BIR Ruling [DA-233-96]

July 9, 1996 BIR RULING [DA-233-96] Alba Ledesma & Co. 7th Floor, Don Chua Lamko Bldg. H.V. dela Costa St. cor. Alfaro St. Salcedo Village, Makati City Gentlemen : This refers to your letter dated March 13, 1996 stating that Philippine Telegraph & Telephone Corporation (PT & T), a domestic corporation will enter into a lease contract with Pacific Atlantic Systems Leaning (PASL), a non-resident foreign corporation not doing business in the Philippines of Scottsdale, Arizona U.S.A.; and that under the contract of lease, PT & T will rent pay telephone equipments at a cost of US$8,699,350.00 payable in ninety six (96) months at US$329,125.00 per quarter in advance; and that PASL has no permanent establishment in the Philippines. cdta In connection therewith, you are requesting confirmation of your opinion that the remittance by PT & T of rental payments to PASL is exempt from the withholding tax under the RP-US Tax Treaty. In reply thereto, please be informed that paragraph (1) Article 8 of the RP-Treaty provides as follows: "Article 8 BUSINESS PROFITS "(1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment" Moreover, Article 5(1) and (2) of said treaty provides, viz.: "Article 5 PERMANENT ESTABLISHMENT (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contacting States engages in a trade or business. (2) The term "fixed place of business" includes 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; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183; and (j) The furnishing of services, including consultancy services, by a 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." Considering that PASL has no permanent establishment in the Philippines to which its business profits/income are attributable, your opinion that the remittance by PT & T of its rental payments for the pay telephone equipments to PASL is not subject to Philippine tax under Section 25(b)(4) in relation to Section 50, both of the Tax Code, as amended, and consequently to the withholding tax is hereby confirmed. (BIR Ruling No. 426-93 dated October 29, 1993) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)