Request for Exemption from Income Tax of Consultancy Fee Paid to Fashion Institute of Technology as Fashion

October 25, 1996 BIR RULING NO. 113-96 28 (b) (6) 000-00 113-96 Department of Trade and Industry Trade and Industry Building 361 Sen. Gil J. Puyat Avenue Makati City 3117 Attention: Mr . Amando T . Alvis Director Gen . Administrative Service Gentlemen : This refers to your letter dated June 24, 1996 stating that you and some of your attached agencies are currently implementing the project for the establishment of the Asian Institute of Design and Technology (Institute) in Manila; that part of the component of the project is to hire a fashion consultant who will prepare the feasibility study on the courses and programs to be offered by the Institute; that the Fashion Institute of Technology (FTI) which is based in New York, USA is found to be the only school where the proposed institute could be patterned; that FIT is a State of New York College recognized in the field of arts and design, business and technology which prepares individuals for careers in fashion and related professions and industries, and also provides research, and other services to those professions and industries; that you will pay for the consultancy fee out of the enterprise development program; that FIT is not a permanent establishment under Section 2 (J) of Art. 5 of the RP-US Tax Treat; and that the number of man-days is only 150. cdtech It appears that under the Supplemental Agreement to the Memorandum of Understanding (MOU) made and entered into on October 23, 1995 by and between the FIT and the Philippines Department of Trade and Industry (DTI), FIT shall, among others, prepare a final report on the conduct of the feasibility study and include the courses and/or programs to be offered by the institute determined most appropriate for the various Philippine industries, including enterprise development; that it shall include a proposal for budget, faculty, space, and equipment, needs and a projected enrollment; that as part of the Project in the works to be undertaken, FIT will provide on its final report the course and curricula, proposal for faculty training and the needed equipment to initiate such programs; and that FIT through its official representative(s), will examine carefully and recommend, if possible, the development of this new training program(s) related to an existing institution, rather than building an entirely new facility. Based on the foregoing representations, you are now requesting, in effect, for a ruling exempting from the payment of Philippine income tax, the consultancy fee you will pay to FIT as Fashion Consultant that will prepare the feasibility study on the courses and programs to be offered by the Asian Institute of Design and Technology which you are currently establishing. In reply, please be informed that Article 8 (1) of the RP-US Tax Treaty provides viz: "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." However, Section 2(j), Article 5 of the RP-US Tax Treaty provides as follows: "ARTICLE 5 "PERMANENT ESTABLISHMENT (1) . . . (2) . . . "(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." Such being the case, and since, as represented, FIT would perform the consultancy services of preparing the feasibility study on the courses and programs to be offered by the Asian Institute of Design and Technology, only within 150 man-days and therefore, it could not be considered as a permanent establishment under Section 2(j) of Article 5 of the RP-US Tax Treaty, this Office is of the opinion as it hereby holds that the consultancy fee which you will pay to FIT out of the enterprise development project is not subject to Philippine income tax and consequently to the withholding tax. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue