ITAD BIR Ruling No. 335-15

December 7, 2015 ITAD BIR RULING NO. 335-15 Article 7 Business Profits, Philippines-Canada tax treaty CalEnergy International Services, Inc. 24th Floor, 6750 Building Ayala Avenue 1226 Makati City Attention: Trinity S. Gatuz Vice President Gentlemen : This refers to your tax treaty application ("TTRA") filed on June 11, 2013 requesting confirmation that service fees to be paid by CalEnergy International Services, Inc. (CalEnergy) to KAWA Engineering LTD. (KAWA) are exempt from income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Canada with respect to Taxes on Income, ("Philippines-Canada tax treaty") . It is represented that KAWA is a non-resident foreign corporation organized and existing under the laws of Canada with principal address at Suite 400, 510 West Hastings St., Vancouver, Canada V6B 1D8; that it is not registered as a corporation or partnership in the Philippines per certificate of non-registration issued by the Securities and Exchange Commission on May 16, 2013; and that CalEnergy is a regional operating headquarters duly organized and existing under the laws of the Republic of the Philippines with office address at 24th Floor, 6750 Building, Ayala Avenue, Makati City. It is also represented that on May 2, 2013, CalEnergy entered into a Service Agreement (agreement) with KAWA; that KAWA agreed to provide services in identifying potential projects for investment in South East Asia, Asia and elsewhere that is considered acceptable to CalEnergy ; that for and in consideration of the services to be rendered by KAWA, CalEnergy shall pay the total service fee based on the hourly rates indicated in 2013 Rate Sheet of KAWA 1 and in any amendments as may subsequently be agreed upon by both parties; that CalEnergy shall pay KAWA such other fees and expenses as may be approved by CalEnergy; that the service fees, other fees and expenses shall be payable every month and not later than thirty (30) days from receipt of the detailed invoice or billing from KAWA for services rendered the previous month; that under the service agreement KAWA performed due diligence and consulting services for the review of a potential investment in a hydroelectric power project located in Myanmar; that these services were rendered by the personnel of KAWA in Canada and Switzerland; and that there were no actual services performed in the Philippines based on the certification issued by the Vice President of CalEnergy on May 2, 2014. ISHCcT Consequently, CalEnergy paid the amount of $58,378.78 on August 13, 2013 to KAWA for services rendered in Canada and Switzerland under its contract for the provision of due diligence and other consulting services to CalEnergy . It is further represented, per Certification issued by CalEnergy dated June 10, 2013, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that profits derived in the Philippines by a nonresident corporation, like KAWA in the instant case, are generally subject to tax under Section 28 (B) (1) of the National Internal Revenue Code of the Philippines of 1997 (Tax Code of 1997), as amended. It provides, viz. : " 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 . . . profits and income. Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Emphasis supplied) xxx xxx xxx" However, said income derived by a nonresident foreign corporation may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : "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 the instant case, Article 7 (1) of the Philippines-Canada tax treaty appropriately applies. It provides: 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 or has carried 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: a) that permanent establishment; or b) sales of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those affected, through that permanent establishment. xxx xxx xxx Based on the foregoing, the profits of an enterprise of Canada shall be taxable only in Canada unless the enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the Philippines but only so much of them that is directly or attributable to that permanent establishment. Applying this to the instant case, the service fees received by KAWA for services rendered in the Philippines under the Agreement shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, paragraphs 1 and 2 of Article 5 of the treaty define a permanent establishment as follows: "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; CAacTH c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of extraction of natural resources; g) a building or construction site or supervisory activities in connection therewith, where such activities continue for a period more than six months; h) an assembly or installation project which exists for more than three months; i) premises used as a sales outlet; j) a warehouse, in relation to a person providing storage facilities for others. xxx xxx xxx Accordingly, since KAWA is not engaged in trade or business in the Philippines to which an office or a branch is necessary, then KAWA is considered to have no permanent establishment in the Philippines. This being the case, the consultancy service fees paid by CalEnergy to KAWA under the agreement shall be exempt from income tax. 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. Attachment 2 of the Service Contract X.