ITAD BIR Ruling No. 199-14

September 23, 2014 ITAD BIR RULING NO. 199-14 Article 8 (Business Profits), Philippines-United States tax treaty Isla Lipana & Co. 29th Floor, Philippine Tower, 8767 Paseo de Roxas, 1226 Makati City Attention: Malou P. Lim Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 15 June 2010 requesting confirmation that fees paid by CE Casecnan Water and Energy Company, Inc. ("CE Casecnan-Philippines") to MidAmerican Energy Holdings Company ("MidAmerican-United States") 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). The following are the facts as represented by the applicant: MidAmerican-United States is a non-resident foreign corporation organized and existing under American laws based on the certificate of residency issued by the notarized and consularized US Department of Treasury and the surviving corporation in a merger with Maverick Reincorporation Sub, Inc. based on a consularized and notarized Amended and Restated Articles of Incorporation. The company MidAmerican-United States is not registered as a partnership or corporation in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on 19 February 2010. On the other hand, CE Casecnan Water and Energy Company, Inc. is a domestic corporation with principal address at 24th Floor, 6750 Building, Ayala Avenue, Makati. The firm of Isla Lipana & Company is the authorized agent of MidAmerican-United States for the purpose of securing this ruling based on a consularized and notarized Special Power of Attorney executed by the Vice-President for Taxation of MidAmerican-United States. aTCADc On 20 March 2008, MidAmerican-United States and CE Casecnan-Philippines entered into a contract for operation of the Casecnan Multipurpose Power Project in relation to corporate management, financial planning support, technical and administrative support services 1 based on a consularized and notarized Service Agreement. CE Casecnan shall pay to MidAmerican a monthly service fee equivalent to 10% of the site costs spent by CE Casecnan on the Casecnan Multipurpose Power Project during the relevant month, inclusive of taxes, legal and out-of-pocket expenses. 2 To facilitate the Service Agreement, MidAmerican-United States sent two personnel in the person of Mitchell Lee Pirnie and Douglas Lee Anderson who worked onsite for an aggregate period of fifty four (54) days or less than one hundred eighty three (183) days based on a notarized Certification with attached copies of the personnel's respective passports issued by the Director of CE Casecnan. The issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal based on the Certification issued by the Director of CE Casecnan-Philippines. Ruling Service fees paid by a domestic entity to a non-resident foreign corporation is be subject to income tax at the rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, 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%). " aDATHC On the other hand, under paragraph 1, Article 8 of the Philippines-United States tax treaty, the service fees paid to MidAmerican-United States may be taxed in the Philippines if they are attributable to a permanent establishment which it has in the Philippines, to wit: "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." Relative thereto, under paragraphs 1 and 2, Article 5 of the treaty, with respect to furnishing of services, MidAmerican-United States is deemed to have a permanent establishment if it furnished services for an aggregate period of more than 183 days: "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; SCHATc 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." Accordingly, since the services performed by MidAmerican-United States to CE Casecnan-Philippines is performed outside the Philippines, MidAmerican-United States is not engaged in trade or business in the Philippines to which it furnished services in an aggregate period of 54 days or less than 183 days. Therefore, MidAmerican-United States did not have a permanent establishment in the Philippines on services it rendered therein. This being the case, the service fees paid by CE Casecnan-Philippines to MidAmerican-United States under the Service Agreement shall be exempt from income tax. However, under Section 108 (A), in relation to Section 105 of the NIRC of 1997, the service fees paid by CE Casecnan-Philippines to MidAmerican-United States, being payments for the supply of services in the Philippines by a nonresident foreign person, are subject to value-added tax ("VAT"), 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, 3 raise the rate of value-added tax to twelve percent (12%) . . ." TSHcIa " SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business ." (emphasis added) Relative thereto, CE Casecnan-Philippines shall withhold VAT on the payments at the rate of 12 percent before remitting them to MidAmerican-United States. CE Casecnan-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If CE Casecnan-Philippines is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for CE Casecnan-Philippines' claim of input tax on the payments; otherwise, it may treat such 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. 4 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. AETcSa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 1st Whereas clause of the Service Agreement. 2. Paragraph 3 of the Service Agreement. 3. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 4. 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 corporation, individuals, estates and trust, 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." Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.