BIR Ruling [DA-160-98]

April 22, 1998 BIR RULING [DA-160-98] Castro Cadiz & Carag Suite 6B, Eisenhower Condominium No. 7 Eisenhower Street 1500 Greenhills, San Juan Metro Manila Attention: Atty . Othelo C . Carag Gentlemen : This refers to your letter dated January 12, 1998 requesting for a ruling on the tax implications of the rental income to be derived by IDHI Netherlands Antilles from IDHI Ports & Shipping Inc. cdt It is represented that IDHI Netherlands Antilles 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 employee or personnel in the Philippines; that it entered into bareboat charter agreements with IDHI Ports & Shipping Inc., a corporation duly organized and existing under the laws of the Republic of the Philippines, for the lease of Jamura V, VI and VII for a period of two (2) years; and that the said bareboat charter agreements were duly registered with and approved by the Maritime Industry Authority. In connection therewith, you now request confirmation of your opinion that "1. IDHI Ports & Shipping Inc. is not required to withhold any tax on the rental payments on behalf of IDHI Netherlands Antilles, considering that the business profits such as rental income derived by IDHI Netherlands Antilles a non-resident foreign corporation with no permanent establishment in the Philippines, are exempt from taxes under the RP-Netherlands Tax Treaty; and 2. IDHI Ports & Shipping Inc. is liable to withholding the payment of value-added tax (VAT) from the rental fees on behalf of IDHI Netherlands Antilles only upon payment or remittance of said rentals by IDHI Ports & Shipping Inc. to IDHI Netherlands Antilles regardless of the accrual of the rentals as business expense in the books of IDHI Ports & Shipping Inc. and as income in the books of IDHI Netherlands Antilles." 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 connected project) for a period or periods exceeding in the aggregate 183 days within any twelve month period. xxx xxx xxx Considering that IDHI Netherlands Antilles does not have a "permanent establishment" in the Philippines as the term is defined above, the rental income which it will receive from IDHI Ports & Shipping, Inc. for the lease of Jamura V, VI and VII, are exempt from the 4.5% tax imposed under Section 28(B)(3) of the Tax Code of 1997. Accordingly, IDHI Ports & Shipping, Inc. is not required to withhold any tax on such rental payments on behalf of IDHI Netherlands Antilles. (BIR Ruling No. 192-91 dated September 17, 1991) However, the said rental payments to be made by IDHI Ports & Shipping, Inc. to IDHI Netherlands Antilles for the lease of Jamura V, VI and VII 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 IDHI Ports & Shipping, Inc. to IDHI Netherlands Antilles. Being the lessee, IDHI Ports & Shipping, Inc. shall be responsible for the payment of VAT on said rental fees on behalf of IDHI Netherlands Antilles, only upon payment/remittance of said rentals to IDHI Netherlands Antilles and not upon accrual of the rentals in the respective books of IDHI Ports & Shipping, Inc. as lessee and IDHI Netherlands Antilles 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) cdtech 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)