BIR Ruling [DA-206-99]

March 30, 1999 BIR RULING [DA-206-99] Castillo Laman Tan Pantaleon and San Jose 2nd-4th Floors, The Valero Tower Valero Street, Salcedo Village Makati City Attention: Atty . Ma . Victoria D . Sarmiento Gentlemen : This refers to your letter dated August 3, 1995 stating that your client, GE Power System, Inc. (GEPSI), a non-resident foreign corporation organized under the laws of Delaware, U.S.A., intends, on its own or in conjunction with non-resident consortium partners, to supply imported equipment and engineering plant design services to a domestic corporation (the " project company ") in connection with a power plant to be constructed under the Government's Build-Operate-Transfer (BOT) program, pursuant to a BOT Agreement between the "project company " and the National Power Corporation; and that the engineering services and technical documentation thereto will be performed abroad. In connection therewith, you now request confirmation of your opinion that GEPSI is not subject to Philippine income tax on its sale of equipment to the '" project company "; and that the fees to be remitted by the '" project company " to GEPSI for engineering design services and technical documentation are likewise not subject to Philippine income/withholding taxes. In reply thereto, please be informed that your opinion is hereby confirmed. Under Article 8 of the RP-US Tax Treaty, "Business profits of a resident of one of the contracting state shall be taxable only in that State unless the resident has a permanent establishment in the other contracting State." Since GEPSI is a United States corporation without a permanent establishment in the Philippines, it follows that the same is not subject to income/withholding taxes on its sale of imported equipment to the '" project company ." With regard to engineering design services and technical documentation, the same involve rendering of professional services. As such, since the services will be performed in the U.S., the fees to be remitted by the "' project company " to GEPSI are not subject to Philippine income tax and consequently to the 35% withholding tax, pursuant to then Section 36(c)(3), in relation to then Section 50(a) of the Tax Code, as amended. (BIR Ruling No. 221-89) Moreover, the aforementioned fee is not considered as rentals or royalties within the purview of then Section 36(a)(4) of the Tax Code, since there is no transfer into this country of technology, equipment or other property, where the payee has proprietary interest. Specifically, under sub-paragraph (e) thereof, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no such transfer of technology as the fee to be paid by the "' project company " to GEPSI is for the latter's engineering design services and technical documentation performed in the United State. Thus, the fee of GEPSI is not considered royalty, but constitutes compensation for labor or personal service performed without the Philippines. The fee is considered income from services without the Philippines pursuant to then Section 36(c)(3) of the Tax Code. Accordingly, and since GEPSI is non-resident foreign corporation, said fee is not subject to Philippine income tax. (BIR Ruling No. 093-89 dated May 2, 1989). 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, this ruling shall be considered null and void. cdta Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)