Exemption of Service Fees from Philippine Income Tax and Consequently to 35% Withholding Tax

June 1, 1990 BIR RULING NO. 110-90 25 242-89 110-90 Gentlemen : This refers to your letter dated January 8, 1990 requesting confirmation of your opinion to the effect that the payments to be made by your client, Pfizer, Inc. (Pfizer) to Ionics, Inc. (Ionics), a non-resident US corporation not engaged in trade or business in the Philippines, for services rendered by Ionics consisting of performance testing and preventive maintenance of Pfizer's Ionics W.F.I. water treatment plant are not subject to Philippine tax pursuant to the RP-US Tax Treaty. aisadc It is represented that Pfizer and Ionics entered into a Service Contract whereby the latter would undertake performance testing and maintenance of the Ionics W.F.I. water treatment plant of Pfizer; that personnel of Ionics will, among others, test and rate the performance of said equipment using certain test data provided to each plant's start-up as basis of comparison; that it will perform maintenance work on the equipment to ensure its continued efficient operation; that it will advise Pfizer as to materials required for continued efficient plant operation and where to source/purchase such needed materials; that while the service contract is valid for one year, the services will be performed in two scheduled visits, with each visit expected to last up to nine days; that emergency visits may be requested by Pfizer and Ionics personnel will be dispatched to the Pfizer site within fifteen days from notification, with such emergency visits lasting a few days; and that in consideration of the services to be rendered by Ionics, Pfizer shall pay the former US$5,500 for the two scheduled visits, US$500/day for additional days and/or emergency visits. In reply thereto, please be informed that paragraph (1), Article 8 of the RP-US Tax Treaty provides as follows: "ARTICLE 8 " BUSINESS PROFITS "(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." 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 or business. cdta "(2) The term "fixed place of business" includes but is not limited to: (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 (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) with the other Contracting State for a period or periods aggregating more than 183 days." Considering that the services to be performed by Ionics personnel under the Agreement will be performed in two scheduled visits with each visit expected to last up to nine days, Ionics does not have a permanent establishment in the Philippines to which the service fees could be attributable. Such being the case, the service fees to be paid by Pfizer to Ionics 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, fees paid to the Ionics personnel for services performed in the country in two scheduled visits, with each visit expected to last up to nine days and emergency visits lasting a few days or less than ninety (90) days in the taxable year are not likewise subject to income tax pursuant to Article 16(2)(a) of the RP-US Tax Treaty. Very truly yours, (SGD.) JOSE U. ONG Commissioner