BIR Ruling [DA-174-99]

March 22, 1999 BIR RULING [DA-174-99] Punongbayan & Araullo 6/F Vernida IV Bldg. Alfaro St., Salcedo Village Makati City Attention: Mr . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated October 1, 1998 requesting confirmation of your opinion that the technical support fees payable to your client, Pengurusan Lebuhraya (PLB) , a non-resident foreign corporation for services rendered outside the Philippines are not subject to income tax and consequently to the 34% withholding tax prescribed by Section 28(B)(1) in relation to Section 57(A) of the Tax Code of 1997. It is represented that on July 26, 1996, UEM-MARA together with the Public Estate Authority (PEA) entered into a concession agreement (Toll Operation Agreement) with the Toll Regulatory Board (TRB) whereby UEM-MARA and PEA will undertake to develop the Manila-Cavite Toll Expressways as a toll expressway; that on July 25, 1997, UEM-MARA entered into a Technical Support Services Agreement (TSSA) with your client, Pengurusan Lebuhraya (PLB) to provide technical support services for the construction works of Manila-Cavite Toll Expressway Project; that PLB is a corporation duly organized and existing under and by virtue of the laws of Malaysia with principal office at 6th Floor, Menara 2, Faber Towers, Jalan Desa Bahagia, Taman Desa, Off Jalan Kiang Lama 58100 Kuala Lumpur; that the TSSA provides that the technical support services to be performed by PLB consisting of engineering, planning and contract services are to be rendered outside the Philippines; and that site inspection which shall be done from time to time shall not exceed an aggregate period of more than six (6) months for the duration of the entire project. In reply, please be informed that Paragraph (1), Article 7 of the RP-Malaysia Tax Treaty provides as follows: "ARTICLE 7 "BUSINESS PROFITS "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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only on so much thereof as is attributable to that permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "ARTICLE 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Agreement, 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" shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce; (g) a farm or plantation; (h) a building site or construction, installation or assembly project which exists for more than 6 months." Considering that Pengurusan Lebuhraya (PLB) rendered services in the Philippines for a period of less than six (6) months and it does not have a permanent establishment in the Philippines to which its business profits/income are attributable, payments received by it under its contract with UEM-MARA are not subject to Philippine income tax and consequently to the 34% withholding tax prescribed by Section 28(B)(1) in relation to Section 57(A) of the Tax Code of 1997. (BIR Ruling No. DA-53-98 dated February 11, 1998) 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)