Philippine Income Tax Exemption on the Rentals of Steel Moulds

January 28, 1987 BIR RULING NO. 025-87 37-a 000-00 025-87 Gentlemen : This refers to your letter dated November 11, 1986 requesting a ruling to the effect that rentals of steel moulds being paid by Dart Industries (Philippines) Inc. (DPI) to Dart Industries, Inc. (DII) a non-resident foreign corporation is not subject to Philippine income tax pursuant to Article 8, paragraphs (1) and (6) of the RP-US Tax Treaty. It is represented that DII a corporation organized and existing under the laws of the State of Delaware, U.S.A. with offices at Blackstone, Massachusetts, has no office or place of business in the Philippines; that DII leases to DPI still moulds to be used by the latter in the manufacture of plastic houseware products known as "tupperware"; and that under BIR Ruling No. 24-b-014-81-148-81 this Office ruled that rentals due to DII on the lease of the said still moulds are subject to a final withholding tax of 7 % pursuant to Section 24(b)(1)(vii) of the Tax Code, as amended. In reply thereto, I have the honor to inform you that Article 8, paragraphs (1) and (6) of the RP-US Tax Treaty provide, viz: "(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." casia xxx xxx xxx "(6) The term "business profits" means income derived from any trade or business whether carried on by an individual, corporation or any other person, or group of persons, including the rental of tangible personal (movable) property." The leasing by DII of steel moulds to DPI to be used by the latter in the manufacture of plastic houseware products does not give rise to a permanent establishment as defined in Article 5 of the aforesaid Tax Treaty. Such being the case, and since the aforementioned mould rentals are considered as "business profits" and that DII has no permanent establishment in the Philippines, under the above-quoted provisions of the Tax Treaty, the mould rentals paid by DPI to DII are taxable only in the United States where DII resides. Said rentals are not, therefore, subject to Philippine income tax imposed by Title II of the Tax Code. In other words, the aforesaid rentals are no longer subject to the 7 % final withholding tax imposed by the present provisions of Section 25(b)(4) [formerly Section 24(b)(1)(vii)] of the Tax Code (included in Chapter III, Title II, Tax Code), beginning January 1, 1983, the effective date of the RP-US Tax Treaty. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner