EYS & Associates Not Subject to Withholding Tax Being Deducted by a Domestic Corporation

May 21, 1998 BIR RULING NO. 059-98 25 (b) (1)-000-00-059-98 Mr. Eusebio Sevilla Jr. Chief Consultant EYS & Associates 2335 S. Cutty Way #68 Anaheim, California 92802 U.S.A. S i r : This refers to your fax message dated August 20, 1996 requesting for a ruling as to whether or not your company is subject to withholding tax being deducted by a domestic corporation pursuant to the provisions of the National Internal Revenue Code, as amended, and if not how the company can possibly collect taxes previously withheld. dctai It is represented that EYS & Associates (EYS) is a consultancy and service group doing business in Anaheim, California; that starting January 1994, it entered into an agreement with a Philippine manufacturer (Company B) of automotive exhaust system components for an American company to perform the following services, viz: "1. Serve as communications (voice, fax and letters) intermediary between Company B and Company C due to the time difference between the U.S.A. and Manila. "2. Recommend US manufacturers or suppliers of equipment, tools and software for purchase by Company B, write requests for quotation and act as intermediary between Company B and the manufacturer or supplier of equipment, tools software. "3. Witness acceptance testing at manufacturer's or supplier's plant of purchased items as required. "4. Company A (EYS) does not do any selling for Company B." and that as a consideration for such services, it is paid a retainer fee of $1,000 per month and an override fee of 5% of shipments over $240,000 for the calendar year by Company B, which the latter subjects to a withholding tax of 30%; and that the net amount remitted to EYS is 70% of earned fees and which is also subject to US income tax. In reply, please be informed that pursuant to Section 25(b)(1) of the Tax Code, as amended, which reads: "(b) Non-resident foreign corporations . (1) In general. Unless otherwise provided, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines such as interest, dividends, rents, royalties, salaries, premiums, (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodical, or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) [of the same Section 25]." (Emphasis supplied). to be subject to Philippine income tax, such income of a non-resident foreign corporation not engaged in trade or business in the Philippines must have been derived in the Philippines. If the services are performed within the Philippines, such income is subject to a withholding tax of thirty five per cent (35%) on the gross income of the said non-resident foreign corporation, in accordance with the above-cited provision of the Tax Code, as amended. Thus, for the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from an activity within the Philippines. (Commissioner vs. BOAC & CTA GR Nos. 65773-74, April 30, 1987). cdlex Since the subject services rendered by EYS & Associates were done outside the territorial jurisdiction of the Philippines, the retainer fee of $1,000 per month and an override fee of 5% for shipments over $240,000 derived therein are considered as income from without the Philippines pursuant to Section 36(c)(3) of the Tax Code, as amended. However, under the existing treaty between the Philippines and the United States, Article 7 thereof, 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 shall be taxed in the other State but only so much of them is attributable to that permanent establishment." that permanent establishment was defined under Article 5 of the same Tax Treaty, viz: "Article 5 PERMANENT ESTABLISHMENT 1. For purposes of this convention, 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 includes but is not limited to: LLphil (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse, in relation to a person providing storage facilities for other; (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 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 connected project) within the other Contracting State for a period or periods aggregating more than 183 days. Thus, a non-resident foreign corporation based in the United States may be taxed only by the United States if it does not have a permanent establishment in the Philippines as defined in the RP-US Tax Treaty. Such being the case, the income earned by EYS & Associates from Company B is not subject to Philippine income tax. As to the other request, EYS & Associates or its authorized representative may claim refund of the previously withheld tax by filing an application for refund with the Commissioner of Internal Revenue, provided that the tax withheld on the income payments were properly remitted to the Bureau of Internal Revenue. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue