BIR Ruling [DA-376-98]

August 20, 1998 BIR RULING [DA-376-98] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Mr . J . A . Osana Partner, Tax Division Gentlemen : This refers to your letter dated June 23, 1998 stating that Keller Grundbau GmbH (Keller) is a non-resident foreign corporation organized and existing under the laws of the Federal Republic of Germany, with principal office address at Kaiserleistrasse 44, D-63067 Offenbach, Germany; that from January 25, 1998 to April 15, 1998, Keller undertook the installation of stone columns of the Sta. Rita Power Station Project in Batangas in accordance with the Subcontractors General Conditions Contract; that said agreement was entered into with McConnel Dowell Philippines, Inc., a corporation organized and existing under the laws of the Philippines with principal address at Suite 706, Richville Corporate Center 1314, Commerce Avenue Extension, Madrigal Business Park, Alabang, Muntinlupa, Metro Manila; and that in accordance with the contract, the installation of stone columns of the Sta. Rita Power Station Project lasted for a period of less than six months. cdt Based on the foregoing, you are requesting confirmation of your opinion that since Keller has no permanent establishment in the Philippines, its business profits derived in the Philippines are not subject to Philippine income tax and consequently to the withholding tax under the RP-West Germany Tax Treaty. In reply, please be informed that paragraph (1), Article 7 of the RP-West Germany 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 so much of them as is attributable to that permanent establishment." "ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this agreement, the term "permanent establishment" means 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 warehouse, in relation to a person providing storage facilities for others; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months. xxx xxx xxx" Considering that Keller does not have a permanent establishment in the Philippines to which its business profits/income is attributable, since its services will be for a period of less than six months as shown in Appendix "B" of the Sub Contractors General Conditions, the income earned by Keller in connection with the project shall not be subject to Philippine income tax and consequently, to any withholding tax in accordance with the RP-West Germany Tax Treaty. (BIR Ruling No. 028-90) However, payments to Keller for the services rendered in the Philippines shall be subject to 10% Value-Added Tax pursuant to Section 105 of the Tax Code of 1997. 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)