BIR Ruling [DA-458-99]

August 11, 1999 BIR RULING [DA-458-99] Puyat Jacinto & Santos 12/F Manilabank Building 6772 Ayala Avenue, Makati City Attention: Atty . Regina P . Jacinto Gentlemen : This refers to your letter dated March 12, 1999 requesting on behalf of your client, Kohn Pedersen and Fox (KPF) , for a ruling that the payments made by Capital Consortium Inc. (CCI) to KPF for architectural design services wholly rendered outside of the Philippines are not subject to Philippine income tax pursuant to the RP-US Tax Treaty. prcd It is represented that, KPF is a non-resident foreign architectural firm organized and existing under the laws of the State of New York, United States of America; that CCI is a domestic corporation organized and existing under the laws of the Republic of the Philippines; that KPF was engaged by CCI to render professional architectural services; that the architectural services include the preparation of conceptual design and schematic design and plans; that all services rendered by KPF are performed by its architects and personnel in New York; that KPF's visits to the Philippines is limited to site inspections, coordination with engineers and other professionals and board presentations, in relation to the preparation of and approval of the project's plans; that KPF's visits to the Philippines is limited to an average of 5 day man trips (number of days includes travel time) which shall in no event exceed the maximum limitation required under the RP-US Tax Treaty to exceed an aggregate period of 183 days; that KPF has no permanent establishment nor does it intend to set up one in the Philippines; that on July 7, 1997, KPF entered into an Architectural Design and Consultancy Agreement (Agreement) with CCI; that under the Agreement, CCI engaged the architectural consultancy services of KPF for a limited scope of the project for conceptual design; that CCI has engaged the services of a local architectural firm for the implementation and execution of KPF's plans, incorporating all requirements of Philippine laws and regulations; that the local architectural firm will consolidate all consultancy work and oversee construction of the project; that on October 30, 1998, KPF entered into another Architectural Design and Consultancy Agreement (Agreement 2); that under Agreement 2, KPF will provide the schematic design work for CCI; that under the same conditions, all services will be done in New York while visits to the Philippines will be limited to consultation with CCI and presentation of the plans for approval. In reply, please be informed that paragraph (1), Article 8 of the RP-US Tax 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. xxx xxx xxx" 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 Contracting States engages in a trade or business. "(2) The term fixed place of business includes but is not limited to: a) A seal 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 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." Under the aforequoted provisions of the RP-US Tax Treaty, KPF does not have a permanent establishment in the Philippines to which its business profits/income is attributable, since the services covered by the two (2) Agreements will be rendered outside the Philippines. Thus, the payments made by CCI for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) in relation to Section 57(A) of the Tax Code of 1997. (BIR Ruling No. 426-93, dated October 29, 1993) 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 By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)