Employees of an England-based Contractor Cannot Claim Income Tax Exemption on the Basis of the RP-UK Tax Treaty

October 18, 1991 BIR RULING NO. 212-91 22 (e) 000-00 212-91 Gentlemen : This refers to your letter dated February 19, 1991 which was endorsed to this Office, in a letter dated March 6, 1991, by the Executive Director, Tanggapan ng Ugnayang Pang-Enerhiya requesting for a ruling on whether or not the Tax Treaty between the Governments of the United Kingdom and the Philippines is applicable to local tax liabilities of employees of Kirkland Resources, a petroleum service contractor. cdta It is represented that your client, KIRKLAND RESOURCES (Holdings) PLC (Kirkland), is a corporation organized and existing under the laws of England, with its principal office located at Clayton House, 7 Vaughan Road, Harpended, Herts, AL54EF, England; that on August 17, 1990, it was granted by the SEC a license to transact business in the Philippines and to establish a branch office in the Philippines to undertake oil and gas exploration and production under Geographical Survey Exploration Contract (GSEC) Nos. 49 and 52 dated January 11, 1988 and April 17, 1989; that in connection therewith, alien employees of Kirkland shall stay in the Philippines for a period not longer than 183 days. On the basis of the foregoing, the following questions are specifically posed: (1) Whether or not Kirkland employees shall be liable for any local/domestic tax; (2) Whether or not Kirkland is automatically covered by the Tax Treaty between the United Kingdom and the Philippines, and if in the negative, whether it has to apply for exemption. In reply, please be informed that in relation to Section 28 (b) (6) of the Tax Code, as amended, the Tax Treaty between the Governments of the Republic of the Philippines and the United Kingdom, which entered into force on January 23, 1978, provides in general that salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in the State where the employee is a resident of. However, Article 14 (1) of the Tax Treaty states that where the employment is exercised in the other Contracting State, a resident of a Contracting State may be taxed in the other Contracting State (where the employment is so exercised) in respect to such remuneration as he may derive therefrom. This exception is further subject to the following exception, the text of which quoted hereunder: "Article 14 DEPENDENT PERSONAL SERVICES (2) Notwithstanding the provisions of paragraph (1) of this Article [stating the general rule and exception above-mentioned], remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned state if : (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned ; (b) t he remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State . xxx xxx xxx In relation to the necessary and sufficient conditions quoted in the above, Article 5 of the same Tax Treaty is enlightening when it provides that: "Article 5 PERMANENT ESTABLISHMENT (1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. (2) The term "permanent establishment" shall include specifically : xxx xxx xxx (f) a mine, oil well, quarry or other place of extraction of natural resources; (g) an installation or structure used for the exploration of natural resources ; xxx xxx xxx (3) An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: xxx xxx xxx (b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph (7) of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. cdtech xxx xxx xxx In view of all the foregoing, it is the opinion of this Office as it hereby holds that the employees of England-based Kirkland Resources cannot claim income tax exemption on the basis of the Tax Treaty between the United Kingdom and the Republic of the Philippines. By virtue of Article 5 (2) (g) of the R.P.-U.K. Tax Treaty, Kirkland Resources is deemed to have a permanent establishment in the Philippines. Accordingly, the three conditions imposed by Article 14 (2) of the same Tax Treaty have not been sufficiently met considering that the remunerations of Kirkland's employees are to be borne by said Kirkland Resources as the employer. Therefore, the salaries, wages, annuities, compensation, remuneration and other emolument, such as honoraria and allowances, received by aliens who are permanent residents of a foreign country but who are not employed and assigned in the Philippines by service contractors or by subcontractors engaged in petroleum operations in the Philippines shall be subject to a 15% tax thereon which shall be withheld at source. (Section 22(e), Tax Code, as amended). Any income earned from all the other sources within the Philippines by the said employees shall be subject to the pertinent income tax, as the case may be, imposed under the National Internal Revenue Code, as amended. (2nd per, Section 22(e), Tax Code, as amended). Very truly yours, (SGD.) JOSE U. ONG Commissioner