Corporate Income Tax Imposed on Sir William Halcrow and Partners, Ltd.

June 15, 1990 BIR RULING NO. 117-90 25 (a) (1) 000-00 117-90 Gentlemen : This refers to your letter dated May 8 and 17, 1990, requesting opinion as to whether or not the foreign consultants (individuals and firm) which you will hire to provide consulting services are exempt from income tax and if not, the applicable tax rates and the manner of remittance. cd It is represented that you will implement the Angat Water Supply Optimization Project (AWSOP) to give an additional 1,300 Mld of water in 1992, which project is financed by ADB Loan No. 986-PH; that you have found Sir William Halcrow and Partners Ltd., a British firm, as the most qualified to do the job; that you have a proposed consultancy contract with the said firm in association with Binnie & Partners, DCCD Engineering Corporation and Engineering & Development Corporation of the Philippines, for the implementation of said project; that the consultant firm shall perform the services for an estimated 120 man-months of service in the Philippines (Article II, 2.03); that payments to consultant shall not exceed in foreign currency UK Pounds 244,065.00 and in Philippine Pesos 8,701,049.00 in addition to a budgetary sum of UK Pounds 12,205.00 and Philippine Pesos 430,052.00 for 5% contingencies (Article IV, 4.02); and that MWSS shall seek exemption, reimburse or pay on behalf of consultant for amounts paid on account of all taxes, duties, fees, levies and other impositions under the laws and regulations of the Philippines or any political subdivision or agency thereof (other than personnel who are citizens or permanent residents of the Philippines) in respect to payments made to (1) consultant or to the expatriate personnel (2) any equipment, materials and supplies brought into the Philippines for the purpose of carrying out the services and which will be subsequently re-exported therefrom and (3) any household, personal effects and furnishings brought into the Philippines by the expatriate personnel and their dependents for their personal use or consumption and which will be consumed in the Philippines or will subsequently be withdrawn upon the departure of the consultant or the expatriate personnel from the Philippines. In seeking the above exemption, you cited paragraph 1 of Letter of Instruction No. 128 which reads as follows: "1. Approval of projects proposed by government agencies shall prescribe the condition that in negotiating tax provisions in consultancy contracts entered into by such agencies in implementation of the foreign loan and involving utilization of loan proceeds, the agency concerned shall agree to the provisions exempting consultants from taxes and duties unless otherwise indicated by the consultants. xxx xxx xxx In reply, please be informed that the foregoing exemption under LOI 128 can no longer be invoked, the same having been withdrawn by Executive Order No. 93 effective March 10, 1987. Moreover, it appears that the consultant shall make available a total of 120 man-months of service in the Philippines. A man-month of service is defined as services of period of time equivalent to one (1) calendar month based on the person rendering or performing such services for 176 working hours per month on the average. (par. 2.03, Agreement) It is, therefore, safe to conclude that the consultant furnishes consultancy services for a period exceeding in the aggregate 183 days within any twelve-month period. Such being the case, the consultant is deemed to have a permanent establishment in the Philippines (Article 5, par. 3(b), RP-UK Tax Treaty) in which case, the profits of the consultant, Sir William Halcrow and Partners, Ltd., may be taxed in the Philippines but only so much of them as is directly or indirectly attributable to that permanent establishment." (Art. 7, par. (1), Ibid) In view thereof, your consulting firm, Sir William Halcrow and Partners, Ltd., is subject to corporate income tax as a resident foreign corporation at the rate of 35% of its taxable income derived in the preceding taxable year from all sources in the Philippines. [Section 25(a)(1), Tax Code] as regards, the two (2) foreign consultants who will be present here for more than 183 days (See Appendix "C" of the Agreement), they will be subject to income tax in the same manner as resident citizens and aliens on taxable income from all sources in the Philippines, pursuant to Section 22(a)(1) of the Tax Code. Moreover, since said foreign corporation will perform services for a fee, remuneration or consideration, it is subject to the 10% value-added tax based on its gross receipts [Section 102(a), Tax Code] It may be stated however, that you are under no legal obligation to withhold said 35% corporate income tax and 10% value-added tax. cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner