Tax Implications of a Contract between a Consortium and the NAPOCOR for the Operation and Maintenance of Power Barges Acquired by NAPOCOR for a 15-Year Term

February 14, 1995 BIR RULING NO. 023-95 25 (a) (1) 000-00 023-95 Punongbayan & Araullo 6th Floor, Vornida IV Bldg. Alfaro St., Salcedo Village 1200 Makati, Metro Manila Attention: Mr . L . N . Reyes Partner Gentlemen : This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI), all referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term. It is represented that NAPOCOR is a government-owned and controlled corporation with principal office address at NAPOCOR Office Building Complex, corner Quezon Avenue and Agham Road, Diliman, Quezon City; that BWSC is a corporation organized and existing under the laws of Denmark; that MES is a corporation organized and existing under the laws of Japan; that both BWSC and MES, the principal Consortium members, are non-resident foreign corporations; that MITSUI, although a member of the Consortium, does not have a major active role in the said Consortium, and its function is entirely that of providing financial advisory service for work done outside of the Philippines; that BWSC has been appointed by the Consortium as Coordination Manager to implement the terms of the Agreement; that in its capacity as Coordination Manager, it established a Philippine corporation wholly-owned by it named Burmeister & Wain Scandinavian Contractor Mindanao, Inc. ("BWSC-Mindanao"), which will subcontract the actual operation and maintenance of the Power Barges, as well as all other work under the Agreement that will necessarily have to be performed in the Philippines; that BWSC-Mindanao has a legal personality separate and distinct from the Consortium members and will be subject to ordinary Philippine corporate income tax calculated on the fees paid by the Principal Consortium members under the subcontract less the allowable deductions; that the principal Consortium members will be responsible for all the works that will be performed outside the Philippines; that NAPOCOR will pay directly to BWSC-Denmark, as Coordination Manager for the Consortium, all payments due under the Agreement; but the principal Consortium members will pay BWSC Mindanao for its services under the subcontract in the form of foreign currency inwardly remitted to the Philippines through the banking system. On the basis of the foregoing facts, you now request for our opinion on the following tax issues: "1. Whether or not the Consortium and its members will be subject to Philippine income tax and consequently to the withholding tax on its gross income from the Agreement; "2. Whether or not the Consortium will be subject to value added tax (VAT); and "3. Whether or not the gross receipts of BWSC-Mindanao are subject to zero percent VAT, if it will register as a VAT taxpayer. In reply thereto, please be informed as follows; 1. Under Section 25(b) of the Tax Code, as amended, non-resident foreign corporations are subject to Philippine income tax only with respect to their gross income received from all sources within the Philippines. Since the principal Consortium members will not have physical presence in the Philippines through a branch, an office or a fixed place of business, they will not derive any taxable income from sources within the Philippines. Accordingly, NAPOCOR will not be obliged to withhold any tax on the fees paid to the said Consortium members, i.e., BWSC Denmark and MES. cdta Furthermore, under the RP-Denmark Tax Treaty and the RP-Japan Tax Treaty, enterprises which are residents of Denmark and Japan are not taxable in the Philippines unless they carry on their business in the Philippines through a permanent establishment located therein and only if income is attributable to such permanent establishment. Both BWSC and MES have no permanent establishments in the Philippines. Under Articles II (l) (j) (v) and 5(g) of the Treaties of Denmark and Japan, respectively, a mere subsidiary corporation in the Philippines controlled by a foreign corporation does not constitute a permanent establishment of the foreign corporation within the Philippines. However, MITSUI, being a foreign corporation existing under the laws of Japan but which is locally represented by its Manila Branch with main office address at 27th Floor, Pacific Star Building, Makati Avenue, Makati, Metro Manila is subject to the Philippine corporate income tax under Section 25 (a) (l) of the Tax Code, the said branch constituting as its permanent establishment within the Philippines. 2. The Consortium is likewise not subject to VAT for services rendered in the Philippines because it is not engaged in any taxable sale of goods or services in the Philippines as specified under Sections 100 and 102 of the Tax Code. A non- resident foreign corporation not engaged in the taxable sale of goods or services in the Philippines is not subject to VAT. (BIR Ruling No. 59-89 dated April 7, 1989) 3. BWSC-Mindanao, being a duly registered corporation engaged in trade or business in the Philippines, is subject to ordinary Philippine corporate income tax. Its gross receipts from the services it renders to the Consortium shall, however, be subject to VAT even if it falls to register as a VAT taxpayer. On the other hand, if it chooses to register as such, and the consideration for such services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Banko Sentral ng Pilipinas, the aforesaid services shall be subject to zero-rate. (VAT Ruling No. 96-90 dated April 10, 1990) 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 and/or any of the requirements are not complied with, then this ruling shall be considered null and void. cdt Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue