BIR Ruling [DA-055-98]

February 12, 1998 BIR RULING [DA-055-98] Castro Cadiz & Carag Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street 1500 Greenhills, San Juan Metro Manila Attention: Atty . Anna Liza M . Ang-Co Gentlemen : This refers to your letter dated January 5, 1998 requesting, in effect, for a ruling confirming your opinion that the rental income to be derived by Water Jet Netherlands Antilles NV (WJNA) from Water Jet Shipping Corporation (Water Jet) is not subject to Philippine income tax pursuant to Article 7, paragraph (1) of the RP-Netherlands Tax Treaty. LexLib It is represented that WJNA is a non-resident corporation organized and existing under the laws of Netherlands; that it is not engaged in trade or business in the Philippines and does not maintain a branch office or any other place of business in the Philippines; that it does not have any employees or personnel in the Philippines; that it entered into bareboat charter agreements with Water Jet, a corporation duly organized and existing under the laws of the Republic of the Philippines, for the lease of MV Water Jet 1 and MV Water Jet 2, for a period of eight (8) years; and that said bareboat charter agreements were duly registered with and approved by the Maritime Industry Authority (MARINA) last March 29, 1996. Based on the foregoing representations, you now request confirmation of your opinion that "1. Water Jet is not required to withhold any tax on the rental payments on behalf of WJNA, considering that the business profits such as rental income derived by WJNA, a non-resident foreign corporation with no permanent establishment in the Philippines, are exempt from taxes under RP-Netherlands Tax Treaty; "2. Water Jet is liable to withhold the payments of value-added tax (VAT) from the rental fees on behalf of WJNA only upon payment or remittance of said rentals by Water Jet to WJNA regardless of the accrual of the rentals as business expense in the books of Water Jet and as income in the books of WJNA." In reply, please be informed that your opinion is hereby confirmed. Article 7(1) of the RP-Netherlands tax Treaty, provides that "ARTICLE 7 "Business Profits "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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 Moreover, Article 5, paragraphs (1) and (2) of said treaty, provides; "ARTICLE 5 "Permanent Establishment "1. For the purposes of this Convention, 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" includes especially. a.) a place of establishment; b.) a branch; c.) an office; d.) a factory; e.) a workshop; f.) a mine, quarry or other place of exploration or extraction of natural resources; g.) 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 183 days; h.) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve month period. xxx xxx xxx" Considering that WJNA does not have a "permanent establishment" in the Philippines as the term is defined above, the rental income which it will receive from Water Jet for the lease of MV Water Jet 1 and MV Water Jet 2, is exempt from the 4.5% tax imposed under Section 28(B)(3) of the Tax Code of 1997. Accordingly, Water Jet Shipping Corporation is not required to withhold any tax on such rental payments on behalf of WJNA. (BIR Ruling Nos. 192-91 dated September 17, 1991; DA 393-97 dated December 1, 1997) However, the said rental payments to be made by Water Jet to WJNA for the lease of MV Water Jet 1 and MV Water Jet 2 shall be subject to the 10% value-added tax imposed under Section 108(A)(2) in relation to Section 105 of the Tax Code of 1997 based on the gross receipts, i.e., rentals to be paid by Water Jet to WJNA. Being the lessee, Water Jet shall be responsible for the payment of VAT on said rental fees on behalf of WJNA, only upon payment/remittance of said rentals to WJNA and not upon accrual of the rentals in the respective books of Water Jet, as lessee and WJNA, as lessor, by filing a separate VAT declaration/return which can be used as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95; Revenue Memorandum Circular No. 23-96; Section 108(A)(2) of the Tax Code of 1997; Revenue Regulations No. 7-95; BIR Ruling No. 422-93) This ruling is being issued 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)