Income Tax and 35% Withholding Tax Exemption on Remittances to Foreign Corporation

July 20, 1988 BIR RULING NO. 345-88 24 000-00 345-88 Gentlemen : This refers to your letter dated January 27, 1988 stating that your client, Kinhill Engineers Pty. Ltd. of 47 Burswood Road, Victoria Park, Perth, Western Australia 6100 Australia, entered into an agreement dated September 18, 1987, with Abcar Paragon Mining Corporation, a domestic corporation registered with the Board of Investments on a preferred non-pioneer status under the Omnibus Investments Code of 1987, for the provision of engineering, procurement and construction management services necessary for refurbishment of the latter's existing plant and construction of Carbon-In-Leach Plant; that the work covered by the agreement would be divided into two phases, namely: (1) design engineering and documentation and (2) procurement and construction management, and that Phase 1 will be done in Australia while Phase 2 (except for procurement work which will take 2-4 weeks) will be performed in the Philippines. It will be noted in the said letter dated September 18, 1987 that Kinhill commenced Phase 2 in or about September 1987 and proposed a schedule to complete it in January 1988 or a period of five (5) months. In reply, please be informed that the services of your client consisting of design, engineering and documentation actually involved rendering of professional services, i.e., engineering construction and management services. Accordingly, since the services where performed in Australia, fees/costs paid to your client are considered income derived from sources outside the Philippines. Hence, and since a non-resident foreign corporation is subject to income tax only on income derived from sources within the Philippines, the remittances to be made by Abcar Paragon Mining Corporation to your client are not subject to income tax and consequently, to the 35% withholding tax prescribed by Section 25(b)(1), in relation to Section 50(a) of the Tax Code, as amended. With respect to Phase 2 which consists of rendering procurement and construction management services at the work site, the income derived by Kinhill from said services may be taxed in the Philippines if such services was carried on in this country through a permanent establishment situated therein. (Par. (1),Art. 7, RP-Australia Tax Treaty) A permanent establishment include "a place in one of the contracting state 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 year of income, as the case may be, in relation to a particular project, or to any project connected therewith." (Par. 2(k),Art. 5, Ibid) Accordingly, since Kinhill staff accomplished Phase 2 only for five (5) months, Kinhill cannot be considered as having carried on the work as a permanent establishment; hence, the income derived therefrom by Kinhill is not also subject to income tax and, consequently, to the 35% withholding tax. A person is subject to VAT only if it renders service "in the course of trade or business." (Sec. 99, Tax Code, as amended by EO 273) This implies the rendering of service, with regularity and continuity, and not occasionally, as in the instant case. In fact, as heretofore stated, Kinhill is not considered as having a permanent establishment insofar as this case is concerned. Accordingly, Kinhill is considered as not having rendered any service in the course of trade or business; hence, it is not subject to VAT. Furthermore, payments of reimbursable costs of Phase 2 (construction supervision) under No. 2.2 of the aforementioned agreement between your client and Abcar Paragon Mining Corp. are not subject to withholding tax since the same are merely reimbursement of expenses to be incurred by your client in the construction/supervision of the work covered by said agreement. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner