Bet Shemesh Engines Ltd.

December 9, 2019 ITAD BIR RULING NO. 040-19 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Israel tax treaty Bet Shemesh Engines Ltd. c/o Seal Aircraft Industries, Inc. Suite 83, Legaspi Suites 178 Salcedo Street, Legaspi Village 1229 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on December 13, 2017 requesting confirmation that the service fee paid by PHILIPPINE AIR FORCE ("PAF") to BET SHEMESH ENGINES LTD. ("Bet Shemesh") is exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the State of Israel for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Israel tax treaty") . TIADCc FACTS Bet Shemesh is a corporation organized and existing under the laws of Israel and a resident thereof based on the Certificate issued by the Registrar of Companies and Partnerships of Israel and the Certificate of Fiscal Residence issued by the Israel Tax Authority. The company is engaged in providing turbine engine parts and services to worldwide customers. It has two sectors, namely: 1) the engine parts sector which is involved in designing, developing and manufacturing engine parts; and 2) the engines sector which is involved in maintenance, repair, overhaul and development of whole engines. 1 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, PAF is the service branch of the Armed Forces of the Philippines responsible in organizing, training and equipping forces for prompt and sustained air operations for the country's defense, and for airlift, airborne and tactical air operations. 2 In 2017 and 2018, PAF and Bet Shemesh entered into the following contracts and amendments for the procurement of spare parts and services for the repair and overhaul of PAF 's aircraft and engines assigned at Sangley Air Station (now Major Danilo Atienza Air Base) in Cavite: Contract No. Date Consideration Subject PAFPC-CDS-17-141 July 12, 2017 Php__________ Engine system of SF-260TP Aircraft with Tail Nos. 701, 704, 705, 706 and 708 PAFPC-CDS-17-142 August 7, 2017 Php__________ MD-520MG Aircraft Nos. 418, 431, 439, 503, 506 and 507 PAFPC-CDS-17-143 July 12, 2017 Php__________ Engine Assy of MD-520MG Aircraft No. 395 PAFPC-CDS-17-143A (Amendment for additional cost) August 3, 2018 Php__________ Engine Assy of MD-520MG Aircraft No. 395 PAFPC-CDS-17-144 August 7, 2017 Php__________ MD-520MG Aircraft Nos. 417, 438 and 505 PAFPC-CDS-17-144A (Amendment for additional cost) September 4, 2018 Php__________ MD-520MG Aircraft Nos. 417, 438 and 505 Based on the Certificate as to the Duration of Service issued by Bet Shemesh , the aircraft and engines subject of the above contracts will be exported to Bet Shemesh in Israel for assessment, repair and overhaul and will be returned to the Philippines after such repair and overhaul. AIDSTE Based on the certification issued by PAF , the transaction subject of this ruling is not under investigation, on-going audit, administrative protest, collection proceedings, judicial appeal or administrative protest. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , income derived by a foreign corporation not engaged in trade or business in the Philippines 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: n 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." Relative thereto, the pertinent provisions of paragraph 1, Article 7, and paragraphs 1 and 2, Article 5, of the Philippines-Israel tax treaty state: AaCTcI " 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." The term "permanent establishment" is defined in Article 5 of the treaty as follows: " 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 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 of natural resources; g) a place of exploration of natural resources; h) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; i) an assembly or installation project which exists for more than six months; j) the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within a State for a period or periods aggregating more than six months within any twelve-month period;" It must be gleaned from the above provisions that the business profits of an enterprise of Israel are taxable only in that State unless the enterprise carries on business in the Philippines through a permanent establishment. The term "permanent establishment" is defined as a fixed place of business where the enterprise is wholly or partly carried on. However, even if there is no fixed place of business, an enterprise of Israel is deemed to have a permanent establishment in the Philippines if it furnishes services, including consultancy services, through its employees or other personnel and activities of that nature continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than six months in any twelve-month period. In the instant case, Bet Shemesh 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 country and the services related to the repair and overhauling of PAF 's aircraft and engines were all performed at the former's place of business in Israel. Hence, the service fees derived by Bet Shemesh from its dealings with the PAF are not taxable in the Philippines pursuant to paragraph 1, Article 7, in relation to Article 5 of the Philippines-Israel tax treaty. EcTCAD Finally, the service fee paid to Bet Shemesh is exempt from value-added tax ("VAT") imposed under Section 108 (A) of the Tax Code, as amended by Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion Act or TRAIN Law, which took effect on January 1, 2018, 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . ." (Underscoring Supplied) Under the cross-border principle of the VAT system, services performed in the Philippines are subject to VAT, while those performed outside the country are exempt from VAT. Since the repair and overhauling of the aircraft and engines of PAF were all done in Israel, the service fee paid therefor are exempt from VAT. 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. https://bsel.co.il/about-us/ . 2. https://www.paf.mil.ph/about-us . n Note from the Publisher: Copied verbatim from the official document.