BIR Ruling No. 122-15

April 17, 2015 BIR RULING NO. 122-15 Section 1 of PD 1354; BIR Ruling No. 024-2001 Isla Lipana & Co. 29th Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Zayber B. Protacio Principal Tax Gentlemen : This refers to your letter dated February 16, 2011 requesting on behalf of your client, TRANSFIELD SERVICES-WORLEYPARSONS JV (M) SDN. BHD. PHILIPPINE BRANCH for the confirmation of the opinion that it is subject to the eight percent (8%) final income tax in lieu of all local and national taxes including the fifteen percent (15%) branch profits remittance tax. It is represented that TRANSFIELD SERVICES-WORLEYPARSONS JV (M) SDN. BHD. is a resident foreign corporation organized and existing under the laws of Malaysia; that it is duly licensed by the Securities and Exchange Commission (SEC) to establish a Philippine Branch under the name TRANSFIELD SERVICES-WORLEYPARSONS JV (M) SDN. BHD.-PHILIPPINE BRANCH (TSWP BRANCH); THAT TSWP BRANCH is engaged in: "advising and consultancy services . . . and maintenance, procurement, project operations and management services . . ., to entities in the Philippines in projects such as, but not limited to the following: hydrocarbon, petroleum, gas, projects, power projects, buildings and erections of every kind. . ."; that on the other hand, SHELL PHILIPPINES EXPLORATION B. V. (SPEX) is a company incorporated under the laws of the Netherlands and is licensed to do business in the Philippines; that SPEX has a service contract with the Philippine Government under Service Contract 38 for the exploration and development of petroleum in an offshore area located in Northwest Palawan; that this area includes the Malampaya gas field which is under the Malampaya Deep Water Gas-to-Power Project ("Project"); that this Project involves the extraction of natural gas 3,000 meters below sea level, the transportation thereof to offshore and onshore platforms for processing, and the final delivery to three gas turbine power plants; that on December 8, 2009, TSWP BRANCH and SPEX entered into a Provision of Maintenance and Engineering Services Contract with respect to the onshore and offshore facilities of the Project; and that TSWP BRANCH was endorsed by the Department of Energy to engage as a petroleum subcontractor service entity pursuant to Section 4 of Presidential Decree No. 1354. EHaDIC In reply, please be informed that Sec. 1 of PD No. 1354 provides: xxx xxx xxx "SEC. 1. Tax on subcontractors . Every subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local . . . ." Moreover, pertinent portion of BIR Ruling No. 024-2001 dated June 13, 2001, states that: "PD No. 1354 is explicit that any person or entity, whether domestic or foreign, that enters into a contract with a service contractor engaged in petroleum operation in the Philippines is considered a subcontractor. The decree, however, clarifies that the gross income entitled to the 8% preferential tax rate refers to the income earned or received as a result of the contract entered into by the subcontractor with the service contractor. PD No. 1354, therefore, does not distinguish between a contract for supply of services and a contract for supply of goods or materials, or both. All that PD No. 1354 requires is that the contract be entered into with a service contractor engaged in petroleum operation in the Philippines. In other words, the contract, whether for supply of labor, or of goods and materials, or both, must provide the service contractor the means necessary to enable it to pursue its petroleum operations." HcTIDC Considering that TSWP BRANCH'S contract of Provision of Maintenance and Engineering Services with respect to the onshore and offshore facilities of the SPEX is inherently necessary or incidental to SPEX's exploration and development of petroleum in the offshore area, and pursuant to BIR Ruling No. 024-2001 dated June 13, 2001, this Office confirms your opinion that TSWP BRANCH is deemed a qualified "subcontractor" within the meaning of P.D. No. 1354 and therefore, entitled to the 8% preferential final withholding tax. TSWP BRANCH, however, is not exempt from the tax on branch profit remittances imposed under Section 28 (A) (5). The 8% final income tax provided under Section 1 of PD No. 1354 refers to a sub-contractor's gross income derived from contracts with a service contractor engaged in petroleum operations in the Philippines. Thus, the phrase "in lieu of any and all taxes" in Section 1 of PD No. 1354 refers to any income derived by the sub-contractor from such contractual arrangements, which, had it not been for PD No. 1354, would be subject to 30% regular corporate income tax. However, the nature of branch profit remittance tax is different inasmuch as the tax is an exaction on profit realized for remittance abroad. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue