ITAD BIR Ruling No. 040-11

February 9, 2011 ITAD BIR RULING NO. 040-11 Articles 5 & 7, Philippines-Austria tax treaty Salvador & Associates Attorneys-at-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Atty. Gerardo V. Francisco Atty. Ronald V. Bernas Atty. Adan T. Delamide Gentlemen : This refers to your Tax Treaty Relief Application filed on October 11, 2010, on behalf of ASIAN TERMINALS, INC. ("ATI"), requesting confirmation of your opinion that the income to be derived by LIEBHERR WERK NENZING GMBH ( "Liebherr" ) on a contract it entered into with ATI is not subject to Philippine income tax, pursuant to the Convention between the Republic of the Philippines and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Austria tax treaty") . It is represented that Liebherr , with address at Dr. Hans Liebherr Strasse 1, 6710 Nenzing, Austria is a resident of Austria within the meaning of the Philippines-Austria tax treaty as evidenced by the Certificate of Residence from the Austrian Tax Administration issued by the Feldkirch, Tax Office, Federal Minister of Finance dated March 5, 2010; that Liebherr is organized and existing under the laws of Austria per the duly authenticated English translation of the 'Extract with Actual Data' issued by Department 23 of the Provincial Court of Feldkirch dated April 26, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per the Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated July 22, 2010; and that, on the other hand, ATI is a company incorporated and existing under the laws of the Philippines with office at ATI Head Office Building, A. Bonifacio Drive, Port Area, Manila 1018, Philippines. It is also represented that on February 09, 2010, a SERVICE CONTRACT ("Service Contract" ) was entered into by and between Liebherr and ATI whereby Liebherr agreed to render various services to ATI in connection with the installation, commissioning and testing of quayside container cranes as follows: 1. Services 1.1 Unloading of the Components 1 from the delivery vessel, and receiving of the same; 1.2 Storing and protecting the Components prior to erection; 1.3 Ensuring the proper erection of the Equipment; 2 1.4 Adjusting the Components as necessary; 1.5 Commissioning of the Equipment on or before three (3) months from the date of arrival at the Port of the Components; 1.6 Performing Tests on Completion in accordance with the General Conditions mentioned in the Service Contract; CTAIHc 1.7 Securing the Work Site, including provision of guard and fire watch; 1.8 Cleaning the Work Site; 1.9 Turning over of the Equipment to ATI for its take over on or before three (3) months from the date of arrival of the Components, but which date of turn-over shall in no case be later than May 1, 2011; 1.10 Upon the signing of a Taking Over Certificate, deployment of one (1) service engineer for a duration of ten (10) weeks to carry out further training and assist with warranty repairs, including the correction of Defects, supporting the Crane(s) during operational activities, finalizing any minor punch list items, assisting with warranty repairs, carrying out further training, assisting in establishing the recommended planned maintenance program, fine tuning the Computerized Maintenance Management Systems (CMMS), advice on any operating problems, and the supervision of crane operators. The conduct of the training shall be in accordance with Annex 'A' 3 of the Service Contract. 1.11 Providing relevant data to allow ATI to effectively manage warranty issues during the Defects Liability Period. 2. Erection Engineer Liebherr shall have a qualified Erection Engineer at the Work Site at all times while the erection is in progress. His primary duty will be to ensure that the Equipment is assembled in accordance with the erection procedure, erection drawings and manufacturer's recommendations. Liebherr's Erection Engineer, along with ATI, shall review the erection operations. In consideration of the above services, it is represented that ATI shall pay Liebherr a contractor fee in the amount of US$1,150,000.00 (One Million One Hundred and Fifty Thousand US Dollars), which shall be paid by ATI to Liebherr via telegraphic transfer remittance to a bank account, notified in writing by Liebherr to ATI prior to the first payment; that Liebherr shall be paid as follows: a) First payment equivalent to 70% of the contractor fee is payable within 221 days after ATI's acceptance of the Commissioning Certificate issued by Liebherr for the Equipment; b) Second and final payment equivalent to 30% of the contractor's fee is payable within 21 days after the issuance by ATI of the Final Acceptance Certificate for the Equipment. It is further represented, based on the Sworn Statement issued by ATI dated November 9, 2010, that at present, Liebherr has not commenced any work under the Service Contract, and that ATI has not made any payments to Liebherr; that Liebherr is expected to commence the work sometime in the first quarter of 2011 when the Equipment components are expected to arrive. Finally, per the sworn statement executed by ATI on October 6, 2010, the transaction subject of the above TTRA is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or a judicial appeal of the taxpayer/s involved. In reply, please be informed that income derived in the Philippines by a nonresident foreign corporation, as in the instant case Liebherr, is generally governed by Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended. It provides, viz. : IEaCDH "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 . . . profits and income , . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Emphasis supplied) xxx xxx xxx However, under Section 32 (B) (5) of the same Code, the said income may not be subject to Philippine income tax. It provides, viz. : "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: 4 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." Based on the above, you invoke Article 7 (1) and Article 5 of the Philippines-Austria tax treaty which respectively provide, viz. : "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: a) that permanent establishment; or b) sales of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those affected, through that permanent establishment." "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an 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 of natural resources; g) a warehouse, in relation to a person providing storage facilities for others; and h) premises used for the purpose of selling goods or merchandise. 3. The term "permanent establishment" likewise encompasses: a) a building site or construction or installation project or supervisory service activities in connection therewith if it lasts more than six months; b) an assembly or installation project which exists for more than three months. SDTIaE xxx xxx xxx" Based on the foregoing, the service fees of Liebherr to ATI shall not be subject to Philippine income tax if Liebherr , being a resident of Austria, does not have a fixed place of business in the Philippines; or even if it has such a fixed place, but said fees are not attributable to such fixed place. However, should employees of Liebherr be required to render services in the Philippines, like for example, an assembly or installation project which exists for more than three months, such shall be deemed to constitute as a permanent establishment of Liebherr in the Philippines. Accordingly, such service fees shall be subject to Philippine income tax. Considering the representation that Liebherr does not have a fixed place of business in the Philippines, and that per the Certification as to Duration of Service executed by ATI on October 6, 2010, Liebherr shall perform the commissioning and turning over of the equipment for a maximum period/duration of three (3) months pursuant to the Service Contract, then Liebherr shall not be deemed to have a permanent establishment in the Philippines to which the payment of fees may be attributed. In view thereof, this Office is of the opinion and so holds that income of Liebherr from its services to ATI under the subject Service Contract shall not be subject to Philippine income tax pursuant to Article 7, in relation to Article 5, of the Philippines-Austria tax treaty. However, Section 108 of the Tax Code of 1997, as amended, provides that the above fees for such services rendered in the Philippines are subject to value-added tax (VAT): "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%), 5 after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . ." (Emphasis supplied) With regard to the procedures for the withholding and the payment of the VAT, ATI, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the final VAT on such fees before making any payment to Liebherr. In remitting the VAT withheld, ATI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from ATI if it is a VAT-registered taxpayer. In case ATI is non-VAT-registered, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, ATI is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Liebherr and the fourth copy for ATI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. aSTAHD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Large pre-assembled components of two (2) cranes ready for erection on an erection site to be identified by ATI. 2. Comprises of two (2) quayside cranes with three (3) spreader and one (1) lot of spareparts. 3. Training Requirements. 4. TITLE II TAX ON INCOME. 5. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.