Professional Documents
Culture Documents
Articles 5 (Permanent
Establishment), 7 (Business Profits)
and Protocol Philippines-Germany
tax treaty
Gentlemen :
This refers to your tax treaty relief application filed on July 4, 2011,
requesting confirmation that service fees paid by the Bangko Sentral ng Pilipinas
("BSP") to Giesecke and Devrient GmbH ("Giesecke") are exempt from income
tax pursuant to the Agreement between the Republic of the Philippines and the
Federal Republic of Germany for the Avoidance of Double Taxation with Respect
to Taxes on Income and Capital ("Philippines-Germany tax treaty").
On August 31, 2010, BSP and Giesecke entered into a Full Service and
Maintenance Contract where Giesecke agreed to provide BSP with regular service
and maintenance activities for the operation of two units of Banknote Processing
System (BPS 1040SB-30) at the BSP Security Plant Complex in East Avenue,
Diliman, Quezon City, Philippines. Giesecke will provide, among others, the daily
presence on-site of two skilled and qualified local engineers and technicians duly
trained by Giesecke to perform the required full service and operational assistance
and maintenance work. These personnel will be present on-site all day on a single
shift basis for five days (Monday to Friday) from 9:00 AM to 6:00 PM with one
hour lunch break. In consideration, BSP will pay service fees to Giesecke
equivalent to 21,300.00 Euros every month or 255,600.00 Euros every year. The
fees are computed and payable quarterly. The Contract took effect on July 4, 2010
up to July 3, 2011.
Ruling
"Article 7
Business Profits
In relation thereto, Article 5 of the treaty and the Protocol thereto defines a
permanent establishment as follows:
"Article 5
Permanent Establishment
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
"PROTOCOL
Accordingly, since the Full Service and Maintenance Contract between BSP
and Giesecke would call for Giesecke agreed to provide BSP with regular service
and maintenance activities for the operation of two units of Banknote Processing
System at the BSP Security Plant Complex in Quezon City, Philippines, for a
continuous period of at least twelve months, Giesecke shall be deemed to have a
permanent establishment in the Philippines, pursuant to Article 5 of the treaty and
the Protocol. This is regardless of the fact that Giesecke subcontracted the said
services to a domestic company, Yung Sung, who will provide the required
engineers on-site throughout the period. These subcontracted engineers would
nonetheless constitute as Giesecke's "other personnel" contemplated in the
protocol. AIDSTE
Since Giesecke did not send its own employees or personnel to the
Philippines but subcontracted the services to Yung Sung, a local company, nor it
maintains any branch or office in the Philippines, the question arises what
reasonable expenses could be allowed to Giesecke to compute its taxable profits.
Overall, there is no need for Giesecke to send its own employees or personnel to
the Philippines since the same services could be performed by Yung Sung which
has the same technical capability to provide such services to BSP. It is more costly
to Giesecke and BSP for Giesecke to send its own people to the Philippines since
their salaries should be at least identical with those they received in Germany.
Moreover, Giesecke or BSP would provide these individuals the usual
accommodation and other allowances during their stay which is at least one year.
This being so, we believe that the only reasonable expense that should be allowed
to Giesecke is the commission it paid to Yung Sung, the local subcontractor. This
commission would include the salaries, allowances, and other remuneration paid
by Yung Sung to its local engineers who would be present at the BSP Security
Plant Complex in Quezon City, during regular working hours from 8:00 AM to
5:00 PM, and all regular working days from July 4, 2010 to July 3, 2011.
Giesecke's taxable profits from this undertaking would be the service fees paid by
BSP equivalent to 21,300.00 euros every month (255,600.00 euros every year)
minus commission paid by Giesecke to Yung Sung.
RDO 39 shall obtain information and documents from BSP about the
amount of service fees it paid to Giesecke pursuant to the Full Service and
Maintenance Contract, and from Yung Sung about the commission it received from
Giesecke for actually rendering the services to BSP. As ruled, the difference
between the service fees and the commission shall constitute Giesecke's taxable
profits in this transaction and shall be the basis for the 30 percent income tax.
Meanwhile, the said commission shall form part of Yung Sung's taxable income as
a domestic corporation and subject to income tax accordingly.
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Finally, under Section 108 (A) in relation to Section 105 of the Tax Code,
the service fees paid by BSP to Giesecke shall be subject to value-added tax
("VAT"), to wit: AaCTcI
The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services. This rule shall likewise apply to existing contracts of sale or
lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase 'in the course of trade or business' means the regular
conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or not
the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
Relative thereto, BSP shall withhold VAT on the service fees at the rate of
12 percent before remitting them to Giesecke. BSP shall use BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). The duly filed BIR Form No. 1600 and its accompanying proof of
payment shall serve as documentary substantiation for BSP's claim of input VAT
on the fees; otherwise, if it is not a VAT-registered taxpayer, BSP shall treat the
Copyright 2016 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2016 7
passed-on VAT as an asset or expense, whichever is applicable. VAT withheld
shall be remitted within ten days following the end of the month the withholding
was made. 3(3)
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Endnotes
1 (Popup - Popup)
1. Refer to http://www.bsp.gov.ph.
2 (Popup - Popup)
2. The VAT rate was increased to 12 percent beginning February 1, 2006, in
accordance with the Memorandum of the Executive Secretary to the Secretary of
Finance dated January 31, 2006, as circularized by Revenue Memorandum
Circular No. 7-2006 (Publishing the Full Text of the Memorandum from
Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the
Recommendation of the Secretary of Finance to Increase the Value Added Tax
Rate from Ten Percent to Twelve Percent) dated January 31, 2006.
3 (Popup - Popup)
3. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No.
4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations
of 2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Payments to Non-Residents.
xxx xxx xxx
(b) The government or any of its political subdivisions, instrumentalities or
agencies including GOCCs, as well as private corporation, individuals, estates and
trust, whether large or non-large taxpayers, shall withhold twelve percent (12%)
VAT, starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Services rendered to local insurance companies with respect to
reinsurance premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600
Remittance Return of VAT and Other Percentage Taxes Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form
No. 1600), which VAT is passed on to the resident withholding agent by the
non-resident recipient of the income, may be claimed as input tax by said
VAT-registered withholding agent upon filing his own VAT Return, subject to the
rule on allocation of input tax among taxable sales, zero-rated sales and exempt
sales. The duly filed BIR Form No. 1600 is the proof or documentary
substantiation for the claimed input tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said
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passed-on VAT by the non-resident recipient of the income, evidenced by the duly
filed BIR Form No. 1600, shall form part of the cost of purchased services, which
may be treated either as an 'asset' or 'expense', whichever is applicable, of the
resident withholding agent.
VAT withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made."
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