ITAD BIR Ruling No. 119-16

June 29, 2016 ITAD BIR RULING NO. 119-16 Articles 5 (Permanent Establishment) and 7 (Business Profits), Philippines-Israel tax treaty Bet Shemesh Engines Ltd. Post Office Haela Bet Shemesh Israel 99000 Attention: Mr. Shay Weiss Marketing Manager MRO and Special Projects Gentlemen : This refers to your tax treaty relief application filed on December 15, 2015 requesting confirmation that payments made by the Office of the President of the Republic of the Philippines ("Office of the President") to the Joint Venture of Bet Shemesh Engines Ltd. and Asian Aeronautics Services, Inc. are 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") . Facts Bet Shemesh Engines Ltd. ("Bet Shemesh") is a foreign corporation organized and existing under the laws of Israel and a resident thereof based on the Certificate issued by Companies Registry under the Ministry of Justice on Israel on August 8, 2014 and Certificate of Fiscal Residence issued by the Tax Authority under the Ministry of Finance of Israel on November 12, 2015. Its main activities are the manufacture, design, research and development, overhaul, repair, assembly, upgrade and testing of turbo engines for jet engines and land based power turbines, and the manufacture of parts for jet engines for main engine manufacturers, the reconditioning of jet engines for air forces of countries as well as civilian helicopter operators, and the development, manufacture and testing of a series of small jet engines with minimum weight of 150 lbs. Bet Shemesh 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 November 27, 2015. On the other hand, Asian Aeronautics Services, Inc. ("Asian Aeronautics") is a domestic corporation organized and existing under the laws of the Philippines. Its main activity is to provide the Philippine and regional aviation communities access to international standard aviation maintenance and services support by providing international standards in the approved Aircraft Maintenance Organization of the Civil Aviation Authority of the Philippines. On July 7, 2015, the Office of the President and the Joint Venture of Bet Shemesh and Asian Aeronautics entered into a Contract for the Procurement of One Unit Twin Pac Engine, Model PT6T-3BE for B-412 Helicopter. The Joint Venture is 60 percent owned by Asian Aeronautics and 40 percent by Bet Shemesh . The Joint Venture is not registered in the Philippines. Based on documents submitted by Bet Shemesh , the assets contributed by Bet Shemesh to the project are the provision of engines and other key activities involved in the project which shall be performed by Bet Shemesh outside the Philippines. Bet Shemesh signed the contract through Mr. Shay Weiss, Marketing Manager. He is employed solely and on and on a full-time basis by Bet Shemesh in the capacity of Marketing Manager. He has no employment, consultancy or other contractual relations with Asian Aeronautics . Mr. Weiss is an Israeli national without nexus in the Philippines. He lives in Israel permanently and travels to other countries in the world in the course of his position. Based on his passport, from 2014 to 2016, he has been in the Philippines for an aggregate of 29 days only in his capacity as Marketing Manager of Bet Shemesh and for such purpose alone. Mr. Weiss does not habitually exercise in the Philippines authority to conclude contracts on behalf of Bet Shemesh . Mr. Weiss' authority is limited to specific activities and following explicit authorization from the senior management of Bet Shemesh . 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 percent, 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, the profits are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, 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." In this connection, under paragraph 1, Article 7 of the Philippines-Israel tax treaty, profits derived in the Philippines by an enterprise of Israel may be taxed in the Philippines if the enterprise carries on business therein through a permanent establishment and the profits are attributable to the establishment, thus: "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; xxx xxx xxx 4. A person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of an independent status to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 of this Article." 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. A permanent establishment includes also a person acting in a Contracting State on behalf of an enterprise of the other Contracting State, where such person has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise. On permanent establishment in the form of fixed place of business (paragraphs 1 and 2), Bet Shemesh does not have this kind of permanent establishment since it is not a registered corporation or partnership in the Philippines to which a branch, office, or other fixed place of business is necessary. Moreover, the Joint Venture which concluded the above procurement contract and where Bet Shemesh is part of, is not a registered entity in the Philippines. On permanent establishment in the form of dependent agent (paragraph 4), Bet Shemesh does not have this permanent establishment since its marketing manager, Mr. Weiss, although having an authority to conclude sales contracts for Bet Shemesh , is not a resident of the Philippines but Israel. From 2014 to 2016, his days of physical presence in the country totalled 29 days only. For a dependent agent in a Contracting State to be considered a permanent establishment of an enterprise of the other Contracting State, paragraph 4 of Article 5 requires the agent to be acting in the first-mentioned State on behalf of the enterprise and he has and habitually exercising in that State an authority to conclude contracts on behalf of the enterprise. The phrases acting in a State and habitually exercising in that State means that the agent has established already a connection or certain degree of permanence in that State in the course of exercising activities on behalf of the enterprise of the other State. Accordingly, since Bet Shemesh does not have a permanent establishment in the Philippines, payments made to Bet Shemesh as part of the Joint Venture which sold and delivered one unit of Twin Pac Engine, Model PT6T-3BE for B-412 Helicopter under the above-mentioned procurement contract are exempt from income tax pursuant to paragraph 1, Article 7 of the Philippines-Israel tax treaty. On the other hand, payments made to Asian Aeronautics , a domestic corporation part of the Joint Venture , are subject to income tax at the rate of 30 percent under Section 27 (A) of the Tax Code. 1 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. " SEC. 27. Rates of Income Tax on Domestic Corporation. (A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22 (B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.