BIR Ruling [DA-194-98]

May 15, 1998 BIR RULING [DA-194-98] Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Atty . George J . Lavadia Principal Gentlemen : This refers to your letter dated June 10, 1997 requesting for a confirmation of your opinion that the lease payments of a Philippine branch of a U.K. corporation to a non-resident foreign Singaporean corporation are not subject to Philippine income tax pursuant to Article 7 of the RP-Singapore Tax Treaty. cdti It is represented that your client, GEC Alsthom Turbine Generators Services Ltd. (GEC), is the branch office in the Philippines of GEC Alsthom Turbine Generators Services Ltd., a corporation duly organized and existing under the laws of the United Kingdom; that Aggreko (Singapore) Pte. Ltd. (Aggreko) is a corporation organized and existing under the laws of Singapore which is not engaged in trade or business in the Philippines and has otherwise no permanent establishment in the Philippines; that GEA entered into a lease agreement with Aggreko; and that under the agreement, GEC will lease from Aggreko generators of various sizes and other auxiliary equipments at a pre-agreed rental rate. In reply, please be informed that Article 7 of the RP-Singapore Tax Treaty provides that: "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 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 thereof as is attributable to that permanent establishment. xxx xxx xxx" Moreover, Article 5(1) and (2) of the said treaty provides, viz: "ARTICLE 5 PERMANENT ESTABLISHMENT "1. For 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" shall include especially 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; LibLex 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 resident of one of the Contracting States 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." From the foregoing, this Office is of the opinion and so holds that the lease payments of GEC to Aggreko, which has no permanent establishment in the Philippines, are not subject to Philippine income tax including the 7.5% final withholding tax imposed under Section 25(b)(4) (now Section 28(B)(4) of the Tax Code of 1997) in relation to Sections 50 and 51 of the Tax Code, as amended. (now Sec. 57(A) and (B) of the Tax Code of 1997) Nevertheless, beginning January 1, 1996, the lease payments of GEC to Aggreko shall be subject to the 10% value-added tax (VAT) imposed under then Section 102(a)(2), in relation to then Section 99 of the Tax Code, as amended. Your client, GEC, shall be responsible for the payment of the VAT on such rentals on behalf of Aggreko by filing a separate VAT declaration/return for this purpose. The said VAT declaration/return can be used by GEC as evidenced in claiming input tax credit. (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. LLjur Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group