BIR Ruling [DA-698-99]

December 21, 1999 BIR RULING [DA-698-99] Ongkiko Kalaw Manhit & Acorda 4th Flr., Cacho Gonzalez Building 101 Aguirre Street, Legaspi Village Makati City Attention: Atty . Zayber B . Protacio Gentlemen : This refers to your request letter dated December 13, 1999 stating that your client, Atwood Oceanics Pacific, Ltd., (AOPL) is a corporation created under the laws of the Cayanan Islands; that on January 29, 1997, AOPL executed an Offshore Drilling Contract (Drilling Contract) with and between Occidental Philippines, Inc., a foreign national entity; that pursuant to al the requirements of such Drilling Contract, AOPL obligated itself, as an independent contractor, to drill, complete or abandon offshore well(s); that AOPL has represented that it has a drilling unit and all necessary spare parts and supplies required to perform the work, i.e., its equipment is in good working order and it has fully trained and knowledgeable personnel capable of performing the work required of it under such Drilling Contract; that on April 4, 1997, Occidental Phil. Inc., the original service contractor, has assigned its obligations as such contractor to Shell Philippines Exploration B.V. (SPEX); that effective December 11, 1997, AOPL assigned all of its contractual obligations under the Drilling Contract to Alpha Offshore Drilling Services, a petroleum service subcontractor with a Philippine branch office; that presently, AOPL intends to establish its own branch in the Philippines (AOPLPB) to effectively exercise its right to control the manner and means of accomplishing the Drilling Contract Obligations it had previously assigned to Alpha Offshore Drilling Contract work services. In connection therewith, you now request for confirmation of your opinion that "1. As subcontractor to a service contract for petroleum operations in the Philippines, AOPLPB 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, AOPLPB ca request SPEX, the service contractor,. On such income, AOPLPB shall file an Annual Information Return only, duly supported with Audited Financial Statements; "2. AOPLPB, on the basis of Section 34(F)(4), in relation to Section 34(F)(6), both of the Tax Code of 1997, shall be allowed to claim depreciation on the oil rig that AOPL shall assign to it for its use in its drilling activities in the Philippines; "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 AOPLPB, 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 Tax Code of 1997; llcd "4. AOPLPB, in consonance with previous rulings, is exempt from the payment of any value-added tax; and, "5. Finally, AOPLPB 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 Tax Code of 1997." In reply, please be informed as follows: 1. 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." LibLex In relation thereto, 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." There can be no uncertainty that as subcontractor, AOPLPB will be subject to the 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. However, the liability for the payment of the 8% final tax on the gross income derived by AOPLPB 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 AOPLPB on the said income, (see Sec. 2.57(A), Rev. Reg. No. 2-98). On the other hand, AOPLPB shall 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 not later than the 15th day of the fourth month following the close of its fiscal year. For this purpose, it can request for a Withholding Tax Statement (BIR Form 2307) to be issued by SPEX simultaneously with the income payment. (see Sec. 2.58(B), supra) 2. Section 34(F)(4) of the Tax Code of 1997 provides that an allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. . . . Moreover, Section 34(F)(6) of the said Code provides that in the case of a non-resident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. In the instant case, considering that the rig Arwood Falcon is located in the Philippines and the use thereof is directly related to its production of petroleum, the assignment of AOPL of its drilling rig to AOPLPB, its Philippine branch shall be allowed to claim depreciation as deduction from its gross income pursuant to Section 34(F)(4) and (6) of the Tax Code of 1997. 3. Section 25(E) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, provides that an alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Accordingly, the salaries, wages, compensations, remuneration and other emoluments of the personnel i.e., shore-based and crew members who are all non-resident alien individuals seconded to the Philippine branch in pursuance of the subcontract are subject to 15% final tax which shall be withheld by AOPLPB and remitted to the Bureau of Internal Revenue (BIR). 4. In BIR VAT-Ruling No. 516-88 dated November 16, 1988, this Office rules that "xxx xxx xxx "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 duly incentives. FIRB Resolution No. 19-87, however, restores the tax and duty exemption to subcontractors and petroleum contractors, subject to the terms and conditions of PD 1354." "Accordingly, 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. xxx xxx xxx" Corollarily, in Industrial Inspection (Int'l.) Incorporated vs. Liwayway Vinzon-Chato, CTA Case No. 5152, May 19, 1997, it was ruled 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 anchored on VAT Ruling 516-88 (Exh. II, p. 167, CTA rec.), dated November 16, 1988, which portion states that: "xxx xxx xxx "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." Based on the foregoing, it is the opinion of this Office 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. Such being the case, the gross receipts derived by AOPLPB, as petroleum subcontractor shall be exempt from payment of any value-added tax. 5. In BIR Ruling No. 161-98 dated November 18, 1998, this Office ruled that "xxx xxx xxx "In reply, please be informed that if as represented, the proposed Philippine branches of BSL, and BIL, which are both SBF enterprises will provide or render management and construction services, respectively within the SSEFZ, said branches of BSL, and BIL, are only subject to 5% final tax on their respective gross income earned in lieu of any and all other taxes. Accordingly, the same shall be exempt from any other national and local taxes, including but limited to 35% (now 34%) corporate income tax and 15% branch profit remittance tax, pursuant to Section 43 of the implementing rules and regulations of Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992. xxx xxx xxx" In applying the above-cited ruling by analogy in this particular case, AOPLPB shall not be subject to the 15% branch profits remittance tax considering that all the income of the branch office comes from the assignment of the contracting agreement from its head office, AOPL, 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. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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 (Local & Enforcement Group)