May 16, 2016

ITAD BIR RULING NO. 094-16

Articles 5 (Permanent
Establishment) and 8
(Business Profits), Philippines-
United States tax treaty

Sycip Gorres Velayo and Co.

6760 Ayala Avenue
Makati City
Attention: Atty. Ma. Fides A. Balili
Principal, Tax Services

Gentlemen :

This refers to your tax treaty relief application filed on July 19,
2013 requesting confirmation that income payments to Sasaki Associates,
Inc. ("Sasaki") (originally Sasaki, Walker and Associates, Inc.; then Sasaki,
Dawson, De May Associates, Inc.) in consideration for services it rendered
to Science Park of the Philippines, Inc. ("Science Park") and Pueblo De Oro
Corporation ("Pueblo") are exempt from income tax pursuant to
the Convention between the Government of the Republic of the Philippines
and the Government of the United States of America with Respect to Taxes
on Income ("Philippines-United States tax treaty").
Facts
Sasaki is a foreign corporation and resident of the United States based
on its amended Articles of Organization and Certificate of Residence Issued
by the Internal Revenue Service on August 20, 2012. It is located at 64
Pleasant Street, Watertown, Massachusetts, United States. Sasaki is
engaged in architecture, interior design, planning, urban design, landscape
architecture, graphic design, and civil engineering, as well
as financial planning and software development. It is founded by the late
Hideo Sasaki in 1953, who was internationally respected as a landscape
architect, planner, teacher, and mentor. The company is not registered as a
corporation or partnership in the Philippines based on the Certification of Non-
Registration of Company issued by the Securities and Exchange Commission
on July 10, 2013. On the other hand, Science Park and Pueblo are domestic
corporations with same principal office address at 17th Floor, Robinson's
 Summit Center, 6783 Ayala Avenue, Makati City, Philippines. Both are
created to purchase, acquire, invest in or sell lands, buildings, improvements
and any other real properties.
On June 14, 2013, Science Park and Pueblo entered into a Contract for
Master Planning Services with Sasaki for the creation of a cutting edge new
industrial estate in the Light Industry and Science Park IV ("LISP IV
Project" or"project") at Malvar, Batangas, Philippines. Sasaki will create a plan
for the project with efficient layout and contemporary landscape. The project
ensures the right mix of program in its development and must create spaces
that create a sense of activity and vibrancy to attract potential tenants,
residents and visitors. Sasaki is drawn to the project not only because it is an
interesting design challenge, but more importantly because of what it means
for the future of these types of mixed program developments throughout the
Philippines and the larger region. The project is divided into four phases with
substantial deliverables in each phase, as follows:
Phase Scope Key Deliverables Duration
       
- Regional context plan, showing the
1 Discovery and Site 3 weeks
science
park in relation to urban centers, airports
  Analysis from
and
  Worksession No. 1: other transportation and population hubs. notice to
Also includes a thorough analyses of
  Philippines proceed
existing
access, circulation, and transit
  Worksession No. 2: from the
connections to
  Online meeting the site. client
       
- Transportation and circulation analysis,
     
at a
suitable scale, showing both regional and
     
local
    conditions.  
       
    - Ecological considerations diagrams,  
including watersheds, drainage,
     
vegetation,
    and other environmental issues and  
    attributes.  
       
- Planning and design precedents,
2 Strategic 2 weeks
illustrating
  Programming and solutions for analogous planning concepts from
 of
other successful industrial parks,
  Initial Land Use Plan client's
innovation
  Worksession No. 3: districts, mixed-use centers, and new approval
  Online meeting communities from around the world. of Phase 1
       
- Recommended development program
     
and
    diagrammatic charts illustrating site areas,  
    gross floor areas, etc.  
       
- Site capacity study, at an appropriate
     
scale,
    depicting the general organization of basic  
land uses and their strategic adjacencies
     
to
each other on the site based on the
     
agreed
    upon development program.  
       
- Draft Illustrative Master Plan, at 1:2,500
3 Draft Master Plan 4 weeks
or
  Worksession No. 4: other suitable scale, showing layout of keyfrom
  Philippines planning concepts, the overall landscape client's
strategy, conceptual building footprints
    approval
and
massing, circulation networks, land uses,
    of Phase 2
and
    the open space program of the site.  
       
    - Draft Land Use Plan, at 1:2,500 or other  
suitable scale, indicating use, area,
     
density
    and development program.  
       
- Draft Landscape and Open Space Plan,
     
at
    1:2,500 or other suitable scale, depicting  
landscape program and amenities
     
including
parks, natural areas, and recreational
     
spaces.
       
4 Final Master Plan - Final Illustrative Urban Design and 4 weeks
  Documentation and Landscape Plan, at 1:2,500 or other from
 suitable
  Visualization scale, showing layout of key planning client's
  Worksession No. 5: concepts, the overall landscape strategy, approval 
conceptual building footprints and
  Philippines of Phase 3
massing,
circulation networks, land uses, and the
     
open
    space program of the site.  
       
    - Final Land Use Plan, at 1:2,500 or other  
suitable scale, indicating use, area,
     
density
    and development program.  
       
- Final Landscape and Open Space Plan,
     
at
    1:2,500 or other suitable scale, depicting  
landscape program and amenities
     
including
parks, natural areas, and recreational
     
spaces.
      ––––––––
    Total 13 weeks
      =======
The project has a contract price of US$400,000.00 to include labor, materials,
and expenses including travel expenses for persons going to the Philippines.
Invoices will be prepared for each payment, including the initial payment.
Payment is due within twenty business days after the invoice is rendered with
the exception of the initial payment, which will be paid not later than thirty
days from the issuance of the client's notice to proceed.  TIADCc

Based on a sworn statement issued by Science Park and Pueblo on

February 26, 2014, Sasaki completed the project in thirteen weeks. A
Certificate of Acceptance for this purpose was issued to Sasaki on February
26, 2014 byScience Park and Pueblo.
Based on the same sworn statement, the following personnel
of Sasaki were sent to the Philippines for the project: (1) Dennis Pieprz
(Principal for Urban Design); (2) Michael Grove (Principal for Planning and
Landscape Architecture); (3) Lachlan Hicks (Planner and Project Manager);
(4) Anthony Fettes (Landscape Ecologist); and (5) Tao Zhang (Landscape
Architect and Ecologist). Their length of stay in the country is tabulated below:
 The following amounts were remitted to Sasaki through bank transfer:
Date Purpose Amount
    (in US Dollars)
     
Aug. 5, 2013 Payments 1 and 2 as described in the Contract. 140,020.00
Aug. 16, 2013 Payment 3 as described in the Contract. 100,020.00
Sep. 2, 2013 Payment 4 as described in the Contract. 100,020.00
Jan. 7, 2014 Payment 5 as described in the Contract. 59,128.88
  Total 399,188.88
Ruling
In reply, please be informed that under Section 28 (B) (1) of
the National Internal Revenue Code of 1997, as amended ("Tax Code"),
income payments made to a foreign corporation not engaged in trade or
business in the Philippines are subject to income tax at the rate of 30 percent,
to wit:
"SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
(1) In General. — Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
 Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year
from all sources within the Philippines, such as interests,
dividends, rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains,
profits and income, and capital gains, except capital gains
subject to tax under subparagraph 5(c) and (d)
above: n Provided, That effective January 1, 2009, the rate
of income tax shall be thirty percent (30%)."
However, under Section 32 (B) (5) of the Tax Code, such payments are
exempt or partially exempt to the extent required by any treaty obligation on
the Philippines, to wit:
"SEC. 32. Gross Income. —
xxx xxx xxx
(B) Exclusions from Gross Income. — The following items shall
not be included in gross income and shall be exempt from
taxation under this Title:
xxx xxx xxx
(5) Income Exempt under Treaty. — Income of any kind, to
the extent required by any treaty obligation binding
upon the Government of the Philippines."
In this regard, paragraph 1, Article 8 of the Philippines-United States tax
treaty, provides relief to business or commercial profits derived by an
enterprise of the United States from sources in the Philippines, to wit:
"Article 8
Business Profits
1. Business profits of a resident of one of the Contracting States shall be
taxable only in that State unless the resident has a permanent
establishment in the other Contracting State. If the resident has a
permanent establishment in that other Contracting State, tax may
be imposed by that other Contracting State on
the business profits of the resident but only on so much of them
as are attributable to the permanent establishment."
Under this article, such profits are subject to income tax in the
Philippines if they are attributable to a permanent establishment which the
enterprise has therein. Otherwise, the profits are exempt.
In relation thereto, paragraphs 1 and 2, Article 5 of the treaty defines
a permanent establishment as follows:
"Article 5
 Permanent Establishment
1. For the purposes of this Convention, the term 'permanent
establishment' means a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
2. The term 'permanent establishment' shall include especially:
a) a seat of management;
b) a branch;  AIDSTE

c) an office;
d) a store or other sales outlet;
e) a factory;
f) a workshop;
g) a warehouse;
h) a mine, quarry, or other place of extraction of natural
resources;
i) a building site or construction or assembly project or
supervisory activities in connection therewith, where such
site, project or activity continues for a period of more than
183 days; and
j) The furnishing of services, including consultancy services, by a
resident of one of the Contracting States through
employees or other personnel, provided activities of that
nature continue (for the same or a connected project)
within the other Contracting State for a period or periods
aggregating more than 183 days."
As defined, a permanent establishment means a fixed place of
business through which the business of an enterprise is wholly or partly
carried, and includes especially, a seat of management, a branch, an office, a
store or other sales outlet, a factory, and a workshop. In the case of the
furnishing of services, a permanent establishment exists if this activity by a
foreign enterprise (through employees or other personnel thereof) is carried
out in a State for an aggregate period of more than 183 days.
Accordingly, since Sasaki is not engaged in trade or business in the
Philippines to which a branch, an office, or other fixed place of business is
necessary, and it did not render services in the country for more than 183
days but forsix days only to carry out the LISP IV
Project, Sasaki is not deemed to have a permanent establishment under
paragraphs 1 and 2, Article 5 of the Philippines-United States tax treaty.
Therefore, payments made to Sasaki for the project are exempt from income
tax under paragraph 1, Article 8 of the treaty.
 On the characterization of payments for services
as business profits rather than payments for know-how or royalties, the
following commentaries of the Organisation for Economic Co-operation and
Development Model Tax Convention on Income and on Capital (Condensed
Version, July 22, 2010) mention:
"11.1 In the know-how contract, one of the parties agrees to
impart to the other, so that he can use them for his own account, his
special knowledge and experience which remain unrevealed to the
public. It is recognised that the grantor is not required to play any part
himself in the application of the formulas granted to the licensee and
that he does not guarantee the result thereof.
11.2 This type of contract thus differs from contracts for the
provision of services, in which one of the parties undertakes to use the
customary skills of his calling to execute work himself for the other
party. Payments made under the latter contracts generally fall under
Article 7.
11.3 The need to distinguish these two types of payments, i.e.,
payments for the supply of know-how and payments for the provision
of services, sometimes gives rise to practical difficulties. The following
criteria are relevant for the purpose of making that distinction:
— Contracts for the supply of know-how concern
information of the kind described in paragraph 11 that
already exists or concern the supply of that type of
information after its development or creation and include
specific provisions concerning the confidentiality of that
information.
— In the case of contracts for the provision of
services, the supplier undertakes to perform services
which may require the use, by that supplier, of special
knowledge, skill and expertise but not the transfer of such
special knowledge, skill or expertise to the other party.
— In most cases involving the supply of know-
how, there would generally be very little more which
needs to be done by the supplier under the contract other
than to supply existing information or reproduce existing
material. On the other hand, a contract for the
performance of services would, in the majority of cases,
involve a very much greater level of expenditure by the
supplier in order to perform his contractual obligations.
For instance, the supplier, depending on the nature of the
services to be rendered, may have to incur salaries and
wages for employees engaged in researching, designing,
testing, drawing and other associated activities or
 payments to sub-contractors for the performance of
similar services." (Pages 225-226)
Based on the commentaries and as a general rule, in a contract for the
supply of know-how, there would generally be very little more which needs to
be done by the supplier other than to supply existing information or reproduce
existing material. On the other hand, in a contract for the performance of
services, this involves, in a majority of cases, a very much greater level of
expenditure by the supplier in order 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 sub-contractors for the performance of similar services.
Accordingly, since the Contract did not call for Sasaki to supply existing
information or reproduce existing material to Science Park and Pueblo, but to
provide actual services to Science Park and Pueblo by preparing the master
plan of the LISP IV Project, the contract is one for the performance of services
and not supply of know-how or other intangible property. Moreover, on
account that Sasaki has employed personnel to make a thorough analysis of
the project site and to prepare the appropriate illustrative master plan, land
use, plan, and landscape and open space plan of the project, which activities
were done mostly in the United States and a few in the
Philippines, Sasaki had incurred substantial and recurring expenditures in
fulfilling its contractual obligations or deliverables to Science Park and Pueblo.
These expenditures include primarily the salaries and allowances of the
personnel involved in the project.
On the other hand, under Section 108 (A) of the Tax Code, payments
to Sasaki for services rendered in the Philippines are subject to value-added
tax ("VAT"), to wit: 
AaCTcI

"SEC. 108. Value-added Tax on Sale of Services and Use or

Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange
of services, including the use or lease of properties:
Provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1,
2006, 1 raise the rate of value-added tax to twelve percent
(12%). . ."
In paying VAT, Science Park (who had control of payments) shall
withhold VAT on the payments at the rate of twelve percent before remitting
them to Sasaki and, for this purpose, use BIR Form No. 1600 (Monthly
Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). This duly filled-up form and accompanying proof of payment shall
serve as documentary evidence for Science Park's claim of input VAT on the
payments; otherwise, ifScience Park is not a VAT-registered taxpayer, it may
treat the VAT as an asset or expense, whichever applicable. VAT withheld
shall be remitted within ten days following the end of the month the
withholding was made. 2
This ruling is issued on the basis of the facts as represented. However,
if upon investigation it shall be disclosed that the actual facts are different,
then this ruling shall be without force and effect insofar as the herein parties
are concerned.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue
Footnotes
1.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.
2.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 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." 
n Note from the Publisher: Copied verbatim from the official copy. The phrase "and (d)
above" no longer appears in RA 9337, the law amending this provision.
|||  (ITAD BIR Ruling No. 094-16, [May 16, 2016])