Philippine Income Tax and 35% Withholding Tax Exemptions on Service Fee

November 29, 1988 BIR RULING NO. 566-88 25 000-00 566-88 Gentlemen : This refers to your letter dated September 20, 1988 requesting confirmation of your opinion to the effect that the payment of service fees in the amount of US$274,702.30 by your client, Procter & Gamble Philippines, Inc. (P & GPI) to Westinghouse Industry Services Asia Pte. Ltd. (WISAPL), a Singapore corporation are not subject to Philippine income/withholding tax in accordance with the RP-Singapore Tax Treaty. It is represented that P & GPI is a corporation duly organized and existing under and by virtue of Philippine laws; that it is a wholly-owned subsidiary of Procter and Gamble, U.S.A., a non-resident foreign corporation not engaged in trade or business in the Philippines; that in 1985, the United States government banned the use of Polychlorinated Biphenyls (PCBs) in electrical equipment; that the ban was based on studies showing that (1) PCBs cause severe skin and liver ailments, and (2) under extreme conditions, PCBs release highly toxic fumes called dioxins; that being non-biodegradable PCBs and contaminated equipment can be disposed of only by a special procedure using high temperature incineration and gas clean-up; that in 1986, the U.S. principal. Procter and Gamble Company, required all its subsidiaries worldwide to dispose of PCBs and contaminated equipment; that in 1987, P & GPI identified several electrical equipment at its manufacturing facilities as containing PCBs; that consequently, a project was launched for the removal and disposal of PCBs and contaminated equipment as well as the installation of non-PCB replacements; that P & GPI contracted WISAPL, a Singaporean corporation to remove and dispose of PCBs and contaminated equipment and to install non-PCB replacements; that the contract lasted for less than six months; and that WISAPL has no office in the Philippines. cdtech In reply thereto, please be informed that paragraph (1), Article 7 of the RP-Singapore Tax Treaty provides as follows: "Article 7 " BUSINESS PROFITS "1. The profits of an enterprise of a Contracting State 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 or has carried 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 that permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provide, viz: "Article 5 " PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term "permanent establishment" means fixed place of business in which the business of the enterprise is wholly or party carried on. "2. The term "permanent establishment" includes specially but is not limited to a) A seat of management; b) A branch c) An office d) A store of (sic) other sales outlet; e) A factory f) A workshop g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry or other place of extraction of natural resources i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period 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 aforementioned services were rendered for less than six months, WISAPL did 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 P & GPI to WISAPL 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. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner