March 4, 2016

ITAD BIR RULING NO. 007-16

Articles 5 (Permanent
Establishment), 7 (Business Profits)
and Protocol Philippines-Germany
tax treaty

Yung Sung Industrial Philippines, Inc.

E-1901B, Philippine Stock Exchange Centre
Exchange Road, Ortigas Complex
Pasig City

Attention: Mr. Victor Antonio C. Cruz

Special Projects Manager

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").

Giesecke is a foreign corporation and a resident of Germany based on the

document issued by the Registration Court in Munich, Germany, on January 18,
2011, and the Certificate on Fiscal Registration issued by the Internal Revenue
Office in Munich, Germany, on February 9, 2011. Giesecke is located at
Prinzregentenstrasse 159, Munich, Germany. It 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 June 27, 2011.
Giesecke was issued Taxpayer Identification Number ("TIN") 409-465-051 by the
Bureau of Internal Revenue ("BIR") Revenue District Office ("RDO") No. 39
(South Quezon City). On the other hand, BSP is the central bank of the Philippines
and the country's central monetary authority. Its primary objective is to maintain
price stability conducive to a balanced and sustainable economic growth, and to
promote and preserve monetary stability and the convertibility of the national

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 currency. 1(1) It is located at A. Mabini corner P. Ocampo Sr. Streets, Malate,
Manila, Philippines.

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.

Based on the Certificate issued by Giesecke on June 4, 2011, Giesecke

appointed Yung Sung Industrial Philippines, Inc. ("Yung Sung") as sole distributor
of all Banknote Processing Systems in the Philippines. Yung Sung will be
responsible for supplying spare parts, accessories and related items, and after sales
service for these systems for a period of at least ten years from the date of its
acceptance. Yung Sung is a domestic corporation located at E-1901B, Philippine
Stock Exchange Centre, Exchange Road, Ortigas Complex, Pasig City,
Philippines.

Based on the Certification issued by Giesecke on September 2, 2011, Yung

Sung is responsible for providing local engineers in connection with servicing the
two units of Banknote Processing System (BPS 1040SB-30) installed at the Cash
Department, BSP Security Plant Complex in Quezon City, Philippines.

Ruling

In reply, please be informed that under Article 7 of the

Philippines-Germany tax treaty, the profits derived by an enterprise of Germany
from sources in the Philippines may be taxed in the Philippines if they are
attributable to a permanent establishment which the enterprise has therein, to wit:
TIADCc

"Article 7

Business Profits

1. The profits of an enterprise of a Contracting State shall be

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 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 of them as is
attributable to that permanent establishment."

In relation thereto, Article 5 of the treaty and the Protocol thereto defines a
permanent establishment as follows:

"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 warehouse, in relation to a person providing storage

facilities for others;

g) a mine, quarry or other place of extraction of natural

resources;

h) 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 six months."

"PROTOCOL

2. In relation to Article 5, if an enterprise of a Contracting State

carries out activities in the other Contracting State by
furnishing services, including consultancy services, through
an employee or other personnel, it shall be considered to have
a permanent establishment in that Contracting State only if
such services continue (for the same or a connected project)
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 within that Contracting State for a period or periods
aggregating more than six months within any twelve-month
period.

No permanent establishment is assumed if the services,

including the provision of equipment, are furnished in a
Contracting State by enterprises of the other Contracting
State, including consultancy firms, in accordance with, or in
the implementation of, an agreement between the Contracting
States regarding technical cooperation."

As defined, a permanent establishment means a fixed place of business

through which the business of an enterprise is wholly or partly carried on, and
includes especially, a place of management, a branch, an office, a factory, and a
workshop. Also, a permanent establishment includes the furnishing of services,
including consultancy services, by an enterprise of a Contracting State (through
employees or other personnel thereof), where such activities continue (for the
same or a connected project) within the other Contracting State for a period or
periods aggregating more than six months within any twelve-month period, except
if these activities were undertaken in accordance with, or in the implementation of,
an agreement on technical cooperation between the Contracting States.

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

The same analogy applies to a permanent establishment in the form of a

building site or construction or assembly project. According to the commentaries
of the Organisation for Economic Co-operation and Development Model Tax
Convention on Income and on Capital (Condensed Version, July 2010), in
counting the period of a permanent establishment arising from this activity, the
period spent by a subcontractor would be counted as that spent by the general
contractor, to wit:

"19. . . . If an enterprise (general contractor) which has undertaken

the performance of a comprehensive project subcontracts parts of such a

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 project to other enterprises (subcontractors), the period spent by a
subcontractor working on the building site must be considered as being time
spent by the general contractor on the building project. The subcontractor
himself has a permanent establishment at the site if his activities there last
more than twelve months." (Page 100) (Emphasis ours)

Since Giesecke has a permanent establishment, the service fees paid to it by

BSP amounting to 21,300.00 Euros every month (255,600.00 Euros every year)
shall be subject to income tax pursuant to paragraph 1, Article 7 of the
Philippines-Germany tax treaty.

Relative thereto, under paragraph 3 of the same Article 7, in computing the

taxable profits of Giesecke, reasonable expenses should be deducted from such
profits and which are incurred for the purpose of providing services to BSP, to wit:

"3. In the determination of the profits of a permanent

establishment, there shall be allowed as deductions expenses which are
incurred for the purposes of the permanent establishment including
executive and general administrative expenses so incurred, whether in the
State in which the permanent establishment is situated or elsewhere."

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.

Giesecke's taxable profits shall be subject to income tax at the rate of 30

percent under Section 28 (A) (1) of the National Internal Revenue Code of 1997

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 ("Tax Code"), as amended, to wit:

"SEC. 28. Rates of Income Tax on Foreign Corporations. —

(A) Tax on Resident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this

Code, a foreign corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources
within the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be thirty
percent (30%)".

As permanent establishment of Giesecke, Yung Sung shall cause the filing

of Giesecke's Quarterly Income Tax Return (BIR Form No. 1702Q) and Annual
Income Tax Return (BIR Form No. 1702) at RDO 39, as required under Section 52
of the Tax Code:

"SEC. 53. Corporation Returns. —

(A) Requirements. — Every corporation subject to the tax

herein imposed, except foreign corporations not
engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return in
accordance with the provisions of Chapter XII of this
Title. The return shall be filed by the president,
vice-president or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer."

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.

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
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 ("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, 2(2) raise the rate of
value-added tax to twelve percent (12%) . . ."

"SEC. 105. Persons Liable. — Any person who, in the course of

trade or business, sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

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.

The rule of regularity, to the contrary notwithstanding, services as

defined in this Code rendered in the Philippines by nonresident foreign
persons shall be considered as being rendered in the course of trade or
business."

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
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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 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. Refer to http://www.bsp.gov.ph.
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. 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.

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 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."

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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
passed-on VAT by the non-resident recipient of the income, evidenced by the
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 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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