Philippines- Malaysia Tax Treaty - Tax on Business Profits and Personal Services

November 3, 2004

ITAD RULING NO. 121-04

Articles 5 (Permanent Establishment), 7 (Business Profits) & 14 (Personal Services), Philippines-Malaysia tax treaty BIR Ruling No. DA-ITAD-152-02

Joaquin Cunanan & Co.

29th Floor, Philamlife Tower

8767 Paseo de Roxas Avenue

Makati City

Attention: Mr. Alexander B. Cabrera

Partner, Tax Services

Gentlemen :

This refers to your request for ruling dated July 7, 2004, on behalf of your client, Visionex Management SDN BHD (Visionex), regarding the fees to be paid by Robinsons Savings Bank (Robinsons Bank) for the former's supply of software and services to the latter under a Treasury System Agreement entered into between them, pursuant to the pertinent provisions of the Philippines-Malaysia tax treaty. In your follow-up letter dated August 2, 2004, however, you requested that a separate ruling on the above supply of services, be given due course, and that the portion for the supply of software be set aside, to be resolved later.  

It is represented that Visionex is a nonresident foreign company organized and existing under the laws of Malaysia with principal office at Lot 5.01 5/F, Menara 1, Faber Towers, Jalan Desa Bahagia Taman Desa, 58100 Kuala Lumpur, Malaysia as confirmed by the Certification of Incorporation of Private Company issued by the Registry of Companies of Malaysia on December 6, 1999; that Visionex is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 7, 2004; that one of its objectives is to carry on all or any of the business of Multimedia, Internet and Electronic commerce providers and facilitators, including but not limited to Internet Service Provider, Network and Hosting services, electronic commerce and information technology activities, venture capital, research and development, consultancy and other related activities, including the provision of goods and services, education, information, website design and consultancy, supply chain management, media and entertainment, trading, financial and business services, software, hardware and computer related activities and including sales and marketing via electronic payment systems; that Robinsons Bank, on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at L3 Expansion Mall, Robinsons Galleria, EDSA cor. Ortigas, Pasig City, Philippines; that, on March 30, 2004, Visionex and Robinsons Bank entered into a Treasury System Agreement wherein Visionex agreed, among others, to: (1) provide training in accordance with the training plan; (2) provide maintenance for the system after the acceptance date; (3) give sufficient notice and provide enhancements to licensed modules of the Visionex product; that the foregoing services, were performed in the Philippines and for an aggregate period not exceeding 183 days; and that, in consideration thereof, Robinsons Bank shall pay Visionex fees for the above services, in US dollars according to the payment schedule set out under the Agreement.  

In reply, we rule on the supply of services portion of the aforementioned Treasury Systems Agreement as follows:

The portion of the fees to be paid by Robinsons Bank to Visionex designated under the Treasury System Agreement as fees for Implementation Services in consideration for the above-mentioned services are business profits taxable under paragraph 1, Article 7 (Business Profits) in relation to Article 5 (Permanent Establishment), both of the Philippines-Malaysia tax treaty, and quoted as follows:

"Article 7

BUSINESS PROFITS

"1.        The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much thereof as is attributable to that permanent establishment.  

"xxx                    xxx                    xxx"

"Article 5

PERMANENT ESTABLISHMENT

"1.        For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

"2.        The term "permanent establishment" shall include especially:

a)         a place of management;

b)         a branch;

c)         an office;

d)         a factory;

e)         a workshop;

f)          a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce;

g)         a farm or plantation;

h)         a building site or construction, installation or assembly project which exists for more than 6 months.

xxx                    xxx                    xxx

"4.        An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if:

a)         it carries on supervisory activities in that other State for more than 6 months in connection with a construction, installation or assembly project which is being undertaken in that other State; or

b)         substantial equipment is in that other State being used or installed by, for or under contract with, the enterprise."

"xxx                    xxx                    xxx"

Applying paragraph 1 of Article 7 above to the instant case, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if it has a permanent establishment situated in the Philippines but only so much of such profit that is attributable to that permanent establishment. Hence, service fees to be paid by Robinsons Bank to Visionex may be taxed in the Philippines if such fees are attributable to a permanent establishment which Visionex has in the Philippines. A permanent establishment, as defined in paragraphs 1 and 2 of Article 5 (Permanent Establishment) of the Philippines-Malaysia tax treaty, means "a fixed place of business in which the business of the enterprise is wholly or partly carried on," and includes for example, a place of management, a branch, an office, a factory, a workshop, etc.  

Accordingly, since Visionex does not have a fixed place of business in the Philippines, the Implementation Services fees to be paid to Visionex by Robinsons Bank under the Treasury System Agreement for the above services are therefore exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 81-04 dated August 5, 2004)

Moreover, remuneration of the personnel who will come to the Philippines to personally carry out the above services is generally subject to Philippine income tax, unless the conditions set forth in paragraph 2, Article 14 (Personal Services) of the Philippines-Malaysia tax treaty are all complied with, to wit:

"Article 14

PERSONAL SERVICES

"1.        Subject to the provisions of Articles 15, 17, 18, 19 and 20, salaries, wages and similar remuneration or income derived by a resident of a Contracting State in respect of professional services or other activities of a similar character, shall be taxable only in that State unless the services or activities are exercised or performed in the other Contracting State. If the employment, services or activities are so exercised or performed, such remuneration or income as is derived therefrom may be taxed in the other State.  

"2.        Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State in respect of an employment, services or activities exercised or performed in any calendar year in the other Contracting State shall be taxable only in the first-mentioned State, if:

a)         the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and

b)         the services or activities are exercised or performed for or on behalf of a person who is a resident of the first-mentioned State, and

c)         the remuneration or income is not borne by a permanent establishment which the person paying the remuneration has in the other State.

"xxx                    xxx                    xxx"

Paragraph 2 above states that the subject remuneration will be exempt from tax if: (a) the personnel (taken individually) are present in the Philippines for an aggregate period or periods not exceeding 183 days in the calendar year concerned, (b) the services or activities are exercised or performed for or on behalf of an employer who is a resident of Malaysia and (c) the remuneration is not borne by a permanent establishment which the employer has in the Philippines.

Based on the representations made herein, all the three conditions required in paragraph 2 above are satisfied considering that (a) the length of stay in the Philippines of the concerned personnel of Visionex did not exceed 183 days; (b) the services or activities are exercised or performed for or on behalf of Visionex, who is a resident of Malaysia; and (c) the remuneration is not borne directly by a permanent establishment which Visionex has in the Philippines. This being so, the subject remuneration of the concerned personnel are not subject to Philippine income tax.  

This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner

Legal Service