May 18, 2009

ITAD BIR RULING NO. 015-09

Articles 5 (Permanent
Establishment), 7 (Business
Profits), 11 (Interest) and 15
(Dependent Personal Services);
Philippines-Germany tax treaty

Diaz Murillo Dalupan and Company

Certified Public Accountants
5th Floor, Don Jacinto Building
Dela Rosa corner Salcedo Streets
Legaspi Village, Makati City 1229

Attention: Mr. Alberto V. Igrubay

Manager
Tax and Corporate Services Division

Gentlemen :

This refers to your letter dated August 10, 2007, 1(1) requesting confirmation
that payments to be made by Häfele Philippines, Inc. (Häfele Philippines) to
Häfele GmbH & Co Kg (Häfele Germany) under a Cost Allocation and Service
Agreement are exempt from income tax and from value-added tax. CacEIS

Basic Facts

It is represented that Häfele Germany is a corporation organized and

existing under the laws of Germany and is a resident of Germany based on the
Certificate dated February 10, 2007, issued by the tax authority of Germany; that
Häfele Germany is situated at Adolf-Häfele-Strasse 1, D-72202 Nagold, Germany,
and is not registered as a corporation or as a partnership in the Philippines based
on a Certification of Non-Registration of Corporation or Partnership dated
November 15, 2007, issued by the Securities and Exchange Commission; that, on
the other hand, Häfele Philippines is a corporation organized and existing under
the laws of the Philippines, under Company Registration No. AS092003589, based
on its Certificate of Filing of Amended Articles of Incorporation with the
Securities and Exchange Commission dated January 24, 2003; that Häfele
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 Philippines is situated at 103 Central Business Park, Amang Rodriguez Avenue,
Manggahan, Pasig City, Philippines; and that the primary purpose of Häfele
Philippines as a corporation is to engage in, conduct and carry on the business of
trading, importing, distributing and marketing of hardware specialist products,
such as fittings product lines, furniture connector systems, built-in office furniture
systems, and store fixture systems, table bases or miter hinges, fittings for
mass-produced furniture, organization trays for office cabinets, desk base and
counters installations and electronic locking systems for hotel rooms, as well as
other kinds of goods or merchandise as may be permitted by law.

It is also represented that on July 18, 2007, Häfele Germany and Häfele
Philippines entered into a Cost Allocation and Service Agreement (Agreement)
wherein Häfele Germany agreed to provide the following services to Häfele
Philippines:

1. Global operations and direct support. All production issues such as

central planning, purchase, equipment, technical issues, and quality.

2. Treasury. Cash pooling, bank account matters, indebtedness and

related matters, exchange rate matters, credit letters, and other
related matters.

3. Communication. Branding policy, institutional advertising, major

professional exhibitions, and sales conference.

4. General management. Strategy definitions and implementation and

other major business issues. ECcaDT

5. Legal. General legal assistance on matters such as internal control,

major contracts, and review of local legal matters.

6. Finance and internal audit. Day to day support, supervision,

instructions, budget reviews, internal audit (review of internal
control procedures, accounting audit, and investments review).

That in consideration for the said services, Häfele Philippines will pay Häfele
Germany a cost allocation in accordance with the following formula:

CxK

Where C corresponds to the Actual Costs of Häfele Germany for

services rendered to all its affiliates including Häfele Philippines from
January to December of each year, and K is the Allocation Key for
services dedicated by Häfele Germany to Häfele Philippines, determined
in accordance with the arm's-length principle and based on a fair estimate

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 of such services.

That Häfele Germany will invoice Häfele Philippines of the cost allocation on a
quarterly basis, and Häfele Philippines will pay Häfele Germany of such amount
through telegraphic wire transfer on or before the 10th day of the month following
that in which the invoice was issued; and that an interest on late payment will be
imposed at the rate generally stipulated on transactions between companies.

It is further represented that the Agreement has an initial term of one year
from January 1 to December 31, 2005 and may be renewed by the parties by
mutual agreement; that based on the notarized Affidavit dated October 3, 2008, by
the Managing Director of Häfele Philippines, Mr. Veli Matti Kaikkonen, Häfele
Philippines and Häfele Germany have been renewing the Agreement by mutual
agreement since 2005 up to present; and that the Agreement may terminate
automatically without the requirement of any formalities in case of material breach
or default by one party in the performance of its contract obligations or in case of
change in the controlling interest of Häfele Philippines.

It is finally represented that based on the notarized Affidavits dated October

3 and 8, 2008, by the same Managing Director of Häfele Philippines, the
following are the personnel of Häfele Germany who were sent to the Philippines
to render services to Häfele Philippines pursuant to the Agreement: TAcSaC

1. Mr. Gerard Brunner. Consulting migration AD/Internet connection

set-up and requirements. March 20 to April 2, 2005.

2. Mr. Egor Savelsberg. Purchasing; Export conduct training on Häfele

Germany, and Online Ordering System. May 21 to 27, 2005.

3. Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and

recommendation. December 22-23, 2005.

4. Mr. Stefan Huber. Managing Director for foreign subsidiaries:

a) Checking business operations of the Asian subsidiaries of

Häfele Germany. April 10-12, 2006.

b) Location checking for future warehouse/office of Häfele

Philippines. June 2-4, 2007.

That the services rendered by the above employees to Häfele Philippines are for
system set-up and upgrade to ensure uniformity of Häfele Philippines with the
other subsidiaries of Häfele Germany and for the evaluation and improvement of
Häfele Philippines for its future expansion; and that based on the notarized
Affidavit dated February 4, 2008, by the same Managing Director of Häfele
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 Philippines, the subject transaction of the request for ruling involving Häfele
Philippines and Häfele Germany is not subject of an investigation, on-going audit,
administrative protest, claim for refund or issuance of tax credit certificate,
collection proceedings, or judicial appeal.

Ruling

A. On income tax

In reply, please be informed that a foreign corporation like Häfele

Germany, whether or not engaged in trade or business in the Philippines, is taxable
only on income derived from sources in the Philippines. Section 23 (F) of the
National Internal Revenue Code of 1997 (Tax Code of 1997), as amended,
provides:

"SEC. 23. General Principles of Income Taxation in the

Philippines. — Except when otherwise provided in this Code:

xxx xxx xxx

(F) A foreign corporation, whether engaged or not in trade or

business in the Philippines, is taxable only on income derived from
sources within the Philippines."

In relation, Section 28 (B) (1) of the Tax Code of 1997, as amended,

provides: CITcSH

"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
subparagraphs 5(c). Provided, That effective January 1,
2009, the rate of income tax shall be thirty percent (30%)."

However, such income derived by Häfele Germany in the Philippines may

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 be exempt from income tax (or partially exempt if subject only to a reduced
income tax rate) if the same is so exempt (or partially exempt) pursuant to a treaty
obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax
Code of 1997, as amended, provides:

"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."

With respect to a treaty that may be invoked by Häfele Germany and other
residents of Germany, there is 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), signed on July 22, 1983, and effective January 1, 1985. Since tax treaties
follow the principal method of classification and assignment in mitigating the
effects of double taxation of income derived by a resident of a Contracting State in
the other Contracting State, it is important to know how income derived by Häfele
Germany is classified and taxed under the Philippines-Germany tax treaty. cDEICH

Payments for services

Payments for services to be made by Häfele Philippines to Häfele Germany

are generally treated as business profits unless otherwise proven as royalties such
as if the activity involves the grant to use or the right to use an intangible property
like know-how (information concerning industrial, commercial or scientific
experience).

To distinguish between payments for the supply of services and payments

for the supply of know-how, the Organisation for Economic Co-operation and
Development (OECD) Model Tax Convention on Income and on Capital
(Condensed Version, July 15, 2005) made the following commentaries on the
subject, thus:

"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.
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 It is recognized 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 that 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. CcSEIH

— 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.

11.4. Examples of payments which should therefore not be

considered to be received as consideration for the provision of know-how
but, rather, for the provision of services, include:

— payments obtained as consideration for

after-sales service,

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 — payments for services rendered by a seller to
the purchaser under a guarantee,

— payments for pure technical assistance,

— payments for an opinion given by an engineer,

an advocate or an accountant, and

— payments for advice provided electronically,

for electronic communications with technicians or for
accessing, through computer networks, a trouble-shooting
database such as a database that provides users of software
with non-confidential information in response to frequently
asked questions or common problems that arise frequently."
(Pages 181-182)

As a basic difference, contracts for the supply of know-how concern

information that already exists or concern the supply of that type of information
after its development or creation and generally include specific provisions
concerning the confidentiality of that information. Also, 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. STEacI

In the subject Agreement, there is no instance when Häfele Germany,

through employees or personnel thereof, will impart any information to Häfele
Philippines that already exists or that is recently developed or created by Häfele
Germany, and which generally require Häfele Philippines to maintain the
confidentiality of such information. On account that Häfele Germany will merely
perform technical support and provide consultancy advice to Häfele Philippines in
the areas of treasury, communication, general management, legal, and finance and
internal audit, but not divulge to Häfele Philippines any special knowledge or
experience involved in carrying out such technical support or the provision of such
consultancy advice, payments arising under this type of arrangement will not give
rise to royalties but merely to payments for services or business profits.

On the taxation of business profits, paragraph 1, Article 8 of the

Philippines-Germany tax treaty provides:

"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

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 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."

Under paragraph 1, the profits of an enterprise of a Contracting State

derived in the other Contracting State may be taxed in the other State if the profits
are attributable to a permanent establishment which the enterprise has in the other
State. In relation, the term permanent establishment is defined in paragraphs 1 and
2, Article 5 of the tax treaty below —

"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."

In addition, Item 2 of the Protocol supplementing the Philippines-Germany

tax treaty treats as a permanent establishment, the furnishing of services which
continues for an aggregate period of more than six months within any
twelve-month period, thus —

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

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 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)
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."

With respect to a permanent establishment in the form of a fixed place of

business like a branch or an office under paragraphs 1 and 2 of Article 5, since the
relevant Certification issued by the SEC dated November 15, 2007, confirms that
Häfele Germany is not engaged in trade or business in the Philippines, it is
unlikely for Häfele Germany to have a branch or an office in the Philippines that
might constitute its permanent establishment, at least as of the said date.

With respect to a permanent establishment in the case of the furnishing of

services which lasts for more than six months within any twelve-month period
under Item 2 of the Protocol, a summary of the number of days spent by the
personnel of Häfele Germany in the Philippines reveals the following:

1. Mr. Gerard Brunner. Consulting migration AD/Internet connection

set-up and requirements. March 20 to April 2, 2005. (14 days)

2. Mr. Egor Savelsberg. Purchasing; Export conduct training on Häfele

Germany, and Online Ordering System. May 21 to 27, 2005. (7
days)

3. Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and

recommendation. December 22-23, 2005. (2 days)

4. Mr. Stefan Huber. Managing Director for foreign subsidiaries:

a) Checking business operations of the Asian subsidiaries of

Häfele Germany. April 10-12, 2006. (3 days)

b) Location checking for future warehouse/office of Häfele

Philippines. June 2-4, 2007. (3 days)

In this case, we consider a twelve-month period beginning March 2005 to

February 2006, another twelve-month period beginning March 2006 to February
2007, and another one beginning March 2007 to February 2008. The number of
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 days spent by the above personnel are 23 days for the first twelve-month period, 3
days for the second twelve-month period, and 3 days for the third twelve-month
period, all of which sum up to less than six-months within each of the said
twelve-month periods. This being the case, the furnishing of services by Häfele
Germany to Häfele Philippines does not create a permanent establishment for
Häfele Germany in the Philippines. ITADaE

Accordingly, in the absence of a permanent establishment in the

Philippines, payments to be made by Häfele Philippines to Häfele Germany
pursuant to the Cost Allocation and Service Agreement are exempt from income
tax in the Philippines.

Interest on late payment

With respect to interest on late payment to be made by Häfele Philippines

to Häfele Germany pursuant to the Cost Allocation and Service Agreement, it is
noteworthy that the definition of the term "interest" under paragraph 5, Article 11
(Interest) of the Philippines-Germany tax treaty likewise considers this payment as
interest, thus:

"5. The term 'interest' as used in this Article means income from
Government securities, bonds or debentures, whether or not secured by
mortgage and whether or not carrying a right to participate in profits, and
debt-claims of every kind as well as all other income assimilated to
income from money lent by the taxation law of the State from which the
income is derived."

Paragraph 5 defines two types of interest, (1) interest taking the form of
income from debt-claims, including income from government securities and
income from bonds or debentures, including premiums and prizes attaching to
such securities, bonds or debentures, and (2) interest taking the form of income
assimilated to income from money lent by the taxation law of the country of
source of the income. In the case of interest on late payment to be paid by Häfele
Philippines to Häfele Germany, which does not arise primarily from debt-claims
but from unsettled or overdue obligations of Häfele Philippines to Häfele
Germany in relation to the latter's provision of technical support and consultancy
advice to Häfele Philippines, the payment in question is in the second category of
interest, that is, as income assimilated to income from money lent by the taxation
law of the country of source of the income.

As to the taxation of interest, paragraphs 2, 3 and 4, Article 11 of the

Philippines-Germany tax treaty provide:

"Article 11

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 INTEREST

1. Interest arising in a Contracting State and paid to a resident of

the other Contracting State may be taxed in that other State.

2. However, such interest may be taxed in the Contracting State

in which it arises, and according to the law of that State, but the tax so
charged shall not exceed:

a) 10 per cent if such interest is paid:

(i) in connection with the sale on credit of

any industrial, commercial or scientific equipment,
or

(ii) on any loan of whatever kind granted

by a bank, or

(iii) in respect of public issues of bonds,

debentures or similar obligations,

b) 15 per cent of the gross amount of such

interest in all other cases.

3. Notwithstanding the provisions of paragraph 2:

a) interest arising in the Federal Republic of

Germany and paid to the Philippine Government and the
Central Bank of the Philippines shall be exempt from
German tax; SCETHa

b) interest arising in the Republic of the

Philippines and paid to the German Government, the
Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau
or the Deutsche Gesellschaft fuer wirtschaftliche
Zusammenarbeit (Entwicklungsgesellschaft) shall be
exempt from Philippine tax.

The competent authorities of the Contracting States shall determine

by mutual agreement any other governmental institution to which this
paragraph shall apply.

4. Notwithstanding the provisions of paragraph 2 of this Article,

interest arising in a Contracting State shall be exempt from tax in that
State if it is derived in respect of a loan made, guaranteed or insured by a
governmental instrumentality of the other Contracting State as by 'Hermes
Deckung' in the case of the Federal Republic of Germany and by the
Central Bank in the case of the Republic of the Philippines, or any other
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 instrumentality as is specified and agreed in letters exchanged between the
competent authorities of the Contracting States."

Under paragraph 2, interest arising in the Philippines and derived by a

resident of Germany is subject to income tax at a rate not to exceed: (a) 10 percent
of the gross amount of the interest if it is paid (i) in connection with the sale on
credit of any industrial, commercial or scientific equipment, (ii) on any loan of
whatever kind granted by a bank, or (iii) in respect of public issues of bonds,
debentures or similar obligations; and (b) 15 percent of the gross amount of the
interest in all other cases. However, under paragraphs 3 and 4, such interest is
exempt from income tax if the interest is paid to the German Government, the
Deutsche Bundesbank, the Kreditanstalt fuer Wiederaufbau, or the Deutsche
Gesellschaft fuer wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft), or if
the interest is derived in respect of a loan made, guaranteed or insured by a
governmental instrumentality of Germany such as 'Hermes Deckung' or by any
other instrumentality as is specified and agreed in letters exchanged between the
competent authorities of the Philippines and Germany.

Accordingly, such interest on late payment to be made by Häfele

Philippines to Häfele Germany pursuant to the Cost Allocation and Service
Agreement is subject to income tax at the rate of 15 percent based on the gross
amount thereof. The interest in question cannot be subject to the lower rate of 10
percent under paragraph 2 (a), or be exempt under paragraphs 3 or 4, of Article 11,
because the conditions in availing either of these more preferential tax treatments
are not present in the case of such interest to be paid to Häfele Germany. ICTHDE

Remuneration of personnel

Salaries and other similar remuneration to be paid by Häfele Germany to its

personnel who provide technical support and consultancy advice to Häfele
Philippines in the Philippines, which are generally subject to income tax in the
Philippines, may be exempt if the three conditions laid down in paragraph 2,
Article 15 of the Philippines-Germany tax treaty below are all complied with
concurrently, to wit:

"Article 15

DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 16, 18 and 19, salaries,

wages and other similar remuneration derived by a resident of a
Contracting State in respect of an employment shall be taxable only in that
State unless the employment is exercised in the other Contracting State. If
the employment is so exercised, such remuneration as is derived therefrom

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 may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration

derived by a resident of a Contracting State in respect of an employment
exercised in the other Contracting State shall be taxable only in the
first-mentioned State if:

a) the recipient is present in the other State for a

period or periods not exceeding in the aggregate 183 days
in the calendar year concerned; and

b) the remuneration is paid by, or on behalf of, an

employer who is not a resident of the other State; and

c) the remuneration is not borne by a permanent

establishment or a fixed base which the employer has in the
other State."

As to the first condition [subparagraph (a)], we recognize that this condition

is satisfied for all personnel of Häfele Germany since the number of days spent by
each in the Philippines did not exceed 183 days in the calendar years 2005, 2006,
2007 and 2008, thus:

2005

Mr. Gerard Brunner. Consulting migration AD/Internet connection

set-up and requirements. March 20 to April 2, 2005. (14 days)

Mr. Egor Savelsberg. Purchasing; Export conduct training on

Häfele Germany, and Online Ordering System. May 21 to 27, 2005. (7
days)

Mr. Joachim Lenz. Logistics; Warehousing set-up, visit and

recommendation. December 22-23, 2005. (2 days)

2006

Mr. Stefan Huber. Managing Director for foreign subsidiaries.

Checking business operations of the Asian subsidiaries of Häfele
Germany. April 10-12, 2006. (3 days)

2007

Mr. Stefan Huber. Managing Director for foreign subsidiaries.

Location checking for future warehouse/office of Häfele Philippines. June
2-4, 2007. (3 days)

2007 *(2)

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 None.

As to the second condition [subparagraph (b)], this is also satisfied since Häfele
Germany, the employer in this case, is not a resident of the Philippines but of
Germany, based on the relevant Certificate issued by the tax authority of Germany
and based on the relevant Certification issued by the Securities and Exchange
Commission of the Philippines. As to the third condition, this is also satisfied
since, as mentioned previously, Häfele Germany, the employer, does not have a
permanent establishment in the Philippines. ITCcAD

Accordingly, since the three conditions are all satisfied for each personnel
of Häfele Germany, such salaries and other similar remuneration to be paid to
them for the calendar years 2005, 2006, 2007 and 2008 are exempt from income
tax in the Philippines.

B. On value-added tax

Although exempt from income tax, payments to be made by Häfele

Philippines to Häfele Germany pursuant to the Cost Allocation and Service
Agreement (including interest on late payment as described above) are subject to
value-added tax (VAT). Section 108 (A) (1) and (3) of the Tax Code of 1997, as
amended, 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 selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: 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%), 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 deficit as a percentage of

GDP of the previous year exceeds one and one-half percent
(1 1/2%)." 2(3)

While VAT is generally imposed on any person who sells, barters,

exchanges, leases goods or properties, and renders services, generally in the course
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 of its trade or business, services rendered by a nonresident foreign person in the
Philippines like Häfele Germany are likewise considered rendered in the course of
trade or business of that person and therefore subject to VAT. Section 105 of the
Tax Code of 1997, as amended, provides:

"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. cETDIA

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, nonprofit 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." (emphasis supplied)

Accordingly, Häfele Philippines, being a resident withholding agent, is

liable to withhold VAT on such payments to be made by it to Häfele Germany, the
nonresident recipient, at the rate of 12 percent. For this purpose, Häfele
Philippines will use BIR Form No. 1600 (Remittance Return of VAT and Other
Percentage Taxes Withheld), and, assuming that it is a VAT-registered taxpayer,
the VAT withheld may be claimed by Häfele Philippines as input tax upon filing
its 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 will be
the proof or documentary substantiation for the claim of input tax or input VAT.
On the other hand, assuming Häfele Philippines is not a VAT-registered taxpayer,
the VAT passed-on to it by Häfele Germany (as evidenced by the duly filed BIR
Form No. 1600) will form part of the cost of services rendered by Häfele Germany
to Häfele Philippines which the latter can treat as an expense or an asset, as
applicable. The VAT withheld will be remitted by Häfele Philippines within 10
days following the end of the month the withholding was made. For this purpose,
Section 4.112-2 of Revenue Regulations No. 16-2005, 3(4) as amended by Revenue
Regulations No. 4-2007, 4(5) provides:
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 "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) 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. STIcEA

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 'expense' or
'asset', 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."

Finally, while Häfele Germany will provide legal services, among others, to
Häfele Philippines under the subject Cost Allocation and Service Agreement,
particularly, general legal assistance on matters such as internal control, major
contracts, and review of local legal matters, this ruling cannot be construed as
authorizing Häfele Germany to exercise legal profession in the Philippines, which
is generally prohibited under Section 14, Article XII of the 1987 Philippine
Constitution. 5(6)

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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.) SIXTO S. ESQUIVIAS IV

Commissioner
Bureau of Internal Revenue
Footnotes
1. Received by the International Tax Affairs Division of this Bureau on December
28, 2007.
2. The VAT rate was increased to 12 percent 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.
3. Entitled Consolidated Value-Added Tax Regulations of 2005, dated September 1,
2005, and effective fifteen days after its publication.
4. Entitled Amending Certain Provisions of Revenue Regulations No. 16-2005, As
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of
2005, dated February 7, 2007, and which is effective fifteen days after its
publication.
5. "Section 14. The sustained development of a reservoir of national talents
consisting of Filipino scientists, entrepreneurs, professionals, managers,
high-level technical manpower and skilled workers and craftsmen in all fields
shall be promoted by the State. The State shall encourage appropriate technology
and regulate its transfer for the national benefit. The practice of all professions in
the Philippines shall be limited to Filipino citizens, save in cases prescribed by
law."

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 Endnotes

1 (Popup - Popup)
1. Received by the International Tax Affairs Division of this Bureau on December
28, 2007.

2 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy.

3 (Popup - Popup)
2. The VAT rate was increased to 12 percent 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.

4 (Popup - Popup)
3. Entitled Consolidated Value-Added Tax Regulations of 2005, dated September 1,
2005, and effective fifteen days after its publication.

5 (Popup - Popup)
4. Entitled Amending Certain Provisions of Revenue Regulations No. 16-2005, As
Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations
of 2005, dated February 7, 2007, and which is effective fifteen days after its
publication.

6 (Popup - Popup)
5. "Section 14. The sustained development of a reservoir of national talents
consisting of Filipino scientists, entrepreneurs, professionals, managers,
high-level technical manpower and skilled workers and craftsmen in all fields
shall be promoted by the State. The State shall encourage appropriate technology
and regulate its transfer for the national benefit. The practice of all professions in
the Philippines shall be limited to Filipino citizens, save in cases prescribed by
law."

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Copyright 2021 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2021 19