Exemption from Philippine Income Tax and Consequently to the 35% Withholding Tax

February 15, 1989 BIR RULING NO. 022-89 25 000-00 022-89 Gentlemen : This refers to your letter dated December 20, 1988 requesting confirmation of your opinion to the effect that the income to be derived by a Japanese-owned shipping firm from Shell Gas (Philippines), Inc. (SGPI) and/or Pilipinas Shell Petroleum Corporation (PSPC) for delivering liquefied petroleum gas (LPG) from its storage at Tabangao, Batangas to other domestic locations is not subject to Philippine income/withholding tax under the RP-Japan Tax Treaty. cdtech It is represented that there were disruptions in the operations in the operation of both the Caltex and PNOC refineries which gave rise to a temporary shortage of LPG for their customers; that the shortage can be supplied by SGPI/PSPC but the lack of suitable LPG tankers poses a big constraint on your ability to service the requirements of PNOC and Caltex; and that to remedy the situation, SGPI or PSPC plans to charter a Japanese-owned LPG vessel which regularly brings in the LPG imports of SGPI to deliver the LPG requirements of the other two oil companies for a period of less than six (6) months within which the temporary shortage will have been solved. In reply thereto, please be informed that your opinion is hereby confirmed. Paragraph (1), Article 7 of the RP-Japan Tax Treaty provides as follows: "Article 7 "(1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting 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 that other Contracting State but only so much of them as is attributable to that permanent establishment." Moreover, Article 5(1), (2) and (3) of the said treaty provide, viz: "Article 5 "(1) For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term "permanent establishment" includes especially: (a) a store or other sales outlet; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a warehouse; (g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. "(3) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. xxx xxx xxx Based on the foregoing facts, it cannot be said that the Japanese-owned shipping firm has a permanent establishment in the Philippines. Such being the case, the payment to be made by SGPI and/or PSPC to it are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 25(b)(1) of the Tax Code, as amended. However, since the aforesaid fees are paid for service, i.e., delivering liquefied petroleum gas (LPG) from Tabangao, Batangas to other domestic locations, rendered in the Philippines, said Japanese firm is subject to the value-added tax pursuant to Section 102(a) of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner