NECESSARY VAT REIMBURSEMENT/REFUND UPON THE EXPIRATION OF ITS VAT CERTIFICATE
EMBASSY OF ARGENTINE REPUBLIC IS STILL A HOLDER OF VALID EXEMPTION FROM VAT
BIR ITAD RULING NO. 037-19, OCTOBER 17, 2019
Embassy of Argentine Republic is requesting the renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) of its diplomatic personnel on local purchase of goods and services. In reply, the BIR ruled that, applying the Principle of Reciprocity and pursuant to the Revenue Memorandum Order (RMO) No. 10-2019, all holders of a valid and current VEC may continue to use the same until the end of the validity period of their respective VECs. Hence, the expired VEC of diplomatic personnel shall not be renewed anymore. The Embassy, its diplomatic and non-diplomatic personnel, upon the expiration of its VEC, may proceed to secure the necessary VAT reimbursement/refund on purchases of local goods and services. However, tax exemption does not cover medicines, legal and notarial services, property rental, passenger transport, books, and municipal fee.
LIMITATIONS ON VAT EXEMPTION PURSUANT TO RP-INDONESIA TAX TREATY
BIR ITAD RULING NO. 036-19, OCTOBER 17, 2019
The Embassy of the Republic of Indonesia is requesting a BIR ruling on the Value-Added Tax (VAT) exemption on local purchase of goods and services. In reply, the BIR noted that, to date, the Embassy of the Republic of Indonesia still holds a valid VAT Exemption Certificate (VEC). Hence, the Embassy may still enjoy Point-of-Purchase VAT exemption until the expiration date of the VEC. Applying the Principle of Reciprocity and pursuant to Revenue Memorandum Order (RMO) No. 10-2019, the Embassy of the Republic of Indonesia, its diplomatic and non-diplomatic personnel, upon the expiration of their respective VEC, may proceed to secure the necessary VAT reimbursement/refund with a minimum purchase of 2,500,00 Rp (around Php 9,220).
VEC OF DIPLOMATIC PERSONNEL ON LOCAL PURCHASES FOR PERSONAL USE WAS NOT RENEWED
PRINCIPLE OF RECIPROCITY ON VAT PRIVILEGES ACCORDED TO EMBASSIES
BIR ITAD RULING NO. 035-19, OCTOBER 17, 2019
The Embassy of the People’s Republic of China is requesting the renewal of Value-Added Tax Exemption Certificate (VEC) relative to the availment of VAT exempt local purchases of goods and services of its diplomatic personnel. In reply, notwithstanding the Vienna Convention on Diplomatic Relations of 1961, which states that embassy, consulates, and their diplomatic agents are exempt from all dues and taxes, personal or real, they are nevertheless subject to indirect taxes (i.e., VAT) which are normally incorporated in the price of goods and services. However, applying the Principle of Reciprocity, the BIR may grant tax privileges to embassies provided the latter allows similar tax privileges to the Philippine Embassy on their country. Upon checking, the Philippine Embassy, its diplomatic and non-diplomatic personnel enjoy VAT exemption privileges in Beijing, China through reimbursement/refund subject to limitations. With this, the BIR ruled that the Embassy of the People’s Republic of China, its diplomatic and non-diplomatic personnel in the Philippines are entitled to VAT exemption privileges through reimbursement/refund and not through (Point-of-Sale) POS basis. Thus, the expired VEC was not renewed anymore.
VAT EXEMPTION PRIVILEGES TO DEPENDENT CHILDREN OF TAIPEI DIPLOMATS IN THE PHILIPPINES
VAT EXEMPTION PRIVILEGES ON LOCAL PURCHASES CAN BE EXTENDED TO FAMILY MEMBERS
BIR ITAD RULING NO. 034-19, OCTOBER 17, 2019
Taipei Economic and Cultural Office (TECO) in the Philippines is requesting the issuance of Value-Added Tax (VAT) Exemption Certificate (VEC) in favor of the dependent children of diplomats. In reply, the BIR granted the VAT exemption privileges to qualified resident foreign missions and their qualified personnel based on the confirmation by the Department of Foreign Affairs (DFA) of the VAT exemption privileges being accorded to Philippine Foreign Service Posts and their personnel stationed in Taiwan. The VAT exemption privileges accorded to qualified personnel of the resident foreign missions in the Philippines may be extended to their dependent spouses and children if the same treatment is being accorded to dependents of Filipino diplomats abroad. Similarly, the grant of VAT exemption privileges to TECO and its personnel in the Philippines will depend on how Manila Economic and Cultural Office (MECO), the Philippine counterpart of TECO in Taipei, is being treated for VAT exemption purposes in Taipei. Based on the information received by the DFA from MECO, business tax exemption cards (the equivalent of VEC in the Philippines) are only issued to MECO personnel and their dependent spouses in Taipei, and the dependent children enjoys tax exemption privilege through their principal. In view thereof, the BIR is of the opinion and ruled to grant VAT exemption privileges to dependent children of TECO personnel in the Philippines. They may enjoy VAT exemption at Point-of-Sale (POS) when accompanied by their parents who are principal holders of VEC.
EMBASSY OF INDIA & ITS DIPLOMATIC PERSONNEL ENJOYS VAT PRIVILEGES THROUGH REIMBURSEMENT/REFUND SUBJECT TO LIMITATIONS
BIR ITAD RULING NO. 032-19, OCTOBER 14, 2019
The Embassy of India is requesting the renewal of VAT Exemption Certificate (VEC) relative to the availment of VAT exempt local purchases of goods and services of its diplomatic personnel. In reply, diplomatic agents are generally exempt from all dues and taxes; however, they are still subject to indirect taxes (i.e., VAT) which are normally incorporated in the prices of goods and services. Nevertheless, under the Principle of Reciprocity, the BIR may grant tax privileges to Embassies provided the latter allows similar tax privileges to the Philippine Embassy on their country. Upon checking, the Philippine Embassy, and its diplomatic personnel (not extended to dependents) enjoy VAT exemption privileges in New Delhi, India through reimbursement/refund subject to limitations. With this, the BIR ruled that the Embassy of India and its diplomatic personnel in the Philippines are entitled to VAT exemption privileges through reimbursement/refund and not through Point-of-Sale (POS) basis. Thus, the expired VEC of diplomatic personnel was not renewed anymore.
EXTENT OF VAT EXEMPT PURCHASES PURSUANT TO RP-SPAIN TAX TREATY
VEC SHALL NOT BE RENEWED ANYMORE, BUT MAY PROCEED TO SECURE VAT REIMBURSEMENT/REFUND
BIR ITAD RULING NO. 031-19, OCTOBER 14, 2019
The Embassy of Spain is requesting the renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) relative to the availment of VAT-exempt local purchases of goods and services of its diplomatic personnel. In reply, under the Principle of Reciprocity, the BIR may grant tax privileges to a foreign embassy and to its members on their local purchase of goods and services, if they can submit proof that the foreign government of the concerned Embassy allows similar tax privileges to the Philippine Foreign Service Post and its personnel on purchase of goods or services in their country. Given that the Philippine Embassy and its diplomatic personnel enjoy VAT exemption privileges on purchase of goods and services through reimbursement/refund subject to limitations, and applying the Principle of Reciprocity, the Embassy of Spain and its diplomatic personnel in the Philippines are entitled to the same privileges. Hence, the expiring VEC shall not be renewed anymore but may be used until its expiration. The Embassy of Spain, and its diplomatic personnel, may proceed to secure the necessary VAT reimbursement/refund on purchases of local goods and services in the Philippines following the guidelines in Revenue Memorandum Order (RMO) No. 10-2019.
UPON EXPIRATION OF VEC, EMBASSY PERSONNEL MAY PROCEED TO SECURE VAT REFUND ON PURCHASES OF LOCAL GOODS & SERVICES IN THE PHILIPPINES SUBJECT TO LIMITATIONS
HOLDERS OF VEC MAY STILL ENJOY POINT-OF-PURCHASE VAT EXEMPTION ON OFFICIAL & PERSONAL PURCHASE OF GOODS & SERVICES UNTIL ITS EXPIRATION
EMBASSY PERSONNEL ARE ENTITLED TO THE SAME VAT EXEMPTION PRIVILEGES THROUGH REIMBURSEMENT/REFUND & NOT THROUGH POS BASIS
BIR ITAD RULING NO. 030-19, OCTOBER 14, 2019
The Delegation of the European Union to the Philippines is requesting a renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) in connection with the availment of VAT exemption on local purchase of goods and services for their personal use. In reply, the BIR may grant tax privileges to a foreign embassy and to its members on their local purchases of goods and services, provided they can submit proof that the government of the concerned embassy allows similar tax privileges to the Philippine Foreign Service Post and its personnel on purchases of goods or services in their country under the Principle of Reciprocity. Moreover, pursuant to Revenue Memorandum Order (RMO) No. 10-2019, diplomatic and non-diplomatic personnel of Delegation of the European Union in the Philippines are entitled to the same VAT exemption privileges through reimbursement/refund, and not through Point-of-Sale (POS) basis. Hence, the expiring VEC of the Embassy personnel shall not be renewed anymore. Upon expiration, Embassy personnel may proceed to secure VAT refund on purchases of local goods and services in the Philippines subject to limitations set forth in RMO No. 10-2019.
EXPIRED VEC OF BELGIUM EMBASSY SHALL NOT BE RENEWED
VAT EXEMPTION THROUGH REIMBURSEMENT/REFUND & NOT THROUGH POS BASIS
BIR ITAD RULING NO. 029-19, OCTOBER 14, 2019
The Embassy of the Kingdom of Belgium is seeking renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) to exempt its local purchases of goods and services from VAT. In reply, the BIR noted that to date, the Embassy still holds a valid VEC. In this regard, the Embassy may still enjoy Point-of-Purchase VAT exemption until the expiration date of the said VEC. Thus, VEC need not be renewed once it expires. Applying the Principle of Reciprocity and pursuant to Revenue Memorandum Order (RMO) No. 10-2019, the Embassy, its diplomatic and non-diplomatic personnel, upon the expiration of their respective VEC, may proceed to secure the necessary VAT exemption privileges through reimbursement/refund and not through Point-of-Sale (POS) basis, with a minimum purchase of €125.00 for the Embassy and €50.00 for its diplomatic and non-diplomatic personnel.
EXPIRED VEC OF AUSTRIAN EMBASSY SHALL NOT BE RENEWED
VAT EXEMPTION THROUGH REIMBURSEMENT/REFUND & NOT THROUGH POS BASIS
BIR ITAD RULING NO. 028-19, OCTOBER 14, 2019
The Austrian Embassy is seeking renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) to exempt its local purchases of goods and services from VAT. In reply, the BIR noted that to date, the Embassy still holds a valid VEC, hence, the Embassy may still enjoy point-of-purchase VAT exemption until the expiration date of the said VEC. Furthermore, expired VEC shall no longer be renewed. Applying the Principle of Reciprocity and pursuant to the Revenue Memorandum Order (RMO) No. 10-2019, the Austrian Embassy, its diplomatic and non-diplomatic personnel, upon the expiration of their respective VEC, may proceed to secure the necessary VAT exemption privileges through reimbursement/refund and not through Point-of-Sale (POS) basis, with a minimum purchase of €73.00.
0% VAT TREATMENT ON DIRECT SUPPLIES OF DOMESTIC GOODS & SERVICES FROM AUSTRALIA & VAT EXEMPTION ON DIRECT IMPORTATION OF GOODS RELATED TO PROJECTS CARRIED OUT IN THE PHILIPPINES PURSUANT TO RP-AUSTRALIA GENERAL AGREEMENT ON DEVELOPMENT COOPERATION
BIR ITAD RULING NO. 027-19, SEPTEMBER 6, 2019
P Co. is seeking confirmation on the 0% and Value-Added Tax (VAT) exemption on its purchases of program supplies, vehicles, professional, and technical materials and services for the implementation of Best Education Sector Transformation (BEST) Program which intends to improve the quality of learning outcomes, to provide more equitable access to education of boys and girls, and to improve service delivery through better governance. As represented, the Government of Australia (GOA) will provide project vehicles, office equipment, and commodities to support the functioning of BEST in the Department of Education (DepEd) Central Office and in the target regions, that all motor vehicles provided by GOA for the program's use will be registered and insured in the name of the Australian Embassy and BEST. At the end of the program, all motor vehicles and office equipment will be returned to GOA who will reassign the same to the Philippines. In reply, Section 106 (2) (c) of the 1997 Tax Code, as amended, provides that certain transactions involving the sale of goods or properties are subject to 0% VAT if they are treated as such under special laws or international agreements to which the Philippines is a signatory. Also, Section 109 (1) (K) of the same code exempts from VAT certain transactions which are exempt under international agreements to which the Philippines is a signatory. In relation to the foregoing, the provisions under Article 7 of the RP-Australia General Agreement on Development Cooperation (GADC) state that the Philippine Government shall subject to 0% VAT the direct supplies of domestic goods and services. Likewise, Article 3 exempts the direct importation of goods from VAT with respect to projects carried out in the Philippines pursuant to the GADC and Article 5 on the direct importation of professional and technical materials which will be exempted from VAT only when it is imported by Australian institution, firm, organization, or Australian personnel.
PRINCIPLE OF RECIPROCITY JUSTIFIES VAT EXEMPTION ON PURCHASE OF FORD VEHICLE BY EMBASSY OF BRAZIL
BIR ITAD RULING NO. 026-19, SEPTEMBER 5, 2019
Embassy of the Federal Republic of Brazil is requesting exemption from the payment of Value-Added Tax (VAT) and Ad Valorem Tax on the local purchase of a motor vehicle for its official use. In reply, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from VAT and Ad Valorem Tax, which are indirect taxes on their local purchases of goods and services, pursuant to Article 34 of the Vienna Convention on Diplomatic Relations. Purchases of goods and/or services shall, in general, be subject to VAT and Ad Valorem Tax under Sections 106 and 149 of the 1997 Tax Code, as amended. However, applying the Principle of Reciprocity, the BIR confirmed the exemption of Embassy from VAT and Ad Valorem Tax on its local purchases of motor vehicles, since it appears on the list submitted by the Department of Foreign Affairs (DFA) that Brazil allows similar exemption to the Philippine Embassy and/or its personnel on their purchases of motor vehicles in Brazil. Thus, the sale of the motor vehicle shall be subject to VAT at 0% rate pursuant to Section 106 (A) (2) (b) of the 1997 Tax Code, as amended, and exempt from Ad Valorem Tax pursuant to Section 9 of Revenue Regulations (RR) No. 25-2003.
HOLDERS OF VALID VECS ENJOY POINT-OF-PURCHASE VAT EXEMPTION UNTIL ITS EXPIRATION DATE
BIR ITAD RULING NO. 025-19, SEPTEMBER 6, 2019
The Embassy of Czech Republic is seeking confirmation on the Value Added Tax (VAT) exemption treatment of purchases of goods and services for the Embassy and its personnel. Upon checking, the Philippine Embassy, its diplomatic and non-diplomatic personnel including their legal dependents in Prague, Czech Republic, enjoy VAT exemption privileges on purchase of goods and services through reimbursement/refund. With this, the same tax privileges are accorded to the Embassy of Czech Republic. However, since the Embassy currently holds a valid VAT Exemption Certificate (VEC), it may continue to use the same until the end of its validity. Thus, the Embassy may still enjoy point-of-purchase VAT exemption until the expiration date of the said VEC. Upon expiration, the Embassy and its personnel may proceed to secure the necessary VAT reimbursement on purchases following the guidelines set forth in Revenue Memorandum Order (RMO) No. 10-2019.
UPON VEC EXPIRATION, EMBASSY PERSONNEL MAY PROCEED TO SECURE VAT REFUND ON PURCHASES OF LOCAL GOODS & SERVICES IN THE PHILIPPINES SUBJECT TO LIMITATIONS
HOLDERS OF VEC MAY STILL ENJOY POINT-OF-PURCHASE VAT EXEMPTION ON OFFICIAL & PERSONAL PURCHASE OF GOODS & SERVICES UNTIL ITS EXPIRATION
EMBASSY PERSONNEL ARE ENTITLED TO THE SAME VAT EXEMPTION PRIVILEGES THROUGH REIMBURSEMENT/REFUND & NOT THROUGH POS BASIS
BIR ITAD RULING NO. 024-19, SEPTEMBER 6, 2019
Royal Norwegian Embassy is requesting a Value-Added Tax (VAT) Exemption Certificate (VEC) renewal in connection with the availment of VAT exemption on local purchases of goods and services for their personal use. In reply, tax privileges may be grated to a foreign embassy and to its members on their local purchases of goods and services provided they can submit proof that the government of the concerned Embassy allows similar tax privileges to the Philippine Foreign Service Post and its personnel on purchases of goods or services in their country under the Principle of Reciprocity. Moreover, pursuant to RMO No. 10-2019, the Embassy, its diplomatic and non-diplomatic personnel are entitled to the same VAT exemption privileges through reimbursement/refund and not through Point-of-Sale (POS) basis. Hence, the expiring VEC of the Embassy personnel shall not be renewed anymore. Upon expiration, the Embassy may proceed to secure VAT refund on purchases of local goods and services in the Philippines subject to the limitations set forth in RMO No. 10-2019.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF EMBASSY OF CANADA
RULES OF RECIPROCITY
BIR ITAD RULING NO. 023-19, SEPTEMBER 6, 2019
The Embassy of Canada is requesting the renewal of Value-Added Tax (VAT) Exemption Certificate (VEC) relative to the availment of VAT-exempt local purchases of goods and services of its diplomatic personnel. In reply, under the Principle of Reciprocity, the BIR may grant tax privileges to a foreign embassy and to its members on their local purchases of goods and services, if they can submit proof that Canada allows similar tax privileges to the Philippine Embassy on its purchase of goods or services in their country. Given that the Philippine Embassy, its diplomatic and non-diplomatic personnel including the qualified dependents, enjoy VAT exemption through reimbursement and applying the Principle of Reciprocity, the Embassy of Canada, its diplomatic and non-diplomatic personnel in the Philippines are entitled to the same privilege. Hence, the expiring VEC shall not be renewed anymore. The Embassy of Canada, its diplomatic and non-diplomatic personnel including their legal dependents, may proceed to secure the necessary VAT reimbursement/refund on purchases of local goods and services in the Philippines following the guidelines in Revenue Memorandum Order (RMO) No. 10-2019.
INCOME PAYMENT TO NRFC IS EXEMPT FROM INCOME TAX BUT MAY BE SUBJECT TO 12% FINAL WITHHOLDING VAT PURSUANT TO RP-MALAYSIA TAX TREATY
INCOME OF NRFC IS TAXABLE IF IT HAS PERMANENT ESTABLISHMENT IN THE PHILIPPINES
BIR ITAD RULING NO. 021-19, AUGUST 29, 2019
A Co., a domestic corporation, is seeking confirmation if commission and service fees paid to B Co., a Non-Resident Foreign Corporation (NRFC) organized under the laws of Malaysia, are exempt from tax. In reply, an NRFC is generally subject to 30% income tax rate on its income earned in the Philippines. However, such income may be exempt to the extent required by any treaty obligation binding upon the Philippine government. Following Articles 5 and 7 of the RP-Malaysia Tax Treaty, profits earned in another contracting state are only taxable if such has a permanent establishment in the said contracting state. Applying this to the current issue, B Co. is not deemed to have permanent establishment in the Philippines based on the records. Thus, commission and service fees earned by B Co. are exempt from income tax. However, A Co. is still obliged to withhold 12% Value-Added Tax (VAT) on payment made. The VAT withheld shall be filed thru BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on the commission and service fee paid. If A Co. is not VAT-registered, it may treat the passed-on VAT as part of the cost of services. VAT withheld shall be remitted within ten (10) days following the end of the month in which the withholding was made.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF EMBASSY OF GERMANY
VAT EXEMPTION PRIVILEGES THROUGH REIMBURSEMENT/REFUND FOR THE EMBASSY OF GERMANY
BIR ITAD RULING NO. 020-19, JULY 24, 2019
The Embassy of the Federal Republic of Germany is requesting a Value-Added Tax (VAT) Exemption Certificate to qualify its local purchases of goods and services from VAT exemption. In reply, applying the Principle of Reciprocity and pursuant to the Revenue Memorandum Order (RMO) No. 10-2019, the Embassy of the Federal Republic of Germany and its diplomatic and non-diplomatic personnel in the Philippines are entitled to the same VAT exemption privileges through reimbursement/refund and not through Point Of-Sale (POS) basis subject to certain limitations.
GROSS PHILIPPINE BILLINGS AND APPLICATION OF MOST-FAVORED NATION
BIR ITAD RULING NO. 019-19, JUNE 30, 2019
K Airlines is requesting confirmation if it shall continue to be exempt from Income Tax on its Gross Philippine Billings on the basis of reciprocity pursuant to Section 28 (A) (3) (a), of the 1997 Tax Code, as amended. K Airlines is an international air carrier organized and existing under the laws of the Netherlands and was issued a license to establish a branch office in the Philippines. In reply, Section 4.2 (B) of Revenue Regulations (RR) No. 15-2013 requires that for reciprocity to be invoked, the Philippine air carriers operating in the Netherlands must actually be enjoying tax exemption therein. This cannot be determined because there are no Philippine air carriers operating in international traffic in the Netherlands. Nonetheless, paragraph 2, Article 8 of the RP-Netherlands Tax Treaty provides relief to K Airlines which subjects it to a lower tax of 1 ½ on its Gross Philippine Billings, or the lowest rate of income tax on such Gross Philippine Billings derived by an enterprise of a third State (i.e., Most Favored Nation Treatment). To avail such relief, K Airlines must submit to the BIR International Tax Affairs Division an authenticated Certificate of Residence issued by the Tax Authority of the Netherlands, and a BIR confirmatory ruling will then be issued.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF THE EMBASSY OF FRANCE PURSUANT TO THE PRINCIPLE OF RECIPROCITY
BIR ITAD RULING NO. 017-19, JUNE 20, 2019
The Embassy of France is requesting a Value-Added Tax (VAT) exemption ruling on its local purchases including that of its personnel. In reply, VAT exemption privileges to a foreign embassy and to its members on their local purchase can be granted if they can submit proof that they allow similar tax privileges to the Philippine Embassy or its personnel on purchases in their country. As per the Indorsement of the DFA-OP and the DFA Matrix of VAT Privileges Enjoyed by the Philippine Foreign Service Posts, Philippine Embassy and its diplomatic personnel in Paris, France enjoy VAT exemption through reimbursement/refund, subject to the following limitations:
1. Purchase of goods and services
a. For the Embassy only
b. Minimum amount of purchase per invoice/receipt is €175.01 (more or less Php 11,352.25)
2. Purchase of gas, petrol, fuel, and other petroleum products –
a. For the Embassy and its diplomatic personnel
b. 200 liters per month
Applying the Principle of Reciprocity, the Embassy of France and its diplomatic personnel in the Philippines are entitled to the same VAT exemption privileges through reimbursement/refund, and not through Point-of-Sale (POS) basis.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF THE EMBASSY OF HUNGARY PURSUANT TO THE PRINCIPLE OF RECIPROCITY
BIR ITAD RULING NO. 016-19, JUNE 20, 2019
The Embassy of Hungary is requesting a Value-Added Tax (VAT) exemption ruling on its local purchases including that of its personnel. In reply, VAT exemption privileges to a foreign embassy and to its members on their local purchase can be granted if they can submit proof that they allow similar tax privileges to the Philippine Embassy or its personnel on purchases in their country. As per the Indorsement of the DFA-OP and the DFA Matrix of VAT Privileges Enjoyed by the Philippine Foreign Service Posts, Philippine Embassy and its diplomatic and non-diplomatic personnel in Budapest, Hungary enjoy VAT exemption through reimbursement/refund, subject to the following limitations: (1) for the Embassy, there is no limit in the amount that can be refunded per year; (2) for the diplomatic and non-diplomatic personnel, the maximum total amount that can be refunded on purchase of goods, services, utilities, motor vehicle, and petrol is Php 60,000 per year, per person. Applying the Principle of Reciprocity, the Embassy of Hungary and its diplomatic and non-diplomatic personnel in the Philippines are entitled to the same VAT exemption privileges through reimbursement/refund, and not through Point-of-Sale (POS) basis.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF THE EMBASSY OF THE REPUBLIC OF TURKEY PURSUANT TO THE PRINCIPLE OF RECIPROCITY
BIR ITAD RULING NO. 015-19, JUNE 20, 2019
The Embassy of the Republic of Turkey is requesting for a ruling on the Value-Added Tax (VAT) exemption on its local purchases including that of its personnel. In reply, VAT exemption privileges to a foreign embassy and to its members on their local purchase can be granted if they can submit proof that they allow similar tax privileges to the Philippine Embassy or its personnel on purchases in their country. As per the Indorsement of the DFA-OP and the DFA Matrix of VAT Privileges Enjoyed by the Philippine Foreign Service Posts, the Philippine Embassy and the head of Mission in Ankara, Turkey enjoy VAT exemption at (Point-of-Sale) POS, while its diplomatic and non-diplomatic personnel enjoy VAT exemption through reimbursement/refund, subject to the following limitations: (1) alcohol and tobacco products are NOT EXEMPT, and (2) the minimum amount of purchase per invoice/receipt is Php 750. Applying the Principle of Reciprocity, the Embassy of the Republic of Turkey, and the Head of its Mission (i.e., Ambassador) in the Philippines are entitled to VAT exemption at POS, while the embassy's diplomatic and non-diplomatic personnel are entitled to VAT exemption privileges through reimbursement/refund basis.
EXTENT OF VAT EXEMPTION ON LOCAL PURCHASES OF THE ROYAL DANISH EMBASSY PURSUANT TO THE PRINCIPLE OF RECIPROCITY
BIR ITAD RULING NO. 014-19, JUNE 4, 2019
The Royal Danish Embassy is requesting a Value-Added Tax (VAT) exemption ruling on its local purchases including that of its diplomatic and non-diplomatic personnel. In reply, VAT exemption privileges to a foreign embassy and to its members on their local purchase can be granted if they can submit proof that they allow similar tax privileges to the Philippine Embassy and its personnel on purchases in their country. As per the Indorsement of the DFA-OP and the DFA Matrix of VAT Privileges Enjoyed by the Philippine Foreign Service Posts, Philippine Embassy its diplomatic and non-diplomatic personnel in Copenhagen, Denmark enjoy VAT exemption privileges through reimbursement/refund, subject to the following limitations: (1) Minimum amount of purchase should be DKK 1,500 (more or less Php 12,000) and the VAT amount is not less than DKK 300, which must appear in one single bill/invoice and must be paid in one transaction. The minimum amount does not apply to supply of electricity, town gas, natural gas, water, heating oil, district heating, waste disposal, and sewage service; (2) VAT-exempt purchases of goods and services include newspapers, stamps, passenger transport, dentists and doctors' bills except from health certificates, insurance policies, admission fees for museums, school fees, petrol and diesel fuel; (3) Purchase of the following items/services are not exempt, hence, VAT paid cannot be reimbursed: antiques; auctioned items; secondhand items; gift certificates; medicine; ammunition and firearms; bridge tolls; membership fees for clubs and associations; renovation of a privately owned property; admission fees for entertainment; construction material; installation and construction expenses; expenses in relation to buying and selling of property and insurance cases when expense is covered by the insurance company. Applying the Principle of Reciprocity, the Royal Danish Embassy and its diplomatic and non-diplomatic personnel in the Philippines are entitled to the same VAT exemption through reimbursement/refund, and not through Point-of-Sale (POS) basis.
DIVIDENDS PAID TO BVI COMPANY ARE SUBJECT TO 15% FINAL TAX
APPLICATION OF TAX SPARING RULE
BIR ITAD RULING NO. 011-19, JUNE 3, 2019
H Co. is seeking confirmation on whether dividends paid to K Co, a Non-Resident Foreign Corporation (NRFC) and a BVI-registered entity, are subject to an income tax rate of 15%. As represented, under the laws of BVI, K Co. is exempt from all provisions of the income tax ordinance therein. In reply, Section 28 (B)(5)(b) of the 1997 Tax Code, as amended, provides that dividends paid by a domestic corporation to an NRFC are subject to an income tax rate of 15%. To be qualified, the 1997 Tax Code, as amended, requires that the country of residence of the NRFC shall allow a credit against the tax due from NRFC taxes deemed to have been paid in the Philippines equivalent to 15%, also known as Tax Sparing Credit. It is the difference between the regular tax of 30% on income of an NRFC and the lower tax of 15% on dividends. Thus, the dividends paid by H Co. to K Co. are subject to income tax rate of 15% on the premise that the latter is exempt from income tax imposed in its country including tax on dividends and that the former is subject to the Regular Corporate Income Tax of 30%, which thereby warrants the reduction of tax on dividends.
CAPITAL GAINS DERIVED BY A FOREIGN ENTITY FROM SALE OR TRANSFER OF SHARES OF STOCK IN A PHILIPPINE CORPORATION TO ANOTHER CORPORATION CAN BE EXEMPTED FROM INCOME TAX FOR AS LONG AS THERE IS AN EXISTING TAX TREATY BETWEEN THE FOREIGN COUNTRY & THE PHILIPPINES
SALE OR TRANSFER OF SHARES OF STOCKS WITH LESS THAN ADEQUATE CONSIDERATION OR LESS THAN MARKET VALUE IS SUBJECT TO DONOR’S TAX
BIR ITAD RULING NO. 010-19, JUNE 3, 2019
N Co., a non-resident Singaporean entity, is seeking confirmation that capital gains derived from its sale of shares of stock in SteelAsia Manufacturing Corporation (SteelAsia) to PlaridelSteel (PlaridelSteel), both domestic corporations, is exempt from income tax pursuant to existing tax treaty agreement between the Philippines and Singapore. As represented, SteelAsia is 60% owned by Filipinos and 40% by NatSteel. NatSteel and PlaridelSteel entered a Deed of Assignment of Shares in favor of the latter. In ruling, Revenue Regulations (RR) No. 4-86 provides that capital gains derived by residents of other contracting states from the disposition of share are taxable in the Philippines only if the assets of the corporation consist principally of 50% real property interest or more of the entire assets. Since SteelAsia’s real property interest consist of less than 50% (i.e., 13.49%), capital gains derived by NatSteel from the sales of shares of stock in SteelAsia to PlaridelSteel are exempt from income tax. However, since the transfer is less than adequate and full consideration of the fair market value of the shares, the said transaction is subject to donor’s tax. Moreover, the said transfer of shares is subject to Documentary Stamp Tax pursuant to Section 175 of the 1997 Tax Code, as amended.
RENTAL INCOME OF NRFC IS EXEMPT FROM INCOME TAX BUT SUBJECT TO 12% FINAL WITHHOLDING VAT PURSUANT TO RP-US TAX TREATY
FOREIGN ENTERPRISE IS DEEMED TO HAVE PERMANENT ESTABLISHMENT IF PERSONNEL-IN-CHARGE HAVE WIDER RESPONSIBILITIES
BIR ITAD RULING NO. 009-19, JUNE 3, 2019
AD-SG Philippine Branch is requesting confirmation on the tax exemption of rental payments to AD-US Company, a Non-Resident Foreign Corporation (NRFC). In reply, an NRFC is generally subject to 7.5% final tax on its rental income earned in the Philippines. However, such income may be exempt to the extent required by any treaty or obligation binding upon the Philippine government. Following Articles 5 and 8 of RP-US Tax Treaty, profits earned in another contracting state are only taxable if a foreign enterprise has permanent establishment in the contracting state. A foreign enterprise which leases equipment is deemed to have permanent establishment in that state if it supplies personnel and said personnel have wider responsibilities in relation to the leased equipment, such as but not limited to participation in decision regarding the work for which the equipment is used. A perusal of the documents showed that AD-US is not deemed to have a permanent establishment in the Philippines given the following: (1) it does not have branch, office, or other fixed place of business in the Philippines; and (2) it did not send any personnel to the Philippines during the term of the agreement. Thus, the rentals paid by AD-SG-Philippine Branch to AD-US Company for the leased equipment are exempt from income tax in the Philippines. However, rental payments are subject to 12% Final Withholding VAT pursuant to Section 4.112-2 of Revenue Regulations (RR) No. 16-2005. The VAT withheld shall be filed thru BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on rental payments made. If AD-SG Philippine Branch is not VAT-registered, it may treat the VAT as an asset or expense, whichever is applicable.
RENTAL INCOME OF NRFC IS EXEMPT FROM INCOME TAX BUT SUBJECT TO 12% FINAL WITHHOLDING VAT PURSUANT TO RP-US TAX TREATY
FOREIGN ENTERPRISE IS DEEMED TO HAVE PERMANENT ESTABLISHMENT IF PERSONNEL-IN-CHARGE HAVE WIDER RESPONSIBILITIES
BIR ITAD RULING NO. 009-19, JUNE 3, 2019
AD-SG Philippine Branch is requesting confirmation on the tax exemption of rental payments to AD-US Company, a Non-Resident Foreign Corporation (NRFC). In reply, an NRFC is generally subject to 7.5% final tax on its rental income earned in the Philippines. However, such income may be exempt to the extent required by any treaty or obligation binding upon the Philippine government. Following Articles 5 and 8 of RP-US Tax Treaty, profits earned in another contracting state are only taxable if a foreign enterprise has permanent establishment in the contracting state. A foreign enterprise which leases equipment is deemed to have permanent establishment in that state if it supplies personnel and said personnel have wider responsibilities in relation to the leased equipment, such as but not limited to participation in decision regarding the work for which the equipment is used. A perusal of the documents showed that AD-US is not deemed to have a permanent establishment in the Philippines given the following: (1) it does not have branch, office, or other fixed place of business in the Philippines; and (2) it did not send any personnel to the Philippines during the term of the agreement. Thus, the rentals paid by AD-SG-Philippine Branch to AD-US Company for the leased equipment are exempt from income tax in the Philippines. However, rental payments are subject to 12% Final Withholding VAT pursuant to Section 4.112-2 of Revenue Regulations (RR) No. 16-2005. The VAT withheld shall be filed thru BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on rental payments made. If AD-SG Philippine Branch is not VAT-registered, it may treat the VAT as an asset or expense, whichever is applicable.
RENTAL INCOME OF NRFC IS EXEMPT FROM INCOME TAX BUT SUBJECT TO 12% FINAL WITHHOLDING VAT PURSUANT TO RP-US TAX TREATY
FOREIGN ENTERPRISE IS DEEMED TO HAVE PERMANENT ESTABLISHMENT IF PERSONNEL-IN-CHARGE HAVE WIDER RESPONSIBILITIES
BIR ITAD RULING NO. 009-19, JUNE 3, 2019
AD-SG Philippine Branch is requesting confirmation on the tax exemption of rental payments to AD-US Company, a Non-Resident Foreign Corporation (NRFC). In reply, an NRFC is generally subject to 7.5% final tax on its rental income earned in the Philippines. However, such income may be exempt to the extent required by any treaty or obligation binding upon the Philippine government. Following Articles 5 and 8 of RP-US Tax Treaty, profits earned in another contracting state are only taxable if a foreign enterprise has permanent establishment in the contracting state. A foreign enterprise which leases equipment is deemed to have permanent establishment in that state if it supplies personnel and said personnel have wider responsibilities in relation to the leased equipment, such as but not limited to participation in decision regarding the work for which the equipment is used. A perusal of the documents showed that AD-US is not deemed to have a permanent establishment in the Philippines given the following: (1) it does not have branch, office, or other fixed place of business in the Philippines; and (2) it did not send any personnel to the Philippines during the term of the agreement. Thus, the rentals paid by AD-SG-Philippine Branch to AD-US Company for the leased equipment are exempt from income tax in the Philippines. However, rental payments are subject to 12% Final Withholding VAT pursuant to Section 4.112-2 of Revenue Regulations (RR) No. 16-2005. The VAT withheld shall be filed thru BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on rental payments made. If AD-SG Philippine Branch is not VAT-registered, it may treat the VAT as an asset or expense, whichever is applicable.
RENTAL INCOME OF NRFC IS EXEMPT FROM INCOME TAX BUT SUBJECT TO 12% FINAL WITHHOLDING VAT PURSUANT TO RP-US TAX TREATY
FOREIGN ENTERPRISE IS DEEMED TO HAVE PERMANENT ESTABLISHMENT IF PERSONNEL-IN-CHARGE HAVE WIDER RESPONSIBILITIES
BIR ITAD RULING NO. 009-19, JUNE 3, 2019
AD-SG Philippine Branch is requesting confirmation on the tax exemption of rental payments to AD-US Company, a Non-Resident Foreign Corporation (NRFC). In reply, an NRFC is generally subject to 7.5% final tax on its rental income earned in the Philippines. However, such income may be exempt to the extent required by any treaty or obligation binding upon the Philippine government. Following Articles 5 and 8 of RP-US Tax Treaty, profits earned in another contracting state are only taxable if a foreign enterprise has permanent establishment in the contracting state. A foreign enterprise which leases equipment is deemed to have permanent establishment in that state if it supplies personnel and said personnel have wider responsibilities in relation to the leased equipment, such as but not limited to participation in decision regarding the work for which the equipment is used. A perusal of the documents showed that AD-US is not deemed to have a permanent establishment in the Philippines given the following: (1) it does not have branch, office, or other fixed place of business in the Philippines; and (2) it did not send any personnel to the Philippines during the term of the agreement. Thus, the rentals paid by AD-SG-Philippine Branch to AD-US Company for the leased equipment are exempt from income tax in the Philippines. However, rental payments are subject to 12% Final Withholding VAT pursuant to Section 4.112-2 of Revenue Regulations (RR) No. 16-2005. The VAT withheld shall be filed thru BIR Form 1600 which shall serve as documentary substantiation for its claim of input tax on rental payments made. If AD-SG Philippine Branch is not VAT-registered, it may treat the VAT as an asset or expense, whichever is applicable.
CONTRACT REPAIRS PURSUANT TO RP-SINGAPORE TAX TREATY IS EXEMPT FROM 30% INCOME TAX BUT SUBJECT TO 12% WITHHOLDING VAT
BIR ITAD RULING NO. 003-19, JANUARY 15, 2019
R Singapore is seeking confirmation if income derived from Philippine Ports Authority ("PPA") is exempt from income tax pursuant to the RP-Singapore Tax Treaty. In ruling, since R Singapore is not engaged in trade or business in the Philippines, and it did not furnish services in the Philippines for more than 183 days but for a total of 42 days only throughout the duration of the project on the repair of PPA's baggage X-ray machine and walkthrough metal detector in different port management offices in the Philippines, it is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of RP-Singapore Tax Treaty. Thus, the contract price for the project paid by PPA to R Singapore is exempt from income tax pursuant to paragraph 1, Article 7 of the Treaty. However, although exempt from income tax, payments made to R Singapore for services performed in the Philippines are subject to 12% Final Withholding Value-Added Tax (VAT) under Sections 108 (A) and 105 of the 1997 Tax Code, as amended.
CAPITAL GAINS DERIVED FROM TRANSFER OF SHARES AS A RESULT OF MERGER ARE EXEMPTED FROM TAX PURSUANT TO RP-GERMANY TAX TREATY
BIR ITAD RULING NO. 002-19, JANUARY 11, 2019
DB Co. is seeking confirmation on whether gains derived from the transfer of shares of stock in DBS to DBN because of merger are exempt from income tax. As represented, DB Co. is a foreign corporation organized and existing under the laws of Germany. DB Co. entered into a Merger Agreement with DBN, with transfer of assets as one of the stipulations, resulting in transfer of shares of DB Co. to DBN, and DBN as the surviving entity. In reply, the capital gains derived by DB. Co from the transfer of shares because of merger are exempt from income tax pursuant to RP-Germany Tax Treaty since the real property interest is only at 1.16%, following the requisite stated in Revenue Regulations (RR) No. 4-86. Likewise, it is exempt from Donor’s Tax following the case of the Republic of the Philippines vs. David Rey Guzman and the Register of Deeds of Bulacan, Meycauayan Branch, G.R. No. 132964, February 18, 2000 in which the Supreme Court held that for a donation to be valid, the following requisites are necessary: (1) reduction in the property of the donor; (2) increase in the property of the donee; and (3) intent on the part of the donor to do an act of liberality (donative intent). In the case of the subject merger, the transfer by DB Co. of its assets to DBN was carried out for purely business reasons and not motivated by any donative intent, hence, it is also exempt from Donor’s Tax. However, such transfer of shares is subject to Documentary Stamp Tax in accordance with Section 52 of Tax Reform for Acceleration and Inclusion (TRAIN) Law.