Shell Philippines Exploration B.V.-Philippine Branch

June 18, 2021 ITAD BIR RULING NO. 032-21 Article 10 (Dividends); Philippines-Netherlands tax treaty Shell Philippines Exploration B.V.-Philippine Branch 19th Floor, Asian Star Building ASEAN Drive, Filinvest Corporation City, Alabang 1781 Muntinlupa City Attention: _________________ Finance Director Gentlemen : This refers to your tax treaty relief application that was filed on 05 June 2014 requesting confirmation that branch profits remitted by Shell Philippines Exploration B.V.-Philippine Branch ("Shell-Branch Office") to its head office, Shell Philippines Exploration B.V. ("Shell-Head Office") are subject to income tax of 10% pursuant to the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . FACTS Shell-Head Office is a corporation organized and existing under the laws of the Netherlands and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Tax Administration Office of Rivierenland in the Netherlands. The company's objects are to prospect for and produce solid, liquid and gaseous hydrocarbons and other minerals, and to process, transport, store and engage in trading, including commission business and agencies, in solid, liquid and gaseous hydrocarbons and products made therefrom alone or together with other substances. On 21 January 1991, Shell-Head Office was granted a license to establish a branch by the Securities and Exchange Commission to be known as 'Shell Philippines Exploration B.V.-Philippine Branch.' The object of this branch office is to undertake its joint venture contract with Occidental Petroleum in the exploration and production of hydrocarbons northwest offshore of Palawan in the Philippines. On 26 June 2014, Shell-Branch Office remitted profits amounting to ___________ (USD ___________) to its head office. Based on the affidavit issued by the Finance Director of the Shell-Branch Office , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. RULING In reply, please be informed that under Section 28 (A) (5) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, profits remitted by a branch office of a foreign corporation in the Philippines to its head office abroad are subject to income tax of 15%, to wit: cSEDTC " SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." However, under Section 32 (B) (5) of the Tax Code, such profits are subject to relief, which may either be in the form of tax exemption or reduction of tax, 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." For this purpose, paragraph 7, Article 10 (Dividends) of the Philippines-Netherlands tax treaty provides that profits remitted by a permanent establishment situated in a Contracting State to its head office in the other Contracting State are subject to tax of 10%, to wit: "7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8." The term permanent establishment is defined under paragraphs 1 and 2, Article 5 of the tax treaty as a fixed place of business in which the business of an enterprise is wholly or partly carried on, and includes especially a branch or an office , to wit: " 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. 2. The term 'permanent establishment' includes especially: a) a place of management; SDAaTC b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." It is clear from the foregoing provisions that Shell-Branch Office is a permanent establishment of Shell-Head Office in the Philippines. Accordingly, the profits remitted by such permanent establishment in the Philippines to its head office in the Netherlands are subject to income tax of 10% pursuant to paragraph 7, Article 10 of the tax treaty. This ruling is issued on the basis of the foregoing facts as represented. If it will be disclosed upon investigation that the actual facts are different, 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