March 11, 2011

ITAD BIR RULING NO. 085-11

Articles 5 and 7 of the Philippines-

Israel tax treaty

Tagnia, Ortega & Partners, CPAS

Unit 804-A AIC-Burgundy Empire Tower
ADB Avenue corner Saphhire and Garnet Roads
Ortigas Center, Pasig City

Attention: Mr. Dexter F. Ortega

Gentlemen :

This refers to your tax treaty relief application ("TTRA") dated December
21, 2010, on behalf of your client, ORPAK SYSTEMS, LTD. ("ORPAK"),
requesting confirmation that income derived by ORPAK from the sale to
PETRON CORPORATION ("PETRON") of pump controllers is not subject to
Philippine income tax pursuant to the Convention between the Government of
the Republic of the Philippines and the Government of the State of Israel for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income ("Philippines-Israel tax treaty"). TcDAHS

Facts
It is represented that ORPAK is a corporation organized and existing
under the laws of Israel and is a resident of Israel within the meaning of
the Philippines-Israel tax treaty, based on its Amended and Restated Articles
of Incorporation and on the Certificate of Fiscal Residence issued by the Israel
Tax Authority on September 21, 2010; that ORPAK is situated at 31 Lechi
Street, Bhei-Barak, Israel; that ORPAK is not registered as a corporation or as
a partnership in the Philippines based on the Certification of Non-Registration
of Company dated December 6, 2010 issued by the Securities and Exchange
Commission; and that, on the other hand, PETRON is a corporation organized
and existing under the laws of the Philippines with office address at SMC Head
Office Complex, 40 San Miguel Avenue, 1550 Mandaluyong City, Philippines.
It is further represented that on November 5, 2010, ORPAK and
PETRON entered into a Point of Sale/Back Office Systems Sale Agreement,
whereby ORPAK shall sell and deliver to PETRON hardware and software for
the implementation of PETRON's point-of-sale (POS), back office systems
 (BOS), and head office systems (HOS) in its 350 service stations and
stores ("Sites"); that ORPAK shall also provide a Head Office Systems (HOS)
application to enable the seamless transfer of information to and from these
Sites; that ORPAK shall deliver the pump controllers and software for all the
350 Sites by March 8, 2011, provided, however, that PETRON may identify and
propose additional service stations in the list of Sites under such terms and
conditions as to be agreed upon by the parties; that the POS, BOS, and
HOS ("Application Software") shall meet all the functional requirements
required by PETRON, which shall be forwarded to ORPAK in writing; that the
Application Software is an integrated solution for point-of-sale transactions
including sales and payment processing for the forecourt and the store, as well
as back-office transactions, such inventory management, purchasing, and
goods receipting, as well as Head Office Component that enable its users to
centrally manage data transfer to and from the sites; that ORPAK shall provide
the necessary peripherals for the integration of PETRON's pumps with the
Application Software; that ORPAK shall undertake development,
implementation and adaptation of the pump controller and the Application
Software to fit the specific requirements of PETRON; that the development,
implementation and adaptation shall all be performed in Israel; that in the event
that any of ORPAK's personnel comes to the Philippines, they shall perform
their duties under ORPAK's control and supervision in accordance with the
standards set out by PETRON; that ORPAK's personnel shall stay in the
Philippines for an aggregate of not more than six months within any twelve-
month period; that in consideration of the products sold by ORPAK to PETRON,
PETRON shall pay ORPAK as follows:
The Contract Price shall be the Total Solution Cost, as shown in the
following table:
1. Solution Cost Summary — Tax Inclusive
Php Reference Amounts Fixed US$ Amounts
ITEM (Same or Mix A B1 A x B1 B2 A x B2
Pump Type) # of
Sites

Small Station 271 Php283,200.00 Php76,747,200.00$6,057.75$1,641,651.34

Medium Station 77 Php288,900.00 Php22,245,300.00$6,179.68 $475,835.29
Large Station 2 Php294,600.00 Php589,200.00$6,301.60 $12,603.21
Head Office
350 Php26,900.00 Php9,415,000.00 $575.40 $201,390.37
System
One Time Cost Php3,360,100.00 $71,873.80
––––––––––––––– –––––––––––
TOTAL SOLUTION COST = Php112,356,800.00 $2,403,354.01
=============== ==========
 2. Payment Terms: Thirty (30) calendar days from receipt of invoice.
Monthly Invoicing based on actual number of Sites implemented.
A sign-off by PETRON is required for the Site to be considered as
implemented.
3. Delivery: There will be no additional cost to PETRON for the
warehousing of the POS/BOS pump controllers and the
Application Software. ORPAK will deliver the items to SmartPetro's
warehouse within Metro Manila for consolidation and software
installation.
4. Currency: All payments will be in United States dollars.
That any amount due to ORPAK shall be paid on the thirtieth day
following the acknowledgement by PETRON of a properly executed invoice or
statement of account; that the parties shall have the following rights and
obligations over the Application Software:
1. The right to the Application Software (embedded software) remains
the sole property of ORPAK;
2. PETRON may not transfer the license to use the Application Software,
or any of its rights or obligations deriving out of the software, to any
third-party entity;IDATCE

3. PETRON may not copy or permit its employees or any third party to
copy the software or use it for a purpose other than the one
stipulated;
4. PETRON may neither modify nor authorize third parties to effect
modifications, enhancements or alterations of the software without
prior authority from ORPAK; and
5. PETRON may not make a public performance of the software nor
publicly display the computer program without prior consent from
ORPAK;
and that ORPAK shall complete the delivery of the pump controllers and
the Application Software by March 8, 2011; and that in case of termination,
PETRON shall give ORPAK at least sixty days written notice prior to the
effective date of termination.
It is finally represented that the transaction subject of the request for
ruling is not under investigation, on-going audit, administrative protest, claims
for refund or issuance of a tax credit certificate, collection proceedings, or
judicial appeal, based on the Certification issued by the concurrent Chief
Executive Officer and President of ORPAK on November 9, 2010.
Ruling
 In reply, please be informed that under Section 28 (B) (1) of the National
Internal Revenue Code (Tax Code) of 1997, as amended, such payments made
to ORPAK, being a foreign corporation not engaged in trade or business in the
Philippines, are subject to income tax in the Philippines at the rate of 30 percent
based on the gross amount thereof, to wit:
"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
subparagraph 5(c): Provided, That, effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
xxx xxx xxx"
However, said income may be exempt or partially exempt if subject to a
reduced rate only pursuant to a treaty obligation to which the Philippine
government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as
amended, provides, viz.:
"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 (i.e., TITLE II — TAX ON INCOME):
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." aDICET

With respect to a treaty, what you invoke for this purpose is

the Philippines-Israel tax treaty. Articles 7 and 5 thereof provide 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 of them
as is attributable to that permanent establishment.
xxx xxx xxx."
"Article 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, the term 'permanent
establishment' means a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
2. The term 'permanent establishment' includes 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 any other
place of extraction of natural resources;
g) a place of exploration of natural resources;
h) a building site or construction project or
supervisory activities in connection therewith, where such
site, project or activity continues for a period of more than
six months;
i) an assembly or installation project which exists
for more than six months;
j) the furnishing of services, including consultancy
services by an enterprise through employees or other
personnel where activities of that nature continue (for the
same or a connected project) within a State for a period or
periods aggregating more than six months within any
twelve-month period;
xxx xxx xxx."
Under paragraphs 1 and 2 of Article 5, ORPAK is deemed to have a
permanent establishment in the Philippines if it has a fixed place of business in
the Philippines through which its business is wholly or partly carried on, such
as a place of management, a branch, an office, a factory, or a workshop. In
relation to the activities of delivering and installing the pump controllers and the
Application Software to be embedded in these controllers, ORPAK is deemed
to have a permanent establishment if such installation continues for a period of
more than six months. DCIAST

Accordingly, since ORPAK is a foreign corporation not engaged in trade

or business in the Philippines, and since ORPAK will not perform activities in
the Philippines relating to the delivery and installation of the pump controllers
for more than six months, ORPAK is not deemed to have a permanent
establishment with respect to activities it will carry out for PETRON. Therefore,
such payments to be made by PETRON to ORPAK under the Agreement for
the sale of the pump controllers and the supply of services relating thereto,
beginning December 1, 2010 are exempt from income tax in the Philippines
pursuant to paragraph 1 of Article 7, in relation to paragraphs 1 and 2 of Article
5 of the Philippines-Israel tax treaty and, in relation to Revenue Memorandum
Order No. ("RMO") 72-2010, 1 effective November 4, 2010.
Finally, such payments to be made to ORPAK, being payments for the
importation of goods to the Philippines and for the sale of services and use or
lease of properties in the Philippines, are subject to value-added tax ("VAT").
Sections 107 (A) and 108 (A) of the Tax Code of 1997, as amended, provide:
"SEC. 107. Value-added Tax on Importation of Goods. —
(A) In General. — There shall be levied, assessed and collected
on every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of Customs
in determining tariff and customs duties, plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by the importer prior
to the release of such goods from customs custody: Provided, That
where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed
cost plus excise taxes, if any: Provided further, That the President, upon
the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, 2 raise the rate of value-added tax to twelve percent
(12%) . . ."
"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, 3 raise the rate of value-added tax to twelve percent (12%) . . ."
With respect to the importation of the pump controllers, the VAT thereon,
including customs duties and other taxes and charges, shall be paid by
PETRON prior to their release from customs custody. On the other hand, with
respect to VAT on the supply of services, PETRON, being the resident
withholding agent, shall withhold VAT on payments to be made to ORPAK,
being the nonresident supplier of services, at the rate of 12 percent. Section
4.112-2 of Revenue Regulations No. 16-2005, 4 as amended by Revenue
Regulations No. 4-2007, 5 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) 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. IDScTE

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."
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.Under the RMO, the filing of TTRAs should be made before the occurrence of
the first taxable event, or the first or the only time when an income payor is
required to withhold income tax on payments subject to preferential treatment.
The first and only time referred herein corresponds to the period within which
a withholding agent is required to file the necessary returns on final and
creditable income taxes withheld in a particular month, which is within ten
days after the end of that month, or, if the withholding was made
in December, on or before January 15 of the following year, pursuant to
Section 2.58 (A) (2) of Revenue Regulations No. 2-98.
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.Ibid.
4.Entitled Consolidated Value-Added Tax Regulations of 2005.
5.Entitled Amending Certain Provisions of Revenue Regulations No. 16-2005, as
Amended, Otherwise Known as the Consolidated Value-Added Tax
Regulations of 2005.
||| (ITAD BIR Ruling No. 085-11, [March 11, 2011])