BIR Ruling [UN-351-95]

October 2, 1995 BIR RULING [UN-351-95] PunongBayan & Araullo 6/F Vernida IV Building Alfaro St., Salcedo Village 1200 Makati Attention: Atty . Vic C . Mamalateo Tax Partner Gentlemen : This refers to your letter dated June 13, 1995, on the application of your client, Mallinckrodt Veterinary, Inc., (USA), a corporation duly organized and existing under the laws of the State of Delaware, U.S.A., for relief from double taxation under the RP-US Tax Treaty on the business income received by it from Mallinckrodt Veterinary, Inc., a corporation organized and existing under the laws of the Republic of the Philippines. It is represented that Mallinckrodt Veterinary Companies (Group) is a group of companies with subsidiaries and affiliates worldwide; that these companies are engaged in the business of manufacturing and distributing animal health products; that one of its affiliates is in the Philippines, Mallinckrodt Veterinary, Inc., (Philippine Company) with principal office at 846 West Service Road, Km. 18 South Superhighway, Paraaque, Metro-Manila and is engaged in the business of manufacturing and distributing animal health care products as well as extending assistance and services to animal raisers; that the Philippine Company is in need of strategic and marketing support assistance in complying with the Group guidelines, procedures and requirements, and general management consultancy on various aspects of the business; that as such, a management services agreement between the Philippine Company and the foreign company has been entered into, wherein the latter will provide to the former such services, relating but not limited to: 1. General and strategic Management guidance; 2. Group Financial and Treasury guidelines; 3. Group budgeting and reporting requirements; 4. Group human resource policies and procedures; 5. Marketing and advertising support; 6. Marketing forum and product promotion organization; 7. Sourcing of new materials for the Philippine Company; 8. Group requirements as to hardware and software, and inventory management; 9. Group legal policies and compliance advice; 10. Administration of trademarks, patents and agreements; 11. Group safety and occupation health requirements; 12. Group environmental policies and requirements; 13. Provision for assistance in terms of product knowledge applications, production methods, control and quality assurance; and 14. Provision of assistance in compliance with safety regulations required by Philippine Laws. and finally, that these services will be substantially performed by the foreign company outside the Philippines and in case there is a need for the employees of the foreign company to stay in the Philippines to provide such services, their stay will be for a period or periods aggregating not more than 183 days in any calendar year. In reply, 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 of the resident but only on so much of them as are attributable to the permanent establishment." Moreover, Article 5(1) and (2) of 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 side 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." Under the aforequoted provisions of the RP-US Tax Treaty, Mallinckrodt Veterinary, Inc. does not have a permanent establishment in the Philippines. Accordingly, the business profits derived by it for services rendered abroad to Philippine Company, are not subject to Philippine income tax and consequently to the withholding tax under Section 25(b)(1) in relation to Section 50(a) of the Tax Code, as amended. (BIR Ruling No. 426-93, dated October 29, 1993) cdll Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant (Legal Service)