BIR Ruling [UN-135-95]

March 31, 1995 BIR RULING [UN-135-95] R. S. Bernaldo & Associates Unit 1810 Cityland Condominium 10 Tower I 6815 Ayala Ave. cor. H. V. dela Costa Ext. 1200 Makati City Attention: Atty . Rosario S . Bernaldo General Manager Gentlemen : This refers to your letter dated November 3, 1994 requesting for opinion on whether or not a lease contract executed abroad between two (2) U.S. companies involving heavy equipment to be used by the branch office of the lessee in the Philippines is taxable in our country. cdtech It is represented that your client, Fluor Daniel Pacific, Inc. (FDPI), the lessee, is a U.S. construction company with a permanent establishment in the Philippines in the form of a branch office; that it has leased heavy equipment, like, cranes, leaders, etc. from American Equipment Corporation (AMEC), another U.S. Corporation, to be used in the construction and civil works in the Philippines; that FDPI has no office, employee or operations in the Philippines aside from its branch office; that the heavy equipment will be sent to and utilized by the said branch office of FDPI in its projects in the Philippines; that the issues you raised are as follows: "(1) Whether or not AMEC, the nonresident lessor, will be considered as having a "permanent establishment" in the Philippines pursuant to the RP-USTaxTreaty on account of the lease of its heavy equipment; and "(2) Whether or not the rental payments by the branch office to the lessor are subject to withholding tax, and if so, at what rate?" In reply thereto, please be informed of the following: (1) Pursuant to the RP-US Tax Treaty, AMEC, the nonresident lessor, cannot be considered as having a "permanent establishment" in the Philippines even if it has leased its heavy equipment to a U.S. construction company with a permanent establishment in the Philippines considering that it does not have a fixed place of business here as the term is defined under Article 5 of the RP-US Tax Treaty, to wit: "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 State 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 of supervisory activities in connection therewith, provided such sale, 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 that 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." Neither can AMEC be considered as having a fixed place of business solely on account of the lease of its heavy equipment which it will utilized here in the Philippines. This Office has already ruled and opined that the leasing by a foreign corporation of steel moulds to a domestic corporation to be used by the latter in the manufacture of plastic houseware products does not give rise to a permanent establishment as defined in Article 5 of the RP-US Tax Treaty. (BIR Ruling No. 25-87 dated January 28, 1987). (2) The aforesaid ruling likewise held that the rentals on the said steel moulds are not taxable in the Philippines under the same Tax Treaty in view of the fact that the said rentals are considered "business profits" and that the foreign lessor has no permanent establishment in the Philippines, hence the rentals from the steel moulds paid by the domestic lessee to the foreign lessor are taxable in the United States where the foreign lessor is a resident. Said rentals are not, therefore, subject to Philippine income tax imposed by Title II of the Tax Code, as amended, or to the 7 1/2% final withholding tax imposed by Section 25(b)(4) [then Sec. 24(b)(1)(vii) of the Tax Code]. (Ibid) Article 8, paragraphs (1) and (6) of the RP-US Tax Treaty provide, viz: "(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 of the resident but only on so much of them as are attributable to the permanent establishment. xxx xxx xxx "(6) The term "business profits" means income derived from any trade or business whether carried on by an individual corporation or any other person, or group of persons, including the rental of tangible personal (movable) property." Similarly, considering that in the present case, AMEC, the foreign lessor, does not have a "permanent establishment" in the Philippines as contemplated within the provision of the RP-US Tax Treaty, the said rentals paid by the branch office of FDPI are considered as "business profits" taxable only in the United States, where AMEC is a resident and has its fixed place of business, hence, not subject to the 7 1/2% final withholding tax imposed under Section 25(b)(4) of the Tax Code, as amended. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service By: ALICIA L. TOMACRUZ Head Rev. Executive Asst. (Legal)