ITAD Ruling No. 009-03

January 16, 2003 ITAD RULING NO. 009-03 RP-UK, Art. 7 & Art. 5 BIR Ruling No. ITAD 27-00/69-007 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: E. C. Alcantara Tax Division Gentlemen : This refers to your application for tax treaty relief dated March 8, 2002 on behalf of your client, Balfour-Cleveland Consortium, requesting confirmation of your opinion that a non-resident foreign corporation which does not perform any service and is not considered to have carried business through a permanent establishment in the Philippines is not subject to income/withholding tax and VAT in the Philippines pursuant to Article 7 of the RP-UK tax treaty in relation to Article 5 of the same treaty. It is represented that Balfour-Cleveland Consortium (the Consortium) is a corporation duly existing and organized under the laws of United Kingdom; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated June 28, 2002; that the Consortium was awarded a contract with the Philippine Government Department of Public Works and Highways (DPWH) for the design, fabrication and supply of structural steel bridges with advisory services; that the principal contract cover two portions, namely, (1) the "offshore portion" consisting of the design and delivery of U.K. supplied bridges covered by the Contract for the Supply of Steel Truss and Beam Bridges for the provision of advisory services of the DPWH Bridge Replacement Project between DPWH and the Consortium, and (2) the "onshore portion" consisting of advisory services; that the Consortium has retained to undertake the offshore portion of the contract while the onshore portion has been subcontracted to First Philippine Balfour Beatty (FPBB) in accordance with the Subcontract Agreement dated October 30, 2001; that FPBB is a corporation organized and existing under the laws of the Philippines with principal office at 3rd Floor, Benpres Bldg., Exchange Road corner Meralco Avenue, Pasig City; that pursuant to the terms of the offshore portion of the principal contract, the Consortium has undertaken to design, fabricate, build and construct structural bridges in the U.K. and subsequently deliver the manufactured product to DPWH, the importer of record, which shall in turn be responsible for the installation of the bridges in the Philippines; that the liability of the Consortium to DPWH shall be deemed terminated upon the delivery of the structural bridges to DPWH; and that the Consortium shall not be engaged in the onshore installation or construction of the super structure, hence no service shall be performed in the Philippines. DIETcH In reply, please be informed that pertinent portions of Article 7 and Article 5 of the RP-UK tax treaty, provide as follows: "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 directly or indirectly attributable to that permanent establishment. "xxx xxx xxx" "Article 5 "PERMANENT ESTABLISHMENT "1. For the purpose 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. . . . "a) . . . "3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: "a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or "b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period." "xxx xxx xxx" Based on the foregoing provisions, the profits of a corporation which is a resident of the United Kingdom is taxable only in United Kingdom, unless the UK corporation carries on business in the Philippines through a permanent establishment situated therein. A UK corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel in connection with a building site or a construction or assembly project is for a period or periods aggregating more than 183 days within any twelve-month period. TacESD Considering that the Consortium subcontracted to FPBB the Advisory portion of the contract, such that the actual services are performed in the Philippines by FPBB and not by the Consortium nor by any of its personnel, the Consortium is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, this Office is of the opinion and so holds that the payments by DPWH to the Consortium are not subject to Philippine income tax and VAT pursuant to Article 7 in relation to Article 5 of the RP-UK tax treaty, and Section 108 of the Tax Code of 1997, respectively. On the other hand, since FPBB is a domestic corporation, any income/profits it derives from the subcontracting agreement with the Consortium are subject to the 10% value-added tax and ordinary corporate income tax pursuant to Sections 108 and 27(A) of the 1997 Tax Code. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service