BIR Ruling [DA-345-99]

June 14, 1999 BIR RULING [DA-345-99] Joaquin Cunanan & Co. 14th floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr . George J . Lavadia Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated September 2, 1997 requesting confirmation of your opinion to the effect that your client, Lindberg Philippines, Inc. (LPI), is exempt from Philippine income tax, particularly to the 7.5% tax on rentals of machineries and equipment from non-resident lessors under Section 28(B)(4) of the Tax Code of 1997 pursuant to the Philippine-Singapore Tax Treaty. It is represented that LPI is a corporation organized and existing under the laws of the Philippines; that it leased machineries and equipment from Lindeteves Engineering Pte Ltd. (LEPL), a non-resident corporation organized and existing under the laws of Singapore; that LEPL is primarily engaged in setting up power generating plants; that LEPL has no permanent establishment 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 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 or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that 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 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 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 LEPL has no permanent establishment in the Philippines, the payments by LPI to LEPL of rentals for the machineries and equipment are not subject to Philippine income tax and consequently to the 7.5% tax on gross recitals or fees imposed under Section 28 (B) (4) of the Tax Code of 1997. On the other hand, beginning January 1, 1996, payment to LEPL for rental income earned in the Philippines shall be subject to 10% value-added tax pursuant to Sec. 4.102-1 of Revenue Regulations No. 7-95. (BIR Ruling No. DA-487-98 dated November 11, 1998) prcd 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. (BIR Ruling No. 174-92 dated May 29, 1992) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal Enforcement Group)