BIR Ruling [DA-071-99]

February 5, 1999 BIR RULING [DA-071-99] Punongbayan & Araullo 6th Floor Vernida IV Building Alfaro Street, Salcedo Village Makati City Attention: Atty . Vic . C . Mamalateo Tax Partner Gentlemen : This refers to your letters dated August 7, 1996 and November 20, 1997 requesting for a confirmation of your opinion on the following issues: "1. The contract fees paid by Placer to Biscay Ltd . (Biscay) is exempt from income tax as well as withholding tax pursuant to the Philippine-Singapore Tax Treaty; "2. Securing of a Tax Identification Number (TIN) for purposes of VAT registration and issuance of a VAT invoice does not create a permanent establishment for BISCAY; "3. Placer may file a separate VAT return for and in behalf of Biscay in order for Placer to claim input tax credits on such transactions." It is represented that your client, Placer, a domestic corporation, entered into a contract with Biscay, non-resident foreign corporation based in Singapore, for the dredging of a settlement channel at Marinduque Island which will be completed in approximately sixty (60) days; and that BISCAY does not maintain an office nor does it have employees in the Philippines whose stay will aggregate more than 183 days during the taxable year. In reply, please be informed as follows: 1. We hereby confirm your opinion that Biscay is exempt from Philippine income tax and withholding tax pursuant to paragraph (1), Article 7 of the RP-Singapore Tax Treaty which provides, viz: "ARTICLE 7 "Business Profit "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 or has carried 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 in that permanent establishment." Considering that the aforementioned services will be rendered for less than six (6) months, Biscay does not have a permanent establishment in the Philippines to which the contract fees are attributable. Such being the case, the contract fees to be received by Biscay from Placer will not be subject to the Philippine income tax and consequently to the withholding tax prescribed under then Section 25(b)(1) of the Tax Code [now Section 28 (B)(1) of the Tax Code of 1997]. (BIR Ruling Nos. 566-88 dated November 29, 1988; DA 161-96 dated May 3, 1996) 2. Pursuant to Section 4.99-1 of Revenue Regulations No. 7-95, any person who, in the course of his trade or business, sells, barters, exchanges or leases goods or properties, or renders services, and any person who imports goods shall be subject the value added tax (VAT) imposed in Sections 106 to 108 of the Code. Such being the case, Biscay is subject to VAT. However, although Biscay will be required to secure a Taxpayer Identification Number (TIN) and register as a VAT taxpayer, it remains a non-resident foreign corporation without a permanent establishment in the Philippines. The issuance of a TIN to a non-resident foreign person/corporation is not conclusive as to the presence of a "permanent establishment" in such Contracting State as defined in Article 5 of the RP-Singapore Tax Treaty. 3. Pursuant to Section 4.102-1(b) of Revenue Regulations No. 7-95, " the VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee . The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee ." (Emphasis supplied) Accordingly, your opinion that Placer, being the lessee of Biscay for the dredging services it rendered, shall be responsible for the payment of VAT on said services in behalf of Biscay by filing a separate VAT declaration/return and the said VAT declaration/return can be used by your client, Placer, as evidence in claiming input tax credit, is hereby confirmed. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) [BIR Ruling No. 49-96 dated April 11, 1996] 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. LLpr Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group