BIR Ruling [UN-066-94]

January 18, 1994 BIR RULING [UN-066-94] Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Ma . Victoria A . Villaluz Tax Division Gentlemen : This refers to your letter, dated September 22, 1993 requesting confirmation of your opinion that the fees paid to your client, TNT-Express Worldwide (UK) Ltd. under a Product Support Service Agreement are not subject to Philippine income tax and consequently to withholding tax. It is represented that TNT-Express Worldwide (UK) Ltd., a corporation organized and existing under the laws of the United Kingdom, has a division known as TNT-International Aviation Services (TNT-IAS) which entered into a Product Support Agreement with Pacific East Asia Cargo, Inc. (PEAC); that PEAC is a licensed air carrier registered with the Board of Investments as a service exporter; that under the Product Support Agreement, TNT-IAS will render services such as the supply and repair of aircraft parts, processing of warranty claims with the manufacturers of the aircraft and engines, and administrative work regarding information that may be furnished by the manufacturers of the aircraft and engines which would include forecasting and work pack preparation; and that these services will be performed in the United Kingdom and therefore no services will be rendered in the Philippines. In reply thereto, I have the honor to inform you that paragraph (1), Article 7 of the RP-UK Tax Treaty provides as follows: aisadc "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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to the permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 Permanent Establishment (1) For 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 especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (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; (h) a building site or construction or assembly project which exists for more than 183 days." Considering that TNT-IAS will render services entirely in the UK, it will not have a permanent establishment in the Philippines to which business profits/income may be attributed. Accordingly, the service fees to be paid by PEAC to TNT-Express-IAS are not subject to any Philippine income tax and likewise not subject to the 35% withholding tax (BIR Ruling No. 110-90 dated June 1, 1990). Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)