Exemption from the Philippine Income Tax and Consequently to the 35% Withholding Tax

December 11, 1989 BIR RULING NO. 242-89 25 566-88 242-89 Gentlemen : This refers to your letter dated April 27, 1989 requesting confirmation of your opinion to the effect that the service charges paid by your client, Pfizer, Inc. (Pfizer) a domestic corporation to Finn-Aqua America, Inc. (Finn-Aqua) a non-resident U.S. corporation not engaged in trade or business in the Philippines, for the preventive maintenance, performance testing and trouble shooting of Pfizer's Finn-Aqua Water-Still 500-H-4 in accordance with their Annual Service Agreement are not subject to Philippine tax pursuant to Article 8(1) and (6) of the RP-US Tax Treaty and, consequently, to the 35% withholding tax. cdtech It is represented that Pfizer and Finn-Aqua entered into an Annual Service Agreement for the preventive maintenance, performance testing and trouble shooting of the former's Finn-Aqua equipment; that the said agreement is for a term of twelve (12) months from October 1, 1988; that as stipulated in the agreement, the abovementioned services shall be performed by factory-trained (FIN-AQUA) field Service Engineers a minimum of two times per year at 5-7 month intervals; that service is carried out over two (2) days during regular working hours; and that in consideration for such service, Pfizer agrees to pay Finn-Aqua the sum of US$4,680.00 payable in two (2) semi-annual installments, the first 50% of which is due 30 days from the date of contract and the balance due six (6) months later. In reply thereto, please be informed that paragraph (1), Article 8 of the RP-US Tax Treaty provides as follows: "Article 8 " BUSINESS PROFITS "(1) Business 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 on the resident but only on so much of them as are attributable to the permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 " PERMANENT ESTABLISHMENT "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "(2) The term "fixed place of business includes but is not limited to: a) A seat of management; (b) A branch; (c) An Office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." Considering that the services to be performed by Finn-Aqua personnel under the Agreement will only be for a couple of days not exceeding 183 days, Finn-Aqua does not have a permanent establishment in the Philippines to which the service fees could be attributable. Such being the case, the service fees to be paid by Pfizer to Finn-Aqua are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 25 (b)(1) of the Tax Code, as amended. Moreover, fees paid to the factory-trained (Finn-Aqua) Field Service engineers for services performed in the country for a minimum of two (2) times per year at 5-7 months interval and over two (2) days during regular working hours or less than ninety (90) days in the taxable year are not likewise subject to income tax pursuant to Article 16(2)(a) of the RP-US Tax Treaty. cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner