ITAD Ruling No. 002-00

January 11, 2000 ITAD RULING NO. 002-00 RP-Australia 002-90 C.L. Manabat & Co. Penthouse, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Mr . Jose C . Leynes Partner Gentlemen : This refers to your letter dated November 29, 1999 stating that Dyno Nobel Asia Pacific Ltd. (DNA) is a company organized and existing under the laws of Australia; that on January 1, 1999, the company entered into a Management Agreement with its affiliate in the Philippines, Dyno Nobel Philippines, Inc. (DNP); that under the said agreement, DNA shall render certain services to DNP related to management and marketing operations of DNP; that DNA does not have any office or branch in the Philippines; that the services that will be provided by DNA under the agreement will be performed through its personnel who will be sent to the Philippines form time to time; that said personnel will not stay in the Philippines for a period beyond six (6) months in the aggregate in any taxable year; that for its services, DNA will be paid by DNP an annual fee equivalent of US%500,000; that you are of the view that the management fees received by DNA under the above agreement is not subject to Philippine income tax by virtue of the tax treaty between the Philippines and Australia; that under the treaty, business profits derived in the Philippines by an Australian resident are taxable only in Australia; and that said profits should not be taxed in the Philippines unless the Australian resident has a permanent establishment in the Philippines. Based on the foregoing, you now request for a ruling to the effect that the said management fees is not subject to Philippine income tax. In reply, please be informed that in BIR Ruling No. 002-90 dated January 4, 1999, management fees are treated as business profits or ordinary income of a foreign national. Thus under Article 7(1) of the RP-Australia Tax Treaty the profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. In connection therewith, Article 5 of the RP-Australia Tax Treaty defines the term "permanent establishment" to mean a fixed place of business of an enterprise is wholly or partially carried on. The term likewise encompasses a place of management, a branch, an office, a factory, a workshop, an oil or gas well, a quarry or any other place of extraction of natural resources; a warehouse, in relation to a person providing storage facilities for others; and premises used for the purpose of selling goods or merchandise. The term likewise is deemed to include a building site or construction or installation project or supervisory service activities in connection therewith if it lasts more than six months; an assembly or installation project which exists for more than three months. Likewise, the term includes 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 7 applies) shall be deemed to be a permanent establishment in the first-mentioned State if: a) he has and habitually exercises in that State an authority to conclude contract on behalf of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or b) he has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Such being the case, and since DNA does not have a permanent establishment in the Philippines and as represented the furnishing of services through its employees is for a period aggregating not more than six months in any taxable year, this Office is of the opinion, and hereby holds, that the management fees received by DNA from DNP under their Management Agreement is not subject to Philippine income tax. (BIR Ruling No. 002-90 dated January 4, 1990) cdlex This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group