Request for Exemption of Societe Francaise d'Studes et de Realisations de Transports Urbains (SOFRETU) and Its Experts from Payment of All Taxes, Duties, Fees or Levies that Should be Imposed on the Consultants During the Duration of Their Contract

February 14, 1995 BIR RULING NO. 031-95 28 (b)-(6) 102 000-00 031-95 Department of Transportation & Communications Philcomcen Bldg., Ortigas Avenue Pasig, Metro-Manila Gentlemen : This refers to your letter dated October 6, 1994 stating that in connection with the implementation of the EDSA LRT Project, you have engaged the services of Societe Francaise d'Studes et de Realisations de Transports Urbains (SOFRETU) as your technical consultants; that SOFRETU, a French company and a subsidiary of the Paris Transit Authority, shall provide you with the technical support and expertise which is vital in the implementation of the Project; that the NEDA Guidelines for the Hiring of Consultants for Government infrastructure projects provide that you may be allowed to seek exemption from all taxes, duties, fees, levies and other impositions under the laws and regulations of the Philippines; and that the said provision was incorporated in your agreement with SOFRETU. aisadc Based on the foregoing representations, you are now requesting, in effect, for a ruling exempting SOFRETU and its experts from the payment of all taxes, duties, fees or levies that should be imposed on the consultants during the duration of their contract with you. It is noted that under Article 13.2 of the Deed of Agreement you executed with SOFRETU the duration of the services will be thirty-three (33) months for the construction period and five (5) years for the operations period. In reply, please be informed that Article 6 paragraph 2(i) of the RP-French Republic Tax Treaty provides, viz: "Article 5 "1. . . . . "2. The term "permanent establishment" shall include especially: "a) . . . xxx xxx xxx "i) the furnishing of services including consultancy services by an enterprise through employees or other personnel, where activities that by nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than six months within any twelve-month period." In connection therewith, Article 7, paragraph 1 of the RP-French Republic Tax Treaty provides, viz: "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 or has carried 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 15 paragraph 1 of the RP-French Republic Tax Treaty provides, viz: "Article 15 " DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Article 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State." llcd Such being the case, and since SOFRETU falls within the purview of a permanent establishment as defined in Article 5 paragraph 2(i) of the RP-French Republic Tax Treaty, the business profits it will derive as your technical consultant in the implementation of the EDSA LRT Project are subject to the 35% income tax imposed under Section 25(a) (1) of the Tax Code, as amended. On the other hand, the salaries, wages and other similar remuneration derived by SOFRETU's personnel (its experts) are likewise subject to the income tax imposed under Section 22(a) (1) of the Tax Code, as amended, and consequently, to the withholding tax prescribed under Section 72 of the Tax Code, as amended. Moreover, under Section 102 of the Tax Code, as amended, SOFRETU shall be subject to the 10% value-added tax on its gross receipts from consultancy services pursuant to the Deed of Agreement you entered into with the said company. Accordingly, your request is hereby denied for lack of legal basis. LLphil Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue