ITAD BIR Ruling No. 108-15

April 14, 2015 ITAD BIR RULING NO. 108-15 Articles 5 (Permanent Establishment) and 7 (Business Profits), Philippines-UK tax treaty DNATA, Inc. 4th Floor Room 425 International Passenger Terminal 1, NAIA Gentlemen : This refers to your application for tax treaty relief filed on August 13, 2014 requesting confirmation that the payments made by DNATA, INC. ("DNATA PH") to DNATA LTD. ("DNATA UK") are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty") . It is represented that DNATA UK is a nonresident foreign corporation organized and existing under the laws of United Kingdom (UK) is a resident thereof with address at Unit 3 Northumberland Close Stanwell Staines-Upon-Thames, Middlesex, TW19 7LN, based on the certification issued by the tax authority of UK on September 2, 2014; that DNATA UK is not registered as a company or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on October 23, 2013; and that on the other hand, DNATA PH is a domestic corporation engaged in servicing the ground handling requirements of local and international airlines with principal business address at 4th Floor, Room 425, International Passenger Terminal 1, NAIA, Pasay. It is further represented that on June 4, 2014, DNATA UK and DNATA PH entered into an Asset Purchase Agreement ("Agreement") whereby DNATA UK agreed to sell an FMC Commander 15 Narrow body loader ("Asset") to DNATA PH; that for and in consideration of said Asset, DNATA PH agreed to pay DNATA UK a lump sum price of Forty Thousand British Pounds (GBP40,000.00) plus shipping and legal documents costing Fourteen Thousand Eight-Hundred Fifty-Five and Fifteen Centavos British Pounds (GBP14,855.15); and, that the issues or transactions subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal based on the Certification issued by the representative of DNATA PH on August 12, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "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." With respect to a treaty, you invoke Articles 7 and 5 of the Philippines-UK tax treaty which 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 are directly or indirectly attributable to that permanent establishment. xxx xxx xxx" "Article 5 Permanent Establishment 1. For the purposes of this Convention, 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, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. 3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. xxx xxx xxx" (emphasis supplied) Based on the foregoing, the profits of an enterprise which is a resident of the United Kingdom is taxable only in that State unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise which is a resident of the United Kingdom carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much as is attributable to that permanent establishment. Applying this to the instant case, the payment received by DNATA UK shall be taxable in the Philippines only if it has a permanent establishment in the Philippines. In this case, inasmuch as it is represented that DNATA UK is not registered in the Philippines as a corporation or as a partnership based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on October 23, 2013, DNATA UK is deemed not to have a permanent establishment in the Philippines to which its profits may be attributable, the payment to DNATA UK by DNATA PH under the Agreement shall be exempt from income tax and consequently from withholding tax, pursuant to the Philippines-UK tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue