Aeromaxis Maintenance Products, Inc.

April 3, 2018 ITAD BIR RULING NO. 067-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Malaysia tax treaty Aeromaxis Maintenance Products, Inc . 18 Mata Street Villamor Air Base 1309 Pasay City Attention: AAA __________ Gentlemen : This refers to your tax treaty relief application filed on January 3, 2014, on behalf of AIROD SDN. BHD. (" AIROD "),requesting confirmation that service fees paid to AIROD by the PHILIPPINE AIR FORCE (" PAF ") are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income (" Philippines-Malaysia tax treaty "). It is represented that AIROD is a foreign corporation organized and existing under the laws of Malaysia and a resident thereof as evidenced by its Certificate of Incorporation and Certificate of Residence issued by the Inland Revenue Board of Malaysia; that AIROD is engaged in the business of maintenance, repair and overhaul of aircraft; that it is not registered as a corporation or partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission; and that, on the other hand, PAF is the aerial warfare service branch of the Armed Forces of the Philippines. HTcADC It is further represented that on November 7, 2013, a contract titled "Procurement of Services and Materials for the 2C Check (Iran) of F-28 Aircraft With Tail NR 1250 (Contract NR PPAFC-CMB-13-34)" was entered into by and between PAF and AEROMAXIS MAINTENANCE PRODUCTS, INC. (" AMPI ");that AIROD is a co-venturer of AMPI ;that AIROD will provide goods and services to PAF to remedy the defects of its aircraft described in the contact; that in consideration, PAF will pay AIROD the amount of PhP__________; that per sworn Certifications issued by PAF , AIROD has completed its work under the contract for the repair of the said aircraft; and that services were all done in Malaysia for a total of 108 days from October 22, 2013 to January 25, 2014. It is finally represented that the transaction 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 per sworn statement issued by AMPI . In reply, please be informed that income derived in the Philippines by a nonresident foreign corporation is subject to income tax at the rate of 30% under Section 28 (B) (1) of the Tax Code of 1997 ("Tax Code"), 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 . . . 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, said income is exempt (or partially exempt) pursuant to a treaty obligation on the Philippine government pursuant to Section 32 (B) (5) of the Tax Code, thus: "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: 2 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 the instant case, paragraph 1 of Article 7 and paragraphs 1 and 2 of Article 5 of the Philippines-Malaysia 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 thereof as is attributable to that permanent establishment. xxx xxx xxx" "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, 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' shall include 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 other place of extraction of natural resources including timber or other forest produce; g) a farm or plantation; h) a building site or construction, installation or assembly project which exists for more than 6 months." Under Article 1, profits derived by an enterprise of a Contracting State from the other Contracting State may be taxed in the other State, but only so much of the profits as are attributable to a permanent establishment situated in that State. Under Article 5, a permanent establishment means a fixed place of business in 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. Accordingly, since AIROD 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 Philippines, and it provided services entirely in Malaysia for the repair of PAF 's aircraft, AIROD does not have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-Malaysia tax treaty. This being the case, this Office is of the opinion and so holds that service fees paid by PAF to AIROD for the repair of such aircraft are exempt from income tax in the Philippines under paragraph 1, Article 7 of the tax treaty. aScITE Furthermore, since the services are performed by AIROD outside the Philippines, the service fees paid to it by PAF are not subject to value-added tax (" VAT ") imposed under Section 108 (A) of the Tax Code, which reads: "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 supplied) Under the cross-border or destination principle of the VAT system, services performed in the Philippines are subject to VAT, while those performed outside are not subject to VAT. 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue