Exemption from the 8% Final Tax

May 15, 1990 BIR RULING NO. 082-90 25 151-89 082-90 Gentlemen : This refers to your letter September 11, 1989 requesting confirmation of your opinion to the effect that your client, Western Oceanic Company (WOC), is exempt from the 8% final tax imposed on petroleum subcontractors under P.D. No. 1354, and that the income of expatriates arising from such contract is not taxable in the Philippines. cdta It is represented that WOC is a petroleum service company organized and existing under the laws of the State of Texas; that WOC entered into a Drilling Contract for Offshore Drilling Unit "Palawan Princess" with Alcorn Philippines, Inc.; that under the contract, WOC shall provide and operate an offshore oil rig for a period of approximately six months; that the Board of Investments granted authority to WOC to do business in the Philippines under the "Isolated Transaction Rule" of Book I of E.O. No. 226; that WOC has completed the work under its aforesaid drilling contract with Alcorn within a period of 170 days as certified by Mr. Jimmy N. Manrique, the comptroller of Alcorn; that WOC had no "permanent establishment" in the Philippines as defined in Article 5 in relation to Article 8 of the RP-US Tax Treaty. In reply, please be informed that paragraph 1, Article 8 of the RP-US Tax Treaty provides as follows: "Article 8" BUSINESS PROFIT "(1) Business profit 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 them as are attributable to the permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 " PERMANENT ESTABLISHMENT "(1) For the purposes of this convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade of business. (2) The term "fixed place of business" includes but is limited to: a. a seat of management; b. a branch; c. and office; d. a store or other sales outlet; e. factory; f. a workshop; g. a warehouse; h. a mine, query, 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 activities 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) . . . Considering that WOC has rendered services in the Philippines for a period of only 170 days and that it does not have a permanent establishment in the Philippines, to which its business profits/income are attributable, your opinion that the payments received by WOC under its contract with Alcorn Philippines, Inc. are not subject to Philippine income tax and consequently to the 8% final tax under P.C. No. 1354 is hereby confirmed. Likewise, this Office confirms your opinion that the income of the expatriates arising from the foregoing drilling contract between WOC and Alcorn is not taxable in the Philippines under Article 16(2) of the RP-US Tax Treaty only if the following conditions are attendant, to wit: 1. Expatriates stay in the Philippines did not exceed 90 days for the taxable year; 2. They are employees of the Permanent establishment in the United States; and 3. The remunerations is borne by said establishment in the United States. 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.) JOSE U. ONG Commissioner