First Philippine Industrial Corporation

June 8, 2021 ITAD BIR RULING NO. 028-21 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-United Arab Emirates tax treaty First Philippine Industrial Corporation 20th Floor, JMT Corporate Condominium 27 ADB Avenue, Ortigas Center 1605 Pasig City Attention: __________________ Gentlemen : This refers to your tax treaty relief application filed on June 3, 2010 requesting confirmation that the service fees paid by First Philippine Industrial Corporation ("FPIC") to NDT Middle East FZE ("NDT") are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital ("Philippines-UAE tax treaty") . FACTS NDT is a foreign corporation organized and existing under the laws of UAE based on its Trading License issued by the Commercial Registration Department of the Jebel Ali Free Zone Authority of UAE, and a resident of UAE based on its Tax Residence Certificate issued by the Ministry of Finance of UAE. NDT is engaged in computer and data processing, inspection and testing of equipment and devices, and trading of equipment and spare parts for oilfields and natural gas. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, FPIC is a domestic corporation. HTcADC On May 30, 2010, FPIC and NDT entered into a Contract for In-Line Inspection Services where NDT agreed to provide in-line inspection services to FPIC 's five pipeline segments consisting of cleaning, calipering, and conducting high resolution magnetic flux leakage for wall measurement and ultrasonic crack detection. In consideration, FPIC will pay service fees to NDT amounting to ________________. NDT carried out the services in the Philippines in 2010 for one hundred and forty (140) days through the following personnel: Date of Arrival Date of Departure _____________________________ July 24 October 8 _____________________________ August 30 October 26 _____________________________ June 9 October 26 RULING A. Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, income derived by a nonresident foreign corporation 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) and (d) above: * 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, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: " 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 this connection, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-UAE tax treaty provide relief 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 is attributable to that permanent establishment." CAIHTE " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction or exploration of natural resources; g) a farm or plantation; h) a building site, a construction assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than six months; i) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of the nature continue in the territory of the other Contracting State for a period or periods aggregating more than six months during any taxable year." Under Article 7, 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 such, profits of that enterprise may be taxed in the other State but only so much of them as is attributable to the permanent establishment. Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a place of management, a branch, an office, a factory, and a workshop. It includes also the furnishing of services by an enterprise through employees or other personnel thereof, which continues for an aggregate of more than six (6) months in any taxable year. Considering that NDT is not engaged in trade or business in the Philippines, does not have a branch, an office, or other fixed place of business in the Philippines, and did not furnish services in the Philippines for more than six months in any taxable year, but for an aggregate of 140 days only , NDT shall not be deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-UAE tax treaty. Accordingly, the service fees paid by FPIC to NDT are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. B. Value-Added Tax However, under Section 108 (A), in relation to Section 105 of the Tax Code, the provision of in-line inspection services is subject to value-added tax (" VAT "), to wit: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%). . ." " SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. " (emphasis supplied) Based on the above provisions, in order to be subject to VAT, the services must be regularly conducted in the Philippines, undertaken in pursuit of a commercial or an economic activity, for a valuable consideration, and not exempt under the Tax Code, other special laws or any international agreement. In the case of non-resident foreign taxpayers, it is sufficient that these services are rendered in the Philippines, regardless of regularity. Considering that the in-line inspection services were all rendered in the Philippines, NDT is, therefore, liable to VAT. DETACa Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 1 FPIC shall withhold the VAT on the service fees at the rate of 12% before remitting it to NDT . FPIC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for FPIC 's claim of input VAT on the service fees. The VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual 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 Footnotes 1. Entitled Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005).