KEPCO Ilijan Corporation

June 26, 2020 ITAD BIR RULING NO. 050-20 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Korea tax treaty KEPCO Ilijan Corporation 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on July 9, 2010 requesting confirmation that service fee to be paid by KEPCO Ilijan Corporation ("KEPCO Ilijan") to Korea Electric Power Corporation ("KEPCO") for services it rendered in 2009 is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . FACTS KEPCO is a corporation organized and existing under the laws of Korea and a resident thereof based on its Certification of Residence issued by the National Tax Administration of Korea. KEPCO is engaged in the development of electric power resources and in electric power generation, transmission, transformation, and distribution, as well as related marketing, research, technological development, overseas business, investment, corporate social responsibility and use of its property. 1 It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission. On the other hand, KEPCO Ilijan is a domestic corporation which operates the Ilijan Power Station located in Barangay Ilijan, Batangas, Philippines. The Ilijan Power Station is a natural gas-fired combined cycle power plant, with diesel fuel fire capability, with power output of 1,200 megawatts. The station is built and operated pursuant to the amended Energy Conversion Agreement between KEPCO Ilijan and the National Power Corporation ("NPC") dated November 5, 1997, where KEPCO Ilijan has been awarded the contract to build and operate the station and subsequently transfer it to NPC. The station consists of facilities constructed or to be constructed by KEPCO Ilijan , including switchyard facilities, access roads, diesel fuel pipelines, and jetties. On November 9, 2000, KEPCO and KEPCO Ilijan entered into a Managerial and Technical Services Agreement where KEPCO agreed to advise and provide assistance to KEPCO Ilijan in the design, financing, construction, commissioning, testing, operation and maintenance of the Ilijan Power Station and its overall development, implementation and administration. KEPCO will provide the following services to KEPCO Ilijan : DETACa 1. Major Scope of Work a) Consulting and advisory services. b) Advisory services in respect of technical and engineering matters in the development, implementation, administration, design, construction, testing, commissioning, operation and maintenance of the station. c) Training of KEPCO Ilijan 's staff and personnel at KEPCO 's facilities in Korea, and coordinating such training to construction contractors. d) Supply or procurement of equipment, instruments, tools, spare parts and other materials and supplies for the station. 2. Technical Support a) Assistance in the formulation of procedures and guidelines in the operation and maintenance of the station, such as operation of equipment, corrective and preventive maintenance, and emergency actions. b) Review and evaluation of the station's design to check its conformity with required specifications, and providing recommendation for improvements or other necessary changes thereto. c) Review and evaluation of training, operation and maintenance manuals to check their conformity with prescribed requirements, and providing recommendation for improvements or other necessary changes thereto. d) Review and evaluation of equipment warranties provided by construction contractors and other equipment suppliers, and providing recommendation for improvements or other necessary changes thereto. 3. Administrative Support a) Provide advice to ensure that the station is constructed, managed, operated and maintained in accordance with required standards, good operating procedures, and operation and maintenance manuals. b) Provide advice on KEPCO Ilijan 's performance of its corporate business activities and its administration and management of project documents. In consideration, KEPCO Ilijan will pay KEPCO an annual service fee amounting to US$ __________ for project consulting and advisory services and US$ __________ for technical and engineering consulting and advisory services. The fee is prorated and payable monthly. Based on a certification issued by KEPCO and the passports of its personnel, KEPCO provided services to KEPCO Ilijan in 2009 under the Managerial and Technical Services Agreement, where KEPCO sent its personnel to the Philippines to work at the Ilijan Power Station. The services were rendered for an aggregate of 35 days January 12-26 (15 days); February 2-6 (5 days); March 30-31 (2 days); April 1-4 (4 days); May 18-22 (5 days); and November 3-6 (4 days). Those personnel and the nature of work they performed are as follows: TaDCEc Personnel Nature of Work Duration BBB ( ______________ ) - Block 1 overhaul technical support _______________ CCC ( ______________ ) - Block 1 overhaul technical support _______________ DDD ( ______________ ) - Exciter characteristic test, analysis and inspection _______________ EEE ( ______________ ) - Exciter characteristic test, analysis and inspection _______________ FFF ( ______________ ) - Block 1 overhaul turbine tuning support _______________ GGG ( ______________ ) - Block 1 overhaul turbine tuning support _______________ HHH ( ______________ ) - Conduct replica on high-pressure bypass line for life assessment _______________ III ( ______________ ) - Conduct replica on high-pressure bypass line for life assessment _______________ JJJ ( ______________ ) - Investigation and study of compressor spindle bolt _______________ KKK ( ______________ ) - Investigation and study of compressor spindle bolt _______________ LLL ( ______________ ) - Conduct technical advice on station performance test _______________ MM ( ______________ ) - Conduct technical advice on station performance test _______________ NNN ( ______________ ) - Provide technical assistance on auxiliary boiler tube leak inspection _______________ 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 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 on 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 1, Article 7 and paragraphs 1, 2 and 3, Article 5 of the Philippines-Korea tax treaty provide: " 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." " 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; cDEHIC 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) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities for others. 3.a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months; b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitutes a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period; and" Under Article 7, profits derived by an enterprise of a Contracting State from sources in the other Contracting State may be taxed in the other State if it carries on business in that State through a permanent establishment situated therein. 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. Also, the furnishing of services including consultancy services by an enterprise (through employees or other personnel thereof) constitutes a permanent establishment if this activity continues within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Accordingly, since KEPCO is not engaged in trade or business in the Philippines, and it does not have a branch, an office, or other fixed place of business in the country, and it did not furnish services in the Philippines in 2009 for a period or periods exceeding in the aggregate 183 days within any twelve-month period, but furnished such services for an aggregate of 35 days only , KEPCO is not deemed to have a permanent establishment in the Philippines during that taxable year pursuant to paragraphs 1, 2 and 3 (b), Article 5 of the Philippines-Korea tax treaty. This being the case, the service fee paid by KEPCO Ilijan to KEPCO for services it performed in 2009 is exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. However, the service fee is subject to value-added tax ("VAT") at the rate of 12% under Section 108 (A) of the Tax Code considering that KEPCO performed services in the Philippines, thus: " 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%) . . ." 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 . . ." (Emphasis ours) Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 2 as amended, KEPCO Ilijan shall withhold VAT on the service fee at the rate of 12% before remitting it to KEPCO . KEPCO Ilijan 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 KEPCO Ilijan 's claim of input VAT on the fee; otherwise, if it is not a VAT-registered taxpayer, KEPCO Ilijan may treat the passed-on VAT as part of the cost of such services and treat the same as asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding is made. ISCDEA 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. http://home.kepco.co.kr/kepco/EN/A/htmlView/ENAAHP001.do?menuCd=EN010101 2. Consolidated Value-Added Tax Regulations of 2005. n Note from the Publisher: Copied verbatim from the official document.