BIR Ruling [DA-050-97]

January 31, 1997 BIR RULING [DA-050-97] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . Ma . Victoria A . Villaluz Gentlemen : This refers to your letter dated November 15, 1996 requesting for confirmation of your opinion to the effect that rental payments of your client, Pacific East Cargo Airlines, Inc. (PEAC) to Kitty Hawk Aircargo, Inc. (Kitty Hawk) are exempt from Philippine income/withholding tax pursuant to Article 8 in relation to Article 5 of the RP-US Tax Treaty. It is represented that PEAC is a domestic corporation engaged in the air transport of cargoes; that PEAC entered into a Contract of Lease of Aircraft (Lease) with a non-resident US lessor, Kitty Hawk; that pursuant to the provisions of the lease contract, the Lease's Commencement Date is the day the Initial Aircraft departs Kitty Hawk's Dallas Forth Worth Facility for the Manila Ninoy Aquino International Airport; that the parties expect the commencement date to be on or about April 26, 1996; that on the other hand, the terminations date of the lease will be midnight GMT on the second anniversary of the commencement date or an earlier date when the lease may be terminated; that as an integral part of the lease, Kitty Hawk will supply crew members to provide maintenance services to PEAC during the lease term; that the maintenance services will be rendered in Jakarta, Indonesia; and that as consideration for the lease, PEAC will pay Kitty Hawk the following amounts: (1) minimum monthly rent ("Basic Rent") of US $450,000.00 per calendar month; and (2) additional monthly rent ("Supplemental Rent") of US $1,995.00 per Block Hour for each Block Hour, if any, in excess of 212 Block Hours in each calendar month (collectively to be known as "Rentals"); and that a "Block Hour" is defined as "each whole or partial hour elapsing from the moment the chocks are removed from the wheels of the Aircraft for Flights until the chocks are next again returned to the wheels of the aircraft accumulated to two decimal places throughout each calendar month. In reply, please be informed that paragraph 1, Article 8 of the RP-US Tax Treaty provides as follows: "Article 8 "BUSINESS PROFITS" "(1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only so much of them as are attributable to the permanent establishment. Moreover, Article 5(1) and (2) of said treaty provides, viz.: "Article 5 "PERMANENT ESTABLISHMENT" "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "(2) The term "fixed place of business" includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; cdt (g) A warehouse; (h) a mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other, personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx Considering that Kitty Hawk does not have a permanent establishment in the Philippines to which the rental income may be attributed and since the maintenance services will be rendered in Jakarta, Indonesia during the term of the lease, payments received by Kitty Hawk under its contract of lease of aircraft with PEAC are not subject to Philippine income tax and consequently to the 7.5% withholding tax prescribed under Section 25 (b) (4) in the relation to Section 50(a) both of the Tax Code, as amended. (BIR Ruling Nos. 82-90 dated May 15, 1990; 113-90 dated June 6, 1990) cdtech This ruling is being issues on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)