ITAD BIR Ruling No. 134-11

April 25, 2011 ITAD BIR RULING NO. 134-11 Articles 5, 7, 15 and 22 of the Philippines-Korea tax treaty; BIR Ruling No. 068-88; BIR Ruling No. DA-ITAD-37-07; BIR Ruling No. DA-ITAD-114-04; BIR Ruling No. DA-ITAD-083-05; BIR Ruling No. DA-ITAD-149-06 KEPCO Philippines 18th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Jung-In Kim General Manager Finance Group Gentlemen : This refers to your letter dated July 4, 2008 requesting a ruling that payments made by KEPCO Philippines Corporation (KEPHILCO) to Korea Electric Power Corporation (KEPCO) pursuant to a Technical Services Agreements for the years 2006 and 2007 are exempt from Philippine withholding taxes 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"). It is represented that KEPCO is a nonresident corporation organized and existing under the laws of Korea with principal address at 167 Samseong, Gangnam-Gu, 135-791 Seoul Korea; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated July 1, 2008; and that, on the other hand, KEPHILCO is a corporation organized and existing under the laws of the Philippines with principal address at #7 Eisenhower Street, Greenhills, San Juan, Philippines. It is further represented that KEPCO and the National Power Corporation ("NPC") have entered into an agreement dated May 17, 1995 (the "Project Agreement") for the rehabilitation, operation, maintenance and management of the 650MW Thermal Power Plant Complex in Pililia, Rizal (the "Project"); that pursuant to an Accession Undertaking dated July 3, 1995 executed by KEPCO, NPC and KEPHILCO, KEPHILCO became a party to the Project Agreement; that KEPCO is engaged in the business of, among others, power generation, and has skill, knowledge and experience in that field; that in reliance upon such skill, knowledge and experience, KEPHILCO has requested KEPCO to provide, and KEPCO has agreed to provide, primary support in connection with the Project, on the terms and subject to the conditions set forth under Technical Services Agreement ("Agreement") entered into between KEPCO and KEPHILCO on September 3, 1996; that the scope of the Technical Services provided by KEPCO to KEPHILCO under the Agreement are: IDAEHT 1. Project Management and Administrative Advisory Services to be provided by the members of Philippines Project Team and those of other department of KEPCO head office the number of which will be decided later by mutual agreement; 2. Technical Services to be provided by KEPCO's experts for Operation, Maintenance and Rehabilitation of Malaya Power Plant; 3. Guarantee of Loans borrowed by KEPHILCO and KEPCO International Hong Kong Limited for the project; 4. Training Services for KEPHILCO employees in Korea and Philippines; 5. Supply or rental of tools, equipment and materials; and 6. Other Services required for the implementation of the Project Agreement. That the Agreement shall commence immediately upon its execution by the parties and shall last for ten years and be renewed for the same period if both parties do not agree to terminate such Agreement; that KEPHILCO shall make compensations for the Services provided by KEPCO pursuant to Schedule 2 (Compensation) of the Agreement, as follows: 1. Lump-Sum Compensation KEPCO shall be compensated on a lump-sum basis for a) Project Management and Administrative Advisory Services by KEPCO head office and b) Guarantee of Loan borrowed by KEPHILCO and KEPCO International Hong Kong Limited for the Project. 2. Reimbursable Compensation KEPCO shall be compensated on a reimbursable basis for a) Technical Services to be provided by KEPCO's Experts, b) Training Services for KEPHILCO employees, c) Supply or rental of tools, equipments and materials and d) Other Services required for the implementation of the Project Agreement as follows: 2.1 Compensation for Technical Services by KEPCO's Experts shall be made based on the actual mandays plus 2 days of travel time engaged in the performance of the Services multiplied by the Daily rate per person. 2.2 Compensation for Training Services for KEPHILCO employees, Supply or rental of tools, equipments and materials and Other Services required for the implementation of the Project Agreement shall be made based on the actual costs incurred in the performance of the Services. That KEPCO shall submit invoices for Lump Sum Compensation and Reimbursable Compensation within 10 days from the end of each quarter and KEPHILCO shall pay within 30 days after the receipt of the invoices by way of telegraphic transfer to the account designated by KEPCO; that the breakdown of managerial & technical assistant services rendered in the Philippines by KEPCO personnel is as follows: Taxable Name of KEPCO Inclusive Dates Total Year Personnel Number of Days 2006 Chung, Tae Han May 29 to June 4 7 2006 Kim, Byeong-Rae August 27 to September 3 8 2006 Kim, Ho-Yol September 4 to September 9 6 2006 Lim, Ick-Hun September 25 to September 30 6 2006 Lim, Ick-Hun November 15 to November 19 5 2006 Chung, Tae-Han November 26 to November 29 4 Total number of days 36 == 2007 Lim, Ick-Hun April 8 to April 14 7 2007 Kim, Ho-Yol May 14 to May 21 8 Total number of days 15 == That per Sworn Certification dated June 18, 2008 issued by KEPHILCO, the application for tax treaty relief covers the business profits earned by KEPCO for the years 2006 and 2007 under the Technical Services Agreement for services rendered outside the Philippines or those performed in the Philippines, but did not exceed an aggregate of 183 days within any twelve-month period; that the services under the Agreement purely involve the rendition of management, administrative and technical services, as well as other services related to the ROMM Agreement between it and NPC; and that for the years 2006 and 2007, no supply or rental of tools, equipment and material nor importation of the foregoing were made pursuant to the Technical Services Agreement; that the total aggregate number of days rendered in the Philippines by KEPCO personnel for the years 2006 and 2007 are 36 and 15 days, respectively; and finally, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. IcTEaC 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, to income received by a nonresident foreign corporation which provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 subject to tax under subparagraphs 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: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (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 relation thereto, the provision of the Philippines-Korea Tax Treaty may apply to the compensation to be paid by KEPHILCO to KEPCO under the Agreement. A. Compensation for Services Generally, business profits (or industrial and commercial profits) include payments for the supply of goods and services, and for the lease of personal properties. In this case, the compensation for project management and administrative advisory services, technical services, and training services, compensation for the supply of tools, equipment and materials, and compensation for the rental of tools and materials (but not equipment), being in the nature of business profits , are taxed under Article 7 in relation to Article 5 of the Philippines-Korea tax treaty, thus: DaTICE "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; 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 continues within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period; and c) a place of exploration of natural resources constitutes a permanent establishment only if it exists for more than six months." Under Article 7, the compensation for project management and administrative advisory services, etc., is subject to Philippine income tax if it is attributable to a permanent establishment of KEPCO in the Philippines; otherwise, the compensation is exempt from Philippine income tax. Under Article 5, KEPCO is considered to have a permanent establishment if it has in the Philippines a fixed place of business through which it carries on its business (like a branch or an office) or if it furnishes services in the Philippines for more than 183 days within any twelve-month period. caADSE Accordingly, inasmuch as KEPCO does not have a branch, neither an office nor any other fixed place of business in the Philippines, and the services rendered in the Philippines pursuant to the Agreement did not exceed 183 days within any twelve-month period, KEPCO is considered as not having a permanent establishment in the Philippines. This is supported by the Certification of Non-Registration of Corporation/Partnership dated July 1, 2008, issued by the Securities and Exchange Commission confirming that KEPCO is not registered as a corporation or a partnership in the Philippines, which shows that it is unlikely for KEPCO to have a branch nor an office nor any other fixed place of business in the Philippines. Furthermore, in its Sworn Certification dated June 18, 2008 KEPCO signified and attested to the fact that the application for the treaty relief covers the services rendered outside the Philippines or those performed in the Philippines, but did not exceed an aggregate of 183 days within any twelve-month period, for the years 2006 and 2007. Moreover, the services under the Agreement purely involve the rendition of management, administrative and technical services, as well as other services related to the ROMM Agreement between it and the National Power Corporation (NPC), and that for the same period, no supply or rental of tools, equipment and material nor importation of the foregoing were made pursuant to the Agreement. The documents submitted to this Office support the foregoing representation and show that the personnel of KEPCO rendered services under the Technical Services Agreement, for an aggregate period not exceeding 183 days within a twelve-month period. Thus, KEPCO is not deemed to have a permanent establishment by virtue of the rendition of said services in the Philippines to which its profits could be attributable. In view thereof, this Office is of the opinion and so holds that the profits derived by KEPCO from the rendition of services under the Agreement shall not be subject to Philippine income tax pursuant to Article 7 (1) in relation to Article 5 (3) (b) of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-37-07 dated March 8, 2007; BIR Ruling No. 068-88 dated March 3, 1988; BIR Ruling No. DA-ITAD-114-04 dated October 26, 2004; BIR Ruling No. DA-ITAD-083-05 dated August 22, 2005; BIR Ruling No. DA-ITAD-149-06 dated December 8, 2006) AcSEHT B. Compensation for guarantee of Loans Unlike the compensation for services discussed above, the compensation for guarantee of loans, which are not derived directly by KEPCO from its primary activity of power generation, are not in the nature of business profits. Also, for apparent reasons, the compensation for the guarantee of loans cannot be treated as income from real property, shipping and air transport, dividends, interest, royalties, or capital gains, as the object or activity that gives rise to income in the nature of income from real property shipping and air transport, dividends, interest, royalties, and capital gains. Hence, because the Philippines-Korea tax treaty has a provision dealing with other income (or income not specifically dealt with in the articles of the tax treaty), this provision (Article 22) will govern the taxation of the compensation for guarantee of loans. It provides: "Article 22 OTHER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Under Article 22, compensation for guarantee of loans shall be taxed only in Korea where KEPCO is a resident, except if the compensation is effectively connected to a permanent establishment which KEPCO has in the Philippines. Accordingly, and as previously established, inasmuch as KEPCO does not have a permanent establishment in the Philippines to begin with, the compensation for guarantee loans to be paid by KEPHILCO to KEPCO under the Technical Services Agreement is exempt from Philippine income tax. The exemption covers the years 2006 and 2007 and possibly other succeeding years provided that KEPCO will not have a permanent establishment in the Philippines. (BIR Ruling No. DA-ITAD-37-07 dated March 8, 2007) C. Compensation for other services Compensation for other services to be paid by KEPHILCO to KEPCO under the Agreement will be the subject matter of another ruling when you shall have submitted a description of such other services, which can give rise to different income characterization under the Philippines-Korea tax treaty. D. Remuneration of personnel With respect to the remuneration of the personnel or employees of KEPCO who will come to the Philippines, it will be subject to income tax because the services are performed in the Philippines. However, under paragraph 2, Article 15 of the Philippines-Korea tax treaty, the remuneration will be exempt from income tax if (1) the personnel or employees (taken individually) are present in the Philippines for less than 183 days within the calendar year concerned, (2) the remuneration is paid by, or on behalf of an employer who is not a resident of the Philippines, and (3) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the Philippines, to wit: HAICcD As Article 15 of the Philippines-Korea treaty provides, viz. : "Article 15 DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Article 16 (Director's Fees), 18 (Pensions and Annuities), 19 (Government Service), 20 (Students and Apprentices), and 21 (Professors and Teachers), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in that other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and b) the remuneration is paid by, or on behalf of an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State." As to the first condition, we note that the furnishing of services by KEPCO personnel in the Philippines did not exceed in the aggregate 183 days within any twelve-month period from 2006 to 2007. As to the second condition, KEPCO, the employer, is not a registered corporation of the Philippines but of Korea. As to the third condition, it was previously established that KEPCO does not have a permanent establishment for the years 2006 and 2007. Accordingly, inasmuch as the personnel or employees of KEPCO were present in the Philippines for less than 183 days within the concerned calendar years, and the remuneration is paid by, or on behalf of, an employer (KEPCO) who is not a resident of the Philippines, and that, the remuneration is not borne by a permanent establishment which the employer (KEPCO) has in the Philippines, this Office is of the opinion and so holds that the remuneration paid to the personnel or employees of KEPCO are exempt from Philippine income tax. The exemption covers the years 2006 to 2007 and possibly other succeeding years provided the three conditions set forth above continue to exist. (BIR Ruling No. DA-ITAD-37-07 dated March 8, 2007) TSEAaD E. On value-added tax (VAT) Finally, on VAT, Sections 107 (A) and 108 (A) of the Tax Code of 1997, as amended, provide: "SEC. 107. Value-added Tax on Importation of Goods. (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) 1 based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: . . . . "Section 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 per cent (10%) now (12%) of the gross receipt of derived from the sale or exchange of services, including the use or lease of properties: . . . xxx xxx xxx 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. . . ." Accordingly, the compensation for the supply of tools, equipment and materials [being treated as importation of goods under Section 107 (A)], and the compensation for the project management and administrative advisory services rendered in the Philippines, technical services rendered in the Philippines, guarantee of loans, training services, rental of tools, equipment and materials, and other services [being treated as sale of services and use or lease of properties under Section 108 (A)], to be paid by KEPHILCO to KEPCO under the Technical Services Agreement, are subject to VAT. (BIR Ruling No. 37-07 dated March 8, 2007) With regard to the procedures for the withholding and the payment of the VAT on the compensations mentioned, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provides that KEPHILCO, being the payor in control of the payment will be responsible for the withholding of the VAT on the compensation before remitting them to KEPCO, the portion of the fees to be paid by KEPHILCO to KEPCO for whatever portion of services to be rendered in the Philippines under the Agreement are subject to the 10% (now 12%) VAT pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, KEPHILCO in withholding the VAT on such fees shall file a separate VAT return for and on behalf of KEPCO using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from KEPHILCO, if it is a VAT-registered taxpayer. In case KEPHILCO is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, KEPHILCO is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to KEPCO upon its request, and the fourth copy to be retained by KEPHILCO as its file copy. [Section 4.110-3 (b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2 (b), RR No. 16-05)]. TcSCEa This ruling is issued on the basis of the foregoing 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. Now 12%.