February 25, 2014

ITAD BIR RULING NO. 020-14

Articles 5 and 7, Philippines-Bahrain tax treaty

Castillo Laman Tan Pantaleon & San Jose

The Valero Tower, 122 Valero St.,
Salcedo Village, 1227 Makati

Attention: Ma. Pilar Pilares-Gutierrez

Legal Counsel

Gentlemen :

This refers to your Tax Treaty Relief Application ("TTRA") led on April 18, 2011,
requesting con rmation that the income received by ARIMA INSURANCE SOFTWARE
COMPANY W.L.L. ("Arima") for the technical support services that it has rendered to
NATIONAL REINSURANCE CORPORATION OF THE PHILIPPINES ("NRCP") pursuant to
their Software License and Technical Support Agreement is not subject to Philippine
income tax pursuant to the Convention between the Republic of the Philippines and the
State of Bahrain for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and on Capital ("Philippines-Bahrain tax
treaty").
It is represented that Arima, is a resident of Bahrain within the meaning of Article
4 of the Philippines-Bahrain tax treaty, as evidenced by the Certi cate of Residence
issued on March 30, 2011 by the Director of Foreign Economic Relations, Ministry of
Finance; that Arima is a foreign corporation organized and existing under the laws of
the Bahrain with of ce address at Building 131, Road 1702, Diplomatic Area 317,
Manama, Kingdom of Bahrain, based on its Memorandum of Association; that the
primary objects of Arima are the development and supply of advance computer
software; that Arima is not registered as a corporation or as a partnership per
Certi cation of Non-Registration issued by the Securities and Exchange Commission
dated March 17, 2011; and that, on the other hand, NRCP is a domestic corporation,
organized and existing under the laws of the Philippines, with of ce address at 18th
Floor, Philippine AXA Life Centre, Sen. Gil Puyat Avenue, Makati City.
It is also represented that on March 23, 2011, Arima and NRCP entered into a
Software License and Technical Support Agreement ("Agreement") 1 wherein it was
stipulated among others that, Arima shall extend to NRCP Technical Support as it may
require in relation to the use of the Licensed Programs, 2 particularly: a) advice by
telephone, e-mail, fax or post on the use of the Licensed Programs; b) advice and
support via 24 hour contact number for the ARIMA Help Desk for major faults/bugs; c)
noti cation, information and advice by telephone, fax, post on forthcoming New
Releases of the Licensed Programs; d) diagnosis of errors and/or faults/bugs in the
Licensed Programs and the recti cation of such faults (remotely utilizing connection
between Arima and the Site, 3 or by attendance on Site as determined by ARIMA); that
in order to render the services needed, personnel of Arima may be dispatched to NRCP,
upon the latter's request; that the amount of Eighty-four Thousand Two Hundred and
Eighty-six US Dollars (USD84,286.00) shall be paid by NRCP to Arima as consideration
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 for the Technical Support; and that said fee shall commence to be payable 3 months
after live implementation, which will deem to occur upon the earlier of a) the use by
NRCP of the Licensed Programs for the purpose of its trade or business; or b ) 6
months after delivery of the Licensed Program material to the site; and that, the
Agreement shall continue to be in full force and effect unless terminated by either
Arima or NRCP. ASETHC

It is further represented that Arima has not yet supplied any personnel to NRCP
and that should Arima supply its personnel to NRCP, such personnel shall not stay in
the Philippines for an aggregate period of 180 days in any given year, per certi cation
by the Executive Vice-President of NRCP dated March 28, 2011; and that the issue or
transaction subject of the above application is not under investigation, on-going audit,
administrative protest, claim for refund or issuance of a tax credit certi cate, collection
proceedings or judicial appeal as certified by IPI.
It is nally represented, as shown in the Certi cation issued by Citibank dated
October 11, 2012, that actual remittances were made by NRCP in favor of Arima in
consideration for the subject technical support services of the latter to the former
beginning on June 07, 2011 until August 23, 2012.
In reply, please be informed that Section 28 (B) (1) of the 1997 National Internal
Revenue Code (1997 NIRC), as amended, applies in general to income derived in the
Philippines by a nonresident foreign corporation. It provides:
"Section 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- ve percent (35%) of the gross income
received during each taxable year from all sources within the
Philippines, such as . . . pro ts and income, . . .: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).

xxx xxx xxx"

However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides:
"Section 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.

xxx xxx xxx"

In this particular case, what is invoked is Article 7 of the Philippines-Bahrain tax

treaty. It provides:
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 "ARTICLE 7

Business Profits
1. The pro ts 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 pro ts of the enterprise may be taxed
in the other State but only so much of them as are attributable to — CaDSHE

a) that permanent establishment; or

b) sales within that other Contracting State of goods of similar kind as
those sold through that permanent establishment; or
c) other business activities carried on in that other State of the same or
similar kind as those effected through that permanent
establishment."
In view of the foregoing, the pro ts of a Bahraini enterprise shall be taxable only
in Bahrain unless such enterprise carries on business in the Philippines through a
permanent establishment situated therein. If the Bahraini enterprise carries on business
as aforesaid, the pro ts of such enterprise may be taxed in the Philippines but only so
much of them is attributable to that permanent establishment.
Applying this to the instant case, the technical support fees received by Arima for
the services rendered in the Philippines shall be taxable in the Philippines only if it has a
permanent establishment in the Philippines in connection with the activities giving rise
to such income. In relation thereto, paragraph 2 (j), Article 5 of the same tax treaty
defines a permanent establishment, as follows:
"ARTICLE 5

Permanent Establishment
1. For the purposes of this Convention, the term 'permanent
establishment' means a xed place of business through which the business of
the enterprise is wholly or partly carried on.
2. The term 'permanent establishment' includes especially:
xxx xxx xxx

j) the furnishing of services, including consultancy services, by an

enterprise through employees or other personnel engaged by the enterprise
for such purpose, but only where activities of that nature continue in the
territory of the other Contracting State for a period or periods aggregating
more than six months within any twelve-month period. Services furnished
in connection with paragraph 3 of Article 12 shall be governed by
provisions of Royalties.

xxx xxx xxx"

It is clear from the aforequoted provision that a Bahraini enterprise may be

considered to have a permanent establishment in the Philippines if the furnishing of
services by such corporation in the Philippines, through its employees or other
personnel, exceeds a period or periods aggregating more than six months within any
twelve-month period. Inasmuch as it is represented that Arima has not yet supplied any
personnel to NRCP and that should Arima supply its personnel to NRCP, such personnel
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 shall not stay in the Philippines for an aggregate period of 180 days in any given year,
then the furnishing of said services by Arima through its employees or other personnel
shall not constitute as carrying of business through a permanent establishment in the
Philippines. HDAaIS

Relative thereto, however, the availment of preferential tax rate under a tax treaty
is governed by Revenue Memorandum Order ("RMO") No. 72-2010. 4 Section 14 of
which provides:
"SEC. 14. When and Where to File the TTRA. — All tax treaty relief
applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S,
0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of
the provisions of Philippine tax treaties shall only be submitted to and received
by the International Tax Affairs Division (ITAD). If the forms or any necessary
documents are submitted to any other BIR Of ce, the application shall be
considered as improperly filed.
Filing should always be made BEFORE the transaction. Transaction for
purposes of ling the TTRA shall mean before the occurrence of the rst
taxable event.
Failure to properly le the TTRA with ITAD within the period prescribed
herein shall have the effect of disqualifying the TTRA under this RMO."
In view of the foregoing, in the absence of a permanent establishment of Arima in
the Philippines to which its pro ts may be attributable, this Of ce hereby GRANTS relief
to all pro ts derived by Arima for its supply of technical services to NRCP under the
Agreement on 19 April 2011 5 and thereafter, and are therefore exempt from Philippine
income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-Bahrain tax
treaty. However, all the technical service fees of NRCP to Arima made on and before 18
April 2011 are DENIED relief and are accordingly subject to 30 percent Philippine
income tax pursuant to Section 28 (B) (1) of the 1997 Tax Code, as amended.
Moreover, should any Arima employee or personnel be sent to NRCP to render
service in the Philippines, the technical support fees paid to Arima in relation to the
same shall be subject to value-added tax ("VAT") pursuant to Section 108 of the 1997
NIRC, as amended. It provides:
"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, raise the rate of value-
added tax to twelve percent (12%), 6 after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government de cit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 1/2%).
The phrase 'sale or exchange of services' means the performance of all
kinds of services in the Philippines for others for a fee, . . ." (Underscoring
supplied) ECSaAc

With regard to the procedures for the withholding and the payment of the VAT,
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 NRCP, being the resident withholding agent and payor in control of payment shall be
responsible for the withholding of the nal VAT on such fees before making any
payment to Arima. In remitting the VAT withheld, NRCP shall use BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld).
The duly led BIR Form No. 1600 and the proof of payment thereof shall serve as
documentary substantiation for the claim of input tax to be applied against the output
tax that may be due from NRCP, if it is a VAT-registered taxpayer. In case NRCP is a
non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of
the service purchased and may treat such VAT as an "expense" or as an "asset",
whichever is applicable. In addition, NRCP is required to issue a Certi cate of Final Tax
Withheld at Source (BIR Form No. 2306) in quadruplicate, the rst three copies for
Arima and the fourth copy for NRCP as its le copy. (Sections 4 & 6, Revenue
Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002)
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 Agreement grants NRCP a non-exclusive and non-transferable license to use the
Licensed Programs and Relevant Program Documentation (instruction manuals, user
guides and other information to be made available from time to time to NRCP during the
term of the Agreement) upon the Designated Equipment (oracle database server and
windows workstation located at 18th Floor, Philippine AXA Life Centre, Sen. Gil Puyat
Avenue, Makati) and to process and refer to the Program Documentation.

2. "Licensed Programs" means the software and application programs in object code form
developed by Arima for the management of reinsurance operations and any New
Release of the same.
3. "Site" means the place or address speci ed by NRCP for the delivery of the Licensed Program
Material.
4. Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing
Philippine Tax Treaties (effective November 4, 2010).

5. 19 April 2011 is the date after the filing of the TTRA.

6. The VAT rate was increased to 12% on 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.

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