BIR Ruling [DA-161-96]

May 3, 1996 BIR RULING [DA-161-96] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. M.V.A. Villaluz Gentlemen : This refers to your letter dated January 5, 1996 representing that Brown & Root Far East Engineers Pte. Ltd. (Brown Ltd.) is a company organized and existing under the laws of Singapore; that it has entered into a service contract with a Philippine corporation for purposes of FPSO II Removal Project, in the Philippines; that the service to be rendered is the removal of the Alcorn Floating production facility offshore Philippines: that mobilization/demobilization of the tugs and related equipment from/to Singapore, the offshore work in the Philippines, and the towing of the FPSO to Manila Bay will take a maximum of 25 days; that for the said project, the company shall be paid service fees and as such earn income for the duration of the contract; and that since the duration of the contract is for only 25 days, no permanent establishment (PE) in the Philippines is thereby created. You now request for a ruling that the income to be received by Brown Ltd. for services to be rendered in the Philippines for only 25 days is exempt from the Philippine income tax, and consequently from the withholding tax since Brown Ltd. has no PE in the Philippines. In reply, please be informed that paragraph (1), Article 7 of the RP-Singapore Tax Treaty provides as follows: "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 them as is attributable to that permanent establishment." cSTHAC Moreover, Article 5 (1) and (2) of the said treaty provide, viz : "Article 5 "PERMANENT ESTABLISHMENT "1. For the purpose of this Convention, the term "permanent establishment" means fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" includes specially 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; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and j) The furnishing of services including consultancy services, by a resident of one of the Contracting State 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. AICHaS xxx xxx xxx" Considering that the aforementioned services will be rendered for less than six months, Brown Ltd. will not have a permanent establishment in the Philippines to which the service fees would be attributable. Such being the case, the service fees to be received by Brown Ltd. from the Philippine corporation will not be subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 25 (b) (1) of the Tax Code, as amended. (BIR Ruling No. 566-88 dated November 29, 1988) HITEaS Very truly yours, (SGD.) ALICIA P. CLEMENO Assistant Commissioner (Legal Service)