BIR Ruling

November 11, 1970 Messrs. Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Rizal Attention: Mr . B . V . Abela Gentlemen : This refers to your letter dated October 19, 1970 requesting information on certain tax aspects of the AGREEMENT FOR THE SUPPLY AND INSTALLATION OF RADAR COMMUNICATION AND ELECTRONIC EQUIPMENT entered into among the Republic of the Philippines (hereinafter referred to as BUYER), Marconi Philippines, Incorporated (hereinafter referred to as SELLER-CONTRACTOR) and Marconi Company, Limited (hereinafter referred to as MANUFACTURER) cdt From the AGREEMENT, the following facts appear: The SELLER-CONTRACTOR is a domestic corporation controlled to the extent of 60% by the MANUFACTURER, a non-resident foreign corporation domiciled in England not engaged in trade or business in the Philippines. The MANUFACTURER shall supply the necessary equipments to the SELLER-CONTRACTOR which will in turn sell the same to the BUYER. You elucidated on this aspect of the agreement to the effect that the sale of the equipment to the SELLER-CONTRACTOR shall be effected in London and the sale by the SELLER-CONTRACTOR to the BUYER shall likewise be effected in London. It is admitted that the SELLER CONTRACTOR shall derive some gain from the sale. The SELLER-CONTRACTOR shall undertake the installation of the equipments and ancillary works incidental thereto consisting of equipment housing and facilities. The MANUFACTURER shall provide training for a number of the BUYER'S personnel in the operation and/or maintenance of the equipments. The consideration of the agreement consists of the following: The consideration of the agreement consists of the following: 1. Supply of equipment, test equipment, spare components and handbooks 3,869,038 2. Training 19,286 3. Installation services 402,000 4. Ancillary works 125,000 Total 4,415,324 Payment of all the foregoing prices shall be made by the BUYER in London direct to the MANUFACTURER for in behalf of the SELLER-CONTRACTOR. In reply, I have the honor to inform you as follows: The MANUFACTURER, for the sale of the equipment and training of the BUYER'S personnel is not considered engaged in trade or business in the Philippines. The status of the MANUFACTURER as such will remain the same without the necessity of the SELLER-CONTRACTOR going to England to effect the purchase from the MANUFACTURER and of the BUYER going to England to purchase the same from the SELLER-CONTRACTOR. It may further be stated that the sale of the equipment could be effected by the MANUFACTURER direct to the BUYER with the same result. cd The proceeds of the sale of the equipment are not income to the MANUFACTURER from sources in the Philippines and, therefore, are not subject to Philippine income tax. The same holds true with respect to the income derived by the MANUFACTURER from the training of the personnel of the BUYER, the service being performed in London. The separate personalities of the MANUFACTURER and the SELLER-CONTRACTOR is generally to be recognized. However, as an exception, such separate personalities may be disregarded if warranted under certain circumstances. The circumstances for instances, as (1) The intervening sale of the equipment to the SELLER-CONTRACTOR: and (3) The payment of all amounts due under the agreement direct to the MANUFACTURER may bring about corporate disregard if availed of to avoid tax. These circumstances, however, do not permit tax evasion as the sale could very well be made direct to the BUYER, the MANUFACTURER after all being a direct party to the AGREEMENT, without a change in the tax status of the parties. The taxable gross receipts of the SELLER-CONTRACTOR shall consist of the cost of installation and cost of ancillary works. The cost of the equipment shall not form part of taxable receipts, the sale being a separate transaction from the installation thereof. (Eternit Corporation v. Collector, G.R. No. L-11913, April 29, 1959) The gain to be derived by the SELLER-CONTRACTOR shall not also form part of its taxable receipts, it arising as aforesaid from a separate transaction. Such gain shall, however, be subject to income tax. cdti Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue