ITAD Ruling No. 016-01

February 19, 2001 ITAD RULING NO. 016-01 RP-Indonesia-Arts. 5 & 7 NIRC-Sec. 108 BIR Ruling No. ITAD-102-00 Chato Eleazar Liboro & Santos Law Office 6th Floor Strata 2000, Emerald Avenue, Ortigas Center, Pasig City 1605 Attention: Atty . Wilfredo M . Chato and Atty . Gladdys L . Gerial-Atienza Gentlemen : This refers to your letter dated August 23, 2000, on behalf of your client BANCO DE ORO ("BDO"), requesting relief from double taxation under the RP-Indonesia Tax Treaty. It is represented that BANKING PARTNER'S CONSULTING, A DIVISION OF PT ABDULGANI IMMACON, ("BPC") is a corporation duly organized and existing under and by virtue of the laws of Indonesia; that it is not licensed to engage in business in the Philippines as per certification issued by the Securities and Exchange Commission dated April 11, 2000; that BANCO DE ORO ("BDO") on the other hand, is a corporation duly organized and existing under Philippine laws; that on March 30, 2000, BPC entered into a contract with BDO for the automation of BDO's loan origination process whereby BPC would render services through its employees for a period aggregating not more than 183 days within any twelve-month period. Based on the representations, and pursuant to Article 7(1) in relation to Article 5 of the RP-Indonesia Tax Treaty which respectively provides, viz: "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 within that other Contracting State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or "(c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment." aETDIc "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of the 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 farm or plantation; "(g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; "(h) a place of exploration of natural resources; "(i) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; "j) an assembly or installation project which exists for more than three months; "(k) premises used as a sales outlet; "(l) a warehouse, in relation to a person providing storage facilities for others; "(m) the furnishing of services, including consultancy services, by an enterprise through an employee or other personnel where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 183 days within any twelve-month period. xxx xxx xxx" it is your opinion that the furnishing of services by BPC through its employees to BDO for a period not exceeding 183 days within any twelve-month period does not constitute as a permanent establishment to which BPC's profits could be attributed to. As a consequence, BDO's payment for the services under the contract shall not be subject to Philippine income tax although such payment is subject to the value-added tax (VAT) under Section 108 of the Tax Code of 1997. AEIHaS Under the aforequoted provisions, considering that the BPC employees would render services in the Philippines for a period not exceeding 183 days within any twelve-month period, such would not constitute a permanent establishment to which the profits of BPC could be attributed to. Hence, your opinion that the payment by BDO to BPC for services rendered under the contract shall not be subject to Philippine income tax is hereby confirmed. (BIR Ruling No. ITAD-102-00 dated August 07, 2000) However, the payments to be made by BDO for the furnishing of services in the Philippines are subject to the ten per cent (10%) value-added tax pursuant to Section 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. Accordingly, BDO shall be responsible for the payment of VAT on said services on behalf of BPC by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by BDO as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) This ruling is issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group