Exemption from the Payment of Philippine Income Tax and Withholding Tax — Payments Received by Siemens

March 13, 1990 BIR RULING NO. 028-90 25 000-00 028-90 Gentlemen : This refers to your letter dated October 14, 1988 requesting confirmation of your opinion to the effect that payments received by your client, Siemens AG (Siemens) for services rendered to the Philippine Long Distance Telephone Company (PLDT) are not subject to Philippine income tax and consequently to any withholding tax under the RP-West Germany Tax Treaty. cdt It is represented that Siemens in a corporation duly organized and existing under and by virtue of the laws of the Federal Republic of Germany; that in the implementation of its Ortigas Digital/Local Tandem Exchange Project, PLDT has agreed to purchase certain telecommunications/transmission equipment from Siemens; that Siemens shall also be responsible for designing, supervising the installation, test, correction, of faults, technical and maintenance assistance; and that these services will be for only a period of six months. In reply thereto, I have the honor to inform you that paragraph (1), Article 7 of the RP-West Germany Tax Treaty provides as follows: "Article 7 " 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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 " PERMANENT ESTABLISHMENT "1. For the purposes of this agreement, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" shall include especially: "a. a place of management; "b. a branch; "c. an office; "d. a factory; "e. a workshop; "f. a warehouse, in relation to a person providing storage facilities for others; "g. a mine, quarry or other place of extraction of natural resources; "h. a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months. "3. . . . "4. . . . "5. . . . "6. . . . "7. . . . Considering that Siemens AG does not have a permanent establishment in the Philippines to which its business profits/income is attributable, since its services will be for a period of only five months as reflected in the "Proposed Time Schedule for Transmission-Equipment" submitted by counsel for Siemens AG, payments to be received by it from PLDT are not subject to Philippine income tax and consequently to the withholding tax prescribed under Section 25(b)(1) of the Tax Code, as amended. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner