BIR Ruling [DA-438-99]

July 29, 1999 BIR RULING [DA-438-99] PD 1354, 28 (B) (4), 25 (E), 161-98 VAT Ruling No. 516-88 Laya Mananghaya & Co. 23rd Floor, Antel 1000 Corporate Center Valero corner Sedeno Streets Salcedo Village, Makati City Attention: Mr. Zayber B. Protacio Tax Principal Gentlemen : This refers to your request, in behalf of your client, Alpha Offshore Drilling Services (Philippine Branch) , (for brevity, AODS), for confirmation of the following opinions 1. As subcontractor to a service contract for petroleum operations in the Philippines, AODS is liable only to an 8% final tax on its gross income derived from such contract, which amount shall be deducted, withheld and paid by the service contractor. On such income, AODS can request Shell Philippines Exploration B.V., (for brevity, SPEX), the service contractor, for a withholding tax statement at the time it receives the income payment, and subsequently, shall file an Annual Information Return only, duly supported with Audited Financial Statements; 2. The lease by AODS of the oil-rig M/V FALCON from a nonresident foreign corporation-lessor is subject to the final withholding tax of 7.5% under Section 28(B)(4) of the NIRC, based on the gross rental fees to be paid by AODS to said lessor of the equipment; 3. The salaries and other emoluments of the personnel and crew members who are permanent residents of a foreign country, but who are seconded to AODS, the subcontractor of a service contract on petroleum operations in the Philippines, are subject to the 15% final tax, either under Section 2 of PD 1354 or Section 25(E) of the NIRC; 4. AODS, in consonance with previous rulings, is exempt from the payment of any value-added tax; and, 5. Finally, Alpha Offshore Drilling Services (Philippine Branch) is subject only to the 8% final tax under Presidential Decree No. 1354, which is a tax imposed in lieu of all national and local taxes, including the 15% branch profits remittance tax under Section 28(A)(5) of the NIRC. Based on your representations, an Offshore Drilling Contract was executed by and between the original service contractor, Occidental Philippines, Inc. , a California corporation, and Atwood Oceanics Pacific Ltd. (for brevity, "AOPL"), the original subcontractor on January 29, 1997. AOPL is a corporation created under the laws of the Cayman Islands and is a subsidiary of Atwood Oceanics, Inc. , a US corporation that is based in Houston, Texas. It is further represented that pursuant to all the requirements of such Offshore Drilling Contract , AOPL obligated itself, as an independent contractor, to drill, complete or abandon offshore well(s); that it has a drilling unit and all necessary spare parts and supplies required to perform the work; that its equipment is in good working order; and, that it has fully trained and knowledgeable personnel capable of performing the work required of it under the said Contract. Furthermore, AOPL, as an independent contractor, exercised the right to control the manner and means of accomplishing the operations so that on January 19, 1995, it entered into an Assignment and Assumption Agreement by and between AODS whereby the former's offshore drilling rig FALCON was to be time chartered bareboat to AODS. In the meantime, Occidental Phil., Inc. , the original service contractor, has likewise assigned its obligations as such contractor to Shell Philippines Exploration B.V. (for brevity, SPEX). It is your representation also that for present purposes, AODS is the subcontractor, while SPEX is the service contractor; and further, that AODS is a subsidiary of Eagle Oceanics , which in turn is a subsidiary of Atwood Oceanics, Inc. Penultimately, it is your representation that in pursuance of the service contract and as part of the Time Charter Agreement between AOPL and AODS, AOPL shall lease M/V Falcon bareboat, and shall second to AODS the necessary personnel for the AODS undertaking. Finally, you state that AODS is a branch office and a subcontractor that is engaged in providing offshore drilling services for exploratory and developmental oil and gas wells. Based on your representations, please be advised of our opinions as follows: 1. As subcontractor, AODS is subject to an 8% final tax, based on its gross income, derived from its contract, and such tax shall be in lieu of all taxes, both local and national . The liability for the payment of the 8% final tax on the gross income derived by AODS, the present subcontractor, rests primarily on SPEX as the payor/withholding agent. The amount of income withheld by the withholding agent is constituted as a full and final payment of the income tax due from AODS on the said income. AODS shall nevertheless file an Annual Information Return, duly supported by Audited Financial Statements. For this purpose, it can request for a Withholding Tax Statement (BIR Form 2306) to be issued by SPEX simultaneously with the income payment. On the other hand, SPEX, not AODS , shall file a monthly and an annual Information Return of Income Tax Withheld at Source (BIR Forms 1601 and 1604) within ten days following the month of withholding and on or before January 31 of the following year in which payments were made, respectively. Section 1 of Presidential Decree No. 1354 provides as follows: "Every subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operation in the Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local: Provided, however, that any income received from all other sources within and without the Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign subcontractors shall be subject to the regular income tax under the National Internal Revenue Code. The term "gross income" means all income earned or received as a result of the contract entered into by the subcontractor with a service contractor engaged in petroleum operations in the Philippines under Presidential Decree No. 87." Moreover, Section 3 of the same PD 1354 states in part that "Manner of collecting the tax. (a) Every service contractor shall deduct, withhold, and pay the tax imposed in Section 1 of this Decree from the amounts paid by the service contractor to the subcontractor under the contract entered into by and between them in the same manner and subject to the same conditions as provided in Section 54 [now Section 57] of the National Internal Revenue Code." Accordingly, Section 2.57.(A) of Revenue Regulations No. 2-98, which implements Section 57 of the Tax Code, provides that the amount of income withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. The payee is not required to file an income tax return for the particular income. Section 2.58.(B) of the same Revenue Regulations 2-98 further allows the payee to request for a Withholding Tax Statement (BIR Form 2306) at the time that it receives the income payment from the payor. With respect to such income payments, the payor shall file a monthly return of withheld taxes (BIR Form 1601) within ten days following the month of withholding except for taxes withheld for December which shall be filed on or before January 25 of the following year; and, an annual information return (BIR Form 1604), on or before January 31 of the following year in which payments were made. (Sections 2.58.(A).(2) and 2.58.(C), Revenue Regulations 2-98) On the Other hand, the payee (in this case, AODS) must nevertheless file an Annual Information Return, duly supported by Audited Financial Statements, on its income derived in the Philippines, though already subjected to a final withholding tax. 2. Rental fees paid by AODS to AOPL are subject to a final withholding tax of 7.5% . In this respect, Section 28(B)(4) of the Tax Code clearly provides that the rentals, charters and other fees derived by a nonresident foreign corporation-lessor of machineries and other equipment are subject to a final withholding tax of 7.5% of the gross rentals or fees. On this basis and in relation to Section 57 of the Tax Code, AODS is required to withhold a final tax of 7.5% of gross rentals payable by it to the nonresident foreign corporation-lessor for the bareboat lease of oilrigs necessary for its business operations. 3. The salaries and other emoluments of the personnel and crew members hired to render service in pursuance of the subcontract are subject to the 15%, which shall be withheld by AODS and remitted to the BIR . Under section 2 of PD 1354 and section 25(E) of the Tax Code, the salaries, wages, compensations, remuneration and other emoluments of the personnel ( i.e., shore-based ) and crew members who are all nonresident alien individuals seconded to the Philippine branch (AODS, as you represented) in pursuance of the subcontract are subject to a single 15% final tax only. 4. AODS is exempt from payment of any value-added tax . It is now established that petroleum subcontractors' gross receipts for services paid by the petroleum service contractors are exempt from the payment of value-added tax, based on FIRB Resolution No. 19-87. VAT Ruling No. 516-88 of the BIR is categorical in its statement that "Under PD 1354, the gross income of subcontractors and alien employees of service contractors and subcontractors engaged in petroleum operations in the Philippines are exempt from all taxes ( VAT included ), except the 8% final income tax. This preferential tax treatment privilege was repealed by EO 93 which withdrew all tax and duty incentives. FIRB Resolution No. 19-87, however, restored the tax and duty exemption to subcontractors and petroleum contractors, subject to the terms and conditions of PD 1354." This Office declared in the quoted Ruling that a PNOC subsidiary, acting as a subcontractor to petroleum service contractors, was exempt from VAT and was not required to incorporate VAT on its billings to all petroleum service contractors it transacts with. Accordingly, we take cognizance of the Court of Tax Appeals decision in the case of Industrial Inspection (Int'l.) Incorporated v. Liwayway Vinzons-Chato , (CTA Case No. 5152, May 19, 1997), that "The gross receipts for services rendered for Alcorn Production (Phils.), Inc., an entity contracted by the Philippine Government to drill oil wells in strategic sites within the Philippine territory is tax exempt. This position is anchor on VAT Ruling 516-88 (Exh. H, p. 167, CTA rec.), dated November 16, 1988, which in portion states that: 'In reply, please be informed of the following: 1. By virtue of FIRB Resolution No. 19-87, PNOC Marine Corporation is exempt from VAT, and should not incorporate VAT on its billings to Alcorn (Production) Philippines, Inc. and to all other petroleum service contractors it transacts with.' The said exemption is based upon the Fiscal Incentives, dated June 24, 1987, restoring the tax and duty exemption to subcontractors and petroleum service contractors. The petitioner, submitting that it falls under the category of a subcontractor, is exempt from the payment of 10% VAT for services rendered for Alcorn Philippines." The decision further lays down that "[p]etitioner, as subcontractor of Alcorn Production (Phils.), Inc., an entity engaged in petroleum operation in the Philippines, is already subject to the 8% final income tax. Therefore, this tax shall be paid in lieu of all taxes (including the VAT) pursuant to PD 1354. This was strengthened by VAT Ruling No. 516-88, November 16, 1988 . . . and OEA Circular No. 80-01-01, December 22, 1989, . . . holding that petroleum subcontractors are exempt from the payment of the VAT from its gross receipts for services paid by the petroleum subcontractors. In all aspects, petitioner should not be held liable for the VAT for services rendered to Alcorn, being a contractor engaged in petroleum operations in the Philippines." 5. AODS is not subject to the 15% branch profits remittance tax . AODS is not subject to the branch profits remittances considering that all the income of the branch office comes from its subcontracting agreement with the Atwood Oceanic Pacific Ltd. and considering further that the branch office, as such subcontractor, is already subject to the 8% final income tax, which is in lieu of all taxes, under PD 1354. ESAHca In this regard, this Office already had the occasion to similarly rule in BIR Ruling No. 161-98, dated November 18, 1998, that the 5% final tax imposed upon a branch office's gross income was in lieu of all other national and local taxes, including the 35% corporate income tax and 15% branch profit remittance tax . 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, Commissioner of Internal Revenue (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)