Taxability of Profits of a Resident of One of the Contracting States

May 6, 1988 BIR RULING NO. 201-88 25 (a) 198-87 201-88 Gentlemen : This is refer to your letter dated April 20, 1988 requesting confirmation of your opinion to the effect that the payments which your client, AT & T-World Services, Inc. (AT & T-WSI) will receive under its contract with Philippine Long Distance Telephone Company (PLDT) are not subject to any Philippine income tax and consequently to the withholding tax. cdti It is represented that AT & T-WSI is a corporation organized under U.S Laws: that AT & T-WSI entered into a contract with PLDT which requires AT & T-WSI to render supervision services in connection with the Guam-Philippines-Taipei Telecommunications (GPT) project; that the approximate duration of the contract is 18 months; that specifically, the services to be rendered by AT & T-WSI consist of civil works and installation supervision, project management supervision and final test; that AT & T-WSI has decided to subcontract these services to other contractors as follows: 1. The civil works and installation supervision was subcontracted to G.M. Gest, Inc. (GEST). AT & T-WSI will have no employees in the Philippines for this work; 2. The project management supervision was subcontracted to an individual independent contractor, Mr. Merril Johnson, Mr. Johnson is not an employee of AT & T-WSI and the latter will have no employees in the Philippines for this works; and that the final test will be handled by AT & T-WSI employees and will last for approximately two months. In reply thereto, I have the honor to inform you that "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". (Art. 8(1), RP-US Tax Treaty) From the foregoing facts, and since G.M. Gest, Inc. and the individual independent contractor, Mr. Merril Johnson will actually perform the civil works and installation supervision as well as the project management supervision respectively, AT & T-WSI is not considered to have carried on business in the Philippines through a permanent establishment in the Philippines as contemplated in Article 5(2) of the RP-US Tax Treaty. Consequently, the profits derived by AT & T-WSI in the aforementioned supervision services in connection with the Guam-Philippines-Taipei Telecommunications (GPT) project are not subject to the Philippine income tax and consequently, to the withholding tax. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner