TAX BENEFITS ARE GRANTED ONLY FOR GOODS & SERVICES DIRECTLY RELATED TO THE PROGRAM IMPLEMENTATION OF INTERNATIONAL GRANTS

Tetra Tech International Development Pty. Ltd. (TTIDP Ltd.), an Australian-registered company, was engaged by the Australian Government’s Department of Foreign Affairs and Trade (DFAT) as the managing contractor for the FAIR JUSTICE PROGRAM in the Philippines (2024–2029). The program, approved by the Philippine Supreme Court on January 30, 2024, is fully funded by the Government of Australia and aligns with the Philippine Development Plan (2023–2028) and the Supreme Court’s Strategic Plan for Judicial Innovations (2022–2027). The Australian Embassy requested confirmation that TTIDP Ltd.’s procurement of goods and services for the program is subject to 0% VAT or VAT-exempt under the General Agreement on Development Cooperation (GADC) between the Philippines and Australia. In reply, Article 7(1)(a) of the GADC, in relation to Sections 106(A)(2)(b), 108(B)(3), and 109(1)(K) of the Tax Code of 1997, as amended, provides that goods and services procured locally by TTIDP Ltd. for the FAIR JUSTICE PROGRAM are subject to 0% VAT, while direct importations are VAT-exempt. However, these VAT privileges are limited strictly to transactions necessary for the program's implementation and cannot be applied to TTIDP Ltd.'s other activities. [BIR ITAD RULING NO. 027-25, MAY 6, 2025]

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[INCOME TAX & VAT APPLY TO CROSS-BORDER SERVICES WHEN A PERMANENT ESTABLISHMENT IS CREATED IN THE PHILIPPINES] [REMUNERATION FOR SERVICES RENDERED IN THE PHILIPPINES BY EXPATRIATES IS TAXABLE UNDER ARTICLE 14 OF THE PH-SINGAPORE TAX TREATY IF IT IS PAID BY & BORNE BY A PERMANENT ESTABLISHMENT LOCATED IN THE PHILIPPINES]

M Energy Solutions Philippines, Inc. (MAN PH) is a domestic corporation, entered into an Inter-Entity Service Agreement with M Energy Solutions Singapore Pte. Ltd. (MAN SG), a resident foreign corporation based in Singapore. It is engaged in repairing ships, converting, demolition, altering ships, etc. As part of the agreements, MAN SG shall provide engineers and technicians, who will assist with the installation and commissioning of engines and render advice on technicalities. Further, the services will be performed in the Philippines and shall not exceed an aggregate period of 183 days. MAN PH is seeking confirmation that the service fee paid to MAN SG is exempt from income tax. In reply, Section 28(B)(1) of the Tax Code, as amended, provides that nonresident foreign corporations are generally subject to a 25% tax on gross income derived from Philippine sources. However, tax treaty provisions may override domestic laws. The PH-Singapore Tax Treaty limits the taxation rights of the Philippines to income attributable to a Permanent Establishment (PE). A PE is deemed to exist if services are provided in the Philippines for more than 183 days, regardless of whether contracts are separate. MAN SG was found to have a PE in the Philippines, providing services for 275 days. Therefore, its profits attributable to that PE are taxable in the Philippines, with deductions allowed for related expenses. Regarding employee remuneration, Article 14 of the Treaty provides that such income is taxable in the Philippines if the services are performed there and borne by a Philippine PE. Although the employees were in the country for less than 183 days and were paid by MAN SG, however, the third condition was not met. Thus, the employees' incomes are taxable in the Philippines under the Treaty, in relation to Section 25(B) of the Tax Code. Furthermore, the services rendered by MAN SG in the Philippines are subject to 12% VAT under the Tax Code. However, services performed outside the Philippines are not subject to VAT. [BIR ITAD RULING NO. 023-25, APRIL 24, 2025]

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FAILURE TO COMPLY WITH THE BIR’S REQUEST FOR SUBMISSION OF REQUIRED DOCUMENTS TO SUBSTANTIATE THE CLAIM FOR PREFERENTIAL TAX TREATMENT MAY RESULT IN THE AUTOMATIC DENIAL OF THE TREATY BENEFIT APPLICATIONS

I Co. is seeking confirmation that the royalties paid to IC, a U.S. corporation, should be subject to a preferential income tax rate of 10% pursuant to the Philippines-United States (PH-US) Tax Treaty. As represented, I Co., a corporation registered under Philippine laws, entered into an Intercompany Agreement with IC, with I Co. to pay a Transfer Price for product licensing and support services outlined in the agreement. In reply, the BIR denied the request for confirmation of entitlement to the 10% preferential tax rate under the “Most Favored Nation” Clause of the PH-US Tax Treaty for failure to comply with multiple Notices to Submit Additional Documents. Pursuant to Section 5 of Revenue Memorandum Order (RMO) No. 14-2021, taxpayers are required to submit both the prescribed and additional documents to support their claims for treaty benefits. As tax exemptions or reduced rates must be strictly construed, the burden of proof rests with the taxpayer. In this case, the applicant failed to discharge that burden, resulting in the denial of the application and the imposition of the regular 25% income tax rate under Section 28(B)(1) of the Tax Code of 1997, as amended. [BIR ITAD RULING NO. 019-25, APRIL 14, 2025]

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RETRANSMISSION OF COPYRIGHTED AUDIOVISUAL CONTENTS QUALIFIES AS ROYALTY UNDER THE PH-US & PH-UAE TAX TREATIES, BUT NON-COMPLIANCE WITH ALL MFN CLAUSE CONDITIONS PRECLUDES ITS APPLICATION

Cignal TV, Inc., (Cignal) a domestic corporation organized under the Philippine laws, is seeking confirmation on the proper tax treatment of royalty payments made to Turner Broadcasting System Asia Pacific Inc., a US-based corporation. Specifically, Cignal inquired on whether such payments qualify for the preferential 10% income tax rate under Article 13(2)(b)(iii) of the PH-US Tax Treaty, invoking the “Most Favored Nation” (MFN) clause in relation to Article 12(2) of the PH-UAE Tax Treaty. As represented, Cignal and Turner entered into a License Agreement, wherein Turner granted to Cignal a non-exclusive license to retransmit the 24-hour television programming services titled “CNN International”, “Cartoon Network”, “truTV”, “CNN International HD”, “Cartoon Network HD”, “Toonami”, and “Warner TV”. In consideration thereof, Cignal would pay monthly royalties to Turner. In reply, Section 28(B)(1) of the Tax Code of 1997, as amended, provides that royalties are generally subject to a 25% final withholding tax. However, in this case, Turner sought to apply the preferential 10% rate under the PH-US Tax Treaty, based on the MFN clause referencing the more favorable rate provided under the PH-UAE Tax Treaty. The BIR affirmed that the payments constituted "royalties" under both tax treaties and acknowledged the similarity in the subject matter—specifically, the retransmission of copyrighted audiovisual content. However, the BIR held that the second condition for invoking the MFN clause was not met. This condition requires similarity in the method of tax relief applied in the treaty partner's jurisdiction. While the UAE adopts a full foreign tax credit method without limitation, the United States applies an ordinary foreign tax credit method, subject to limitations under U.S. domestic law. Due to this fundamental difference in the method of granting tax relief, the MFN clause could not be validly invoked. Consequently, the royalties paid by Cignal to Turner are subject to a 25% Final Withholding Tax pursuant to Article 13(2)(b)(i) of the PH-US Tax Treaty. In addition, the transaction is subject to 12% VAT under Sections 105 and 108 of the Tax Code, as it involves the lease or use of intellectual property—specifically, television programs—within the Philippines. This constitutes a taxable sale or exchange of services. As such, Cignal is required to withhold and remit the 12% VAT to the BIR within ten (10) days following the end of the month in which the payment was made. [BIR ITAD RULING NO. 011-25, APRIL 14, 2025]

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