Reyes Tacandong & Co.

March 11, 2020 ITAD BIR RULING NO. 024-20 Articles 5 (Permanent Establishment) and 7 (Business Profits), Philippines-UK tax treaty Reyes Tacandong & Co. 5th Floor Phinma Plaza 39 Plaza Drive, Rockwell Center, Makati City Gentlemen : This refers to your application for tax treaty relief filed on August 14, 2012 requesting confirmation that income payments made by Green Core Geothermal, Inc. ("GCGI PH") to Quartzelec Ltd. are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("RP-UK tax treaty") . It is represented that Quartzelec Ltd. is a foreign corporation organized and existing under the laws of United Kingdom (UK) and a resident thereof, based on the certification issued by the tax authority of UK on March 7, 2012; that Quartzelec Ltd. is not registered as a company or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on August 10, 2012; and that on the other hand, GCGI PH is a domestic corporation with principal business address at 38th Floor, One Corporate Center, Julia Vargas Avenue, corner Meralco Avenue, Ortigas Center, Pasig City. It is further represented that on December 9, 2011, Quartzelec Ltd. and GCGI PH entered into a Contract for Works for the Tongonan Geothermal Powerplant Unit 3 Generator Rehabilitation Works whereby the latter undertook to perform the works for the Tongonan Geothermal Powerplant Unit 3 Generator Rehabilitation; that for and in consideration of the same, GCGI PH shall pay Quartzelec Ltd. contractor's fees per milestone achieved within 30 days from receipt of undisputed invoices and other required documents; that the duration of services to be performed in the Philippines by the employees of Quartzelec Ltd. under the contract is 45 days only based on the Certification issued by the Plant Manager of Tongonan Geothermal Power Plant Unit 3 of GCGI PH on August 2, 2012. It is finally represented that the issues or transactions subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal based on the Sworn Statement issued by the Chief Finance Officer of GCGI PH on August 3, 2012. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, income derived by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code of 1997, such income shall be exempt from taxation to the extent required by any treaty obligation binding upon the Philippine Government, thus: " SEC. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In relation thereto, Articles 7 and 5 of the RP-UK tax treaty provide 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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as are directly or indirectly attributable to that permanent establishment. xxx xxx xxx" "Article 5 Permanent Establishment 1. For the 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. xxx xxx xxx 3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph (7) of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period . xxx xxx xxx" (emphasis supplied) Based on the foregoing, the profits of an enterprise which is a resident of the United Kingdom is taxable only in that State unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise which is a resident of the United Kingdom carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much as is attributable to that permanent establishment. Applying this to the instant case, the fees received by Quartzelec Ltd. for the services rendered to GCGI PH shall be taxable in the Philippines only if it has a permanent establishment here in connection with the activities giving rise to such income. In order for Quartzelec Ltd. to be considered as having a permanent establishment to which said business profit may be attributed, the employees acting on its behalf must have rendered services in the Philippines for a period exceeding 183 days within any twelve-month period. Inasmuch as Quartzelec Ltd. 's employees performed services in the Philippines for about 45 days only based on the relevant Certification issued by GCGI PH on August 2, 2012, thus, not exceeding an aggregate period of six (6) months within any twelve-month period, Quartzelec Ltd. is deemed not to have a permanent establishment in the Philippines to which said business profit may be attributed. Such being the case, the contractor's fees paid by GCGI PH to Quartzelec Ltd. under the Agreement shall be exempt from income tax and consequently from withholding tax, pursuant to Article 7, in relation to Article 5, of the RP-UK tax treaty. Finally, the contractor's fees paid for the portion of services rendered in the Philippines are subject to value-added tax (VAT) at the rate of 12% pursuant to Section 108 of the Tax Code. Accordingly, GCGI PH , being the resident withholding agent and payor in control of the payments, shall be responsible for the withholding of the final VAT before making any payment to Quartzelec Ltd. In remitting the VAT withheld, GCGI PH shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by GCGI PH upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case GCGI PH is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset," whichever is applicable. In addition, GCGI PH is required to issue the respective Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Quartzelec Ltd. , the first three copies thereof to be given to Quartzelec Ltd. and the fourth copy to be retained by GCGI PH as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3, RR No. 8-2002; Section 7 of RR No. 14-2002]. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue