Taxability of Payments Received by Lloyd Helicopter Group Under its Contract with Shell Phil. Exploration BV

September 17, 1991 BIR RULING NO. 192-91 25 082-90 192-91 Gentlemen : This refers to your letter dated July 29, 1991 stating that your client, Lloyd Helicopter Group (LHG) is a corporation organized and existing under the laws of Australia; that it carries on its business in Australia and overseas by providing fully maintained and crewed helicopters to oil companies undertaking oil exploration activities; that LHG entered into a contract with Shell Philippines Exploration BV (SPEBV), a petroleum service contractor, with a valid petroleum service contract with the Philippine government under P.D. 87 to provide the latter with fully maintained and crewed helicopters for its use in connection with its oil exploration activities in the Philippines; that LHG's contract with SPEBV is for a term of three (3) months; and that the services of LHG to SPEBV was completed within the agreed term. cdt In connection therewith, you now request confirmation of your opinion to the effect that (1) The rental fees to be received by LHG are exempt from the 7.5% final withholding tax imposed under Section 25 (b) (4) of the Tax Code, as amended and to the 8% final withholding tax on petroleum service subcontractors imposed under P.D. No. 1354 since LHG does not have a permanent establishment in the Philippines to which the rentals which are in the nature of business profits are attributable under the RP-Australia Tax Treaty; (2) That the income payment to be received by LHG from SPEBV not being subject to Philippine income tax, SPEBV as the payor of the income and the duly constituted withholding agent of the government is not under obligation to withhold either or both the 7.5% and the 8% final withholding taxes prescribed in Section 25 (b) (4) of the Tax Code, as amended and Presidential Decree No. 1354; (3) That notwithstanding the non-withholding of the final income tax on said income payments, SPEBV will nevertheless be entitled to claim the income payments to LHG under the contract as business expense deductions from its gross income for purposes of computing and paying its income tax liabilities; (4) That the compensation income of the expatriates as signed by LHG to the Philippines arising from the latter's contract with SPEBV are not taxable in the Philippines pursuant to Article 15 (2) of the RP-Australia Tax Treaty. In reply thereto, I have the honor to inform you that paragraph (1), Article 7 of the RP-Australia Tax Treaty provides as follows: "ARTICLE 7 BUSINESS PROFITS "(1) The profits of an enterprise of one of the contracting states shall be taxable only in that state unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid the profits of the enterprise may be taxed in the other State, but only so much of them as is attributable to (a) that permanent establishment; or (b) . . . "(2) . . . "(3) . . . "(4) . . . "(5) . . . "(6) . . . "(7) . . . Moreover, Article 5 (1) and (2) of the said treaty provides, viz: "ARTICLE 5 "PERMANENT ESTABLISHMENT" "(1) For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. cdta "(2) The term 'permanent establishment' shall include especially (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, oil or gas well, quarry or other place of extraction of natural resources; (g) an agricultural, pastoral or forestry; (h) a building site or construction, installation or assembly project, or supervisory activities in connection therewith where such site, project or activity continues for more than six months; (i) premises used as a sales outlet; (j) a warehouse, in relation to a person providing storage facilities for others; (k) a place in one of the Contracting States through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or periods aggregating more than six months in any taxable year or years of income, as the case may be, in relation to a particular project, or to any project connected therewith; "(3) . . . "(4) . . . "(5) . . . "(6) . . . "(7) . . . Considering that LHG will render services in the Philippines for a period of only three months, it does not have a permanent establishment in the Philippines to which its business profits/income are attributable. Accordingly, payments received by it under its contract with SPEBV are not subject to Philippine income tax and consequently to the 8% final tax under Presidential Decree No. 1354 and to the 7.5% final withholding tax prescribed under Section 25 (b) (4) in relation to Section 50 (a) both of the Tax Code, as amended. Moreover, SPEBV as the payor of the income is not under obligation to withhold both the 7.5% and the 8% final withholding taxes prescribed under Section 25 (b) (4) of the Tax Code, as amended and Presidential Decree No. 1354. Furthermore, for income tax purposes, SPEBV is entitled to claim as deduction from its gross income its income payments to LHG as business expenses pursuant to Section 29 (a) (1) of the Tax Code, as amended. Finally, the compensation income of the expatriates assigned by LHG to the Philippines arising from its contract with SPEBV are not taxable in the Philippines pursuant to Article 15 (2) of the RP-Australia Tax Treaty. 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. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner (Officer-in-Charge)