Exemption from Philippine Income Tax and Consequently to the 35% Withholding Tax

April 7, 1989 BIR RULING NO. 059-89 25 198-87 059-89 Gentlemen : This refers to your letter dated November 7, 1988 requesting confirmation of your opinion to the effect that payments received by Siemens AG (Siemens) under its contract with the National Power Corporation (NPC) are not subject to Philippine income tax and consequently to the withholding tax under the RP-West Germany Tax Treaty and to the value-added tax. cdtech It is represented that Siemens is a corporation duly organized and existing under the laws of the Federal Republic of Germany; that NPC awarded to Siemens the contract for the supply and rehabilitation of the Sucat Thermal Power Plant of NPC; that the scope of work under the contract consists of the design, manufacture, supply, installation of equipment, facilities for replacement and complete overhaul of existing equipment/facilities including the supervision, commissioning start-up, performance test and the instructions covering the rehabilitation of Sucat 4; that Siemens will sub-contract the installation and supervision services to be done in the Philippines to Maschinen & Technik, Inc. (Matec) a corporation organized under the laws of the Philippines; and that Siemens will not render any service in the Philippines. 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, payments received by it under its contract with the National Power Corporation are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 25(b)(1) of the Tax Code, as amended. Moreover, since Siemens is not engaged in the sale of goods and services in the Philippines, it is not subject to the value-added tax. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner