Punongbayan and Araullo

October 23, 2018 ITAD BIR RULING NO. 107-18 Articles 5 (Permanent Establishment) and 8 (Business Profits) Philippines- United States of America tax treaty Punongbayan and Araullo 19th and 20th Floors, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on November 14, 2011 requesting confirmation that service fees paid by Chevron Geothermal Philippines Holdings, Inc. ("Chevron Philippines") (now known as Chevron Geothermal Philippines Holdings LLC ) to Thermochem, Inc. ("Thermochem") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . HTcADC FACTS Thermochem is a corporation organized and existing under the laws of the United States and a resident thereof based on its Articles of Incorporation and Certificate of Residence issued by the Internal Revenue Service. Thermochem is engaged in providing chemical engineering, laboratory analysis, geochemistry and field testing services and products to a wide range of energy industries. The primary focus of Thermochem is to protect the long-term assets of its clients and to increase the efficiency of their operations through consulting and testing services, and innovative chemical process development, designed to optimize energy extraction and power generation operations. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on June 13, 2011. 1 On the other hand, Chevron Philippines is a domestic corporation which operates steam fields that provide geothermal energy to the Tiwi and Makiling-Banahaw ("Mak - Ban") power plants located in Albay and Laguna-Batangas provinces in the Philippines. On September 15, 2011, Chevron Philippines and Thermochem entered into a Professional Services Contract for Laboratory and Consulting Services where Thermochem agreed to provide the following services to Chevron Philippines : A. Downhole sampling 1. Set up sampling tool in the laboratory 2. Bring the downhole sampling tool onsite (wellsite) and endorse to wireline contractor to run-in-hole 3. Retrieve the tool after sampling run, cool it and bring it to the lab 4. Retrieve the samples from the tool in the laboratory and set up for the next sampling B. Tiwi (36 wells) and Mak-Ban (61 wells) normal gas sampling and analysis 1. Onsite bottle preparation and sampling 2. Sample preparation, packaging, hazardous materials documentation and shipping 3. Off-site gas analysis C. Micromod and miniskid preventive maintenance and calibration 1. Onsite (Tiwi and Mak-Ban) preventive maintenance and calibration of micromod and miniskid including consultation and re-training of samplers Performance of work will commence upon approval of the contract. The contract is valid for three years and the target completion date is September 14, 2014. Thermochem will provide the following personnel in performance of the work: Senior Chemist/Engineer (tool preparation, operation, sample extraction and consulting on downhole sampling procedures and tools); Field Chemist (assist in tool preparation, operation, sample extraction, and for onsite sampling bottle predations and sampling); Thermochem Engineers (preventive maintenance, troubleshooting, and re-training to be performed on one micromod system and one miniskid system. The area of operations will be in Tiwi, Albay and Mak-Ban, Laguna in the Philippines. In consideration, Chevron Philippines will compensate Thermochem based on the nature of services performed under a compensation schedule. On September 25, 2014, the parties amended the contract to extend its term for one year or until September 14, 2015 for the provision of the following services: A. Semiannual NCG sampling and tft preventive maintenance service B. Semiannual NCG laboratory analysis C. Packaging, shipping, and hazmat documentation D. Domestic and international mobilization Based on the Joint Certification issued by Chevron Philippines and Philippine Geothermal Production Company, Inc. ("Philippine Geothermal") , Thermochem sent its personnel to the Philippines on November 7-19, 2011 to perform downhole sampling, NCG sampling and preventive maintenance and training. On June 1, 2012, Chevron Philippines assigned its contract with Thermochem to Philippine Geothermal , a domestic company and a joint venture between All First Equity Holdings, Inc. (60%) of the SM Group of Companies and Chevron Philippines (40%). Beginning June 1, 2012 until present, Thermochem sent its personnel to the Philippines on May 14-23, 2013 to provide sampling sample packing and labeling. Thermochem completed the work required of it under the contract. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") , profits derived in the Philippines by a foreign corporation not engaged in trade or business are 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%)." aScITE However, under Section 32 (B) (5) of the Tax Code, such profits are 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 8 of the Philippines-United States tax treaty provides: " Article 8 BUSINESS PROFITS 1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." Under this article, business profits derived by a resident of the United States from sources in the Philippines may be taxed in the Philippines if they are attributable to a permanent establishment which the resident has therein. The term permanent establishment is defined in paragraphs 1 and 2, Article 5 of the treaty, to wit: " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. 2. The term 'fixed place of business' includes but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." Under Article 5, a permanent establishment means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on, and includes for example, a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. It includes also the furnishing of services (including consultancy services) which continues in a Contracting State for a period or periods aggregating more than 183 days. Accordingly, since Thermochem 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 for more than 183 days, but for 23 days only ( i.e. , 13 days in 2011; none in 2012; 10 days in 2013; and none in 2014: none) until the completion of the work, Thermochem is not deemed to have a permanent establishment in the Philippines under paragraphs 1 and 2, Article 5 of the Philippines-United States tax treaty. This being the case, service fees paid to Thermochem by Chevron Philippines , and later by Philippine Geothermal , are exempt from income tax in the Philippines pursuant to paragraph 1, Article 8 of the treaty. HEITAD However, since Thermochem performed services in the Philippines, the service fees paid to it are subject to value-added tax ("VAT") under Section 108 (A) of the Tax Code, 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 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) Relative thereto, Chevron Philippines and Philippine Geothermal , as the case may be, shall withhold VAT on the service fees at the rate of 12% before remitting them to Thermochem . The domestic companies shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed form and accompanying proof of payment shall serve as documentary substantiation for their claim of input VAT on the fees. Otherwise, the domestic companies may treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 2 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. A similar name Thermochem, Incorporated is registered with the Securities and Exchange Commission on January 25, 1985 under Company No. 124591. This domestic company is in the trading business and not in providing support services to companies in the energy industry as Thermochem of the United States. Particularly, the domestic company is engaged in and carrying on a general and commercial business of importing and exporting, manufacturing, buying, acquiring, holding, selling or otherwise disposing of and dealing in any merchandise, commodities, goods, tools, equipment, wares of all kinds, and products which are now or may become articles of commerce. 2. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: " SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense,' whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." n Note from the Publisher: Copied verbatim from the official document.