Rental Payments to be Made by Tetra Pak (Philippines), Inc. to Tetra Laval Credit Inc., A Non-Resident Foreign Corporation Subject to Philippine Income Tax pursuant to the RP-US Tax Treaty

April 11, 1996 BIR RULING NO. 049-96 28 (b) (6); 102 (a) (2) 000-00 049-96 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . F . G . Tagao Tax Division Gentlemen : This refers to your letter dated August 28, 1995 requesting in effect for a ruling confirming your opinion that rental payments to be made by your client, Tetra Pak (Philippines), Inc. (TPPI) to Tetra Laval Credit, Inc. (TLC), 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 TPPI, a domestic corporation engaged in the business of leasing equipment, will enter into a Lease Agreement with TLC; that TLC is a corporation organized and existing under U.S. laws which is not engaged in trade or business in the Philippines and does not maintain a branch office, or any other place of business in the Philippines; that under the lease Agreement, TLC shall lease equipment to be used in the processing and packaging of Liquid Food Product such as the Separators, Heat Exchangers, Homogenizing Evaporators Aseptic Packaging and processing systems, automation systems and membrane filtration systems; that TPPI shall pay TLC a stipulated rent payable semi-annually; and that as authorized by the Lease Agreement, TPPI will sublease the equipment leased from TLC to its Philippine customers. In reply, please be informed that Article 8, paragraphs (1) and (6) of the RP-US Tax Treaty provides that: "ARTICLE 8" "(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." 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." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "ARTICLE 5 "PERMANENT ESTABLISHMENT " "(1) For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engage in a trade or business. "(2) The term "fixed place of business" includes but is limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project, or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services; by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." "(3) . . . "(4) . . . "(5) . . . "(6) . . . "(7) . . . "(8) . . . It is clear from the foregoing that the rental income derived by TLC from the processing and packaging equipments to TPPI for subleasing to its Philippine customers is considered "business profits" under Article (6) of the RP-US Tax Treaty, the said rental being "rental of tangible personal (movable) property". However, the said Treaty likewise provides that "business profit" on the said rental may only be taxed in the United States where TLC is a resident considering that the said foreign lessor has no "permanent establishment" in the Philippines as the said term is defined under Article 5 (1) and (2) of the said Tax Treaty. Accordingly, your opinion that the rentals to be paid to TLC by TPPI shall be exempt from the Philippine income tax including the 7.5% final withholding tax imposed under Section 25(b) (4) in relation to Sections 50 and 51, all of the Tax Code, as amended, pursuant to the RP-US Tax Treaty is hereby confirmed. (BIR Ruling No. 192-91 dated September 19, 1991) However, the said rental payments to be made by TPPI to TLC for the lease of equipments shall now be subject to the 10% value-added tax imposed under Section 102(a) (2) in relation to Section 99 of the Tax Code, as amended by R.A. No. 7716, based on the contract price agreed upon by the parties. Your client, TPPI being the licensee shall be responsible for the payment of VAT on such rentals in behalf of TLC by filing a separate VAT declaration/return. The said VAT declaration/return can be used by your client as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) Accordingly, BIR Ruling No. 161-95 dated October 23, 1995 wherein it was ruled that rental payments made to a non-resident foreign corporation are not subject to the value-added tax is therefore, hereby revoke. This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if it turns out later that the facts are not as represented. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue