Exemption from the Philippine Income Tax in Accordance With the RP-US and RP-Canada Tax Treaties

February 1, 1988 BIR RULING NO. 014-88 24 000-00 014-88 Gentlemen : This refers to your letter dated January 19, 1988 requesting confirmation of your opinion to the effect that the payments to be made by your client, Procter & Gamble Philippines, Inc. (P & G) to Innovation Associates Inc. of U.S. (IA-US) and Innovation Associates, Inc. of Canada (IA-Canada) consisting of service fees and reimbursements of actual expenses are not subject to Philippine income tax in accordance with the RP-US and RP-Canada Tax Treaties. It is represented that IA-US and IA-Canada are foreign corporations engaged in the business of conducting seminars; that P & G entered into an agreement with IA-US and IA-Canada whereby the latter will conduct a leadership and mastery course for P & G executives in the Philippines for three (3) days; and that payments to IA-US and IA-Canada shall consist of the fees and reimbursement of actual expenses. cdt In reply, thereto, I have the honor to inform you that paragraph (1), Article 8 of the RP-US Tax Treaty and paragraph 1, Article VII of the RP-Canada Tax Treaty provide, 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." "ARTICLE VII 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 profit of the enterprise may be taxed in the other state but only so much of them as is attributed to: "(a) that permanent establishment; or . . . Moreover, Art. 5(1) of the RP-US Tax Treaty and Art. V(1) of the RP-Canada Tax Treaty define "permanent establishment" 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 state engages in a trade or business" "ARTICLE VI Permanent Establishment "1. For the purpose 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." Considering that IA-US and IA-Canada will conduct the seminar for P & G executives only for three (3) days, IA-US and IA-Canada do not have a permanent establishment in the Philippines to which the fees/business profits are attributable. Such being the case, the fees/business profits IA-US and IA-Canada will derive from conducting a seminar in the Philippines are not subject to Philippine income tax. Moreover, the reimbursement of actual expenses (such as air fare and sundry expenses) to be paid by P & G to IA-US and IA-Canada are not likewise subject to Philippine income tax. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner