ITAD Ruling No. 030-03

February 13, 2003 ITAD RULING NO. 030-03 RP-Thailand, Art. 5 & 7 BIR Ruling No. ITAD-143-02 PNOC Petrochemical Development Corporation 11/F BA Lepanto Building 8747 Paseo de Roxas 1227 Makati City Attention: Ms. Dionisia L. Mascardo Finance & Treasury Manager Gentlemen : This refers to your application for relief from double taxation dated April 11, 2002 requesting confirmation of your opinion that the consultancy services to be paid by PNOC Petrochemical Development Corporation (PPDC) to Chem Systems East Asia (CSEA) are not subject to Philippine income/withholding tax pursuant to Articles 5 & 7 of the RP-Thailand tax treaty. It is represented that CSEA is a corporation duly organized and existing under the laws of the State of Delaware, United States of America, but having its business operation in Thailand under the protection granted by the 1968 United States/Thailand Treaty of Amity & Economic Relations with official address at 15th Floor, Lake Rajada Office Complex, 193/59 Ratchadapisek Road, Klongtoey, Bangkok 10110, Thailand; 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 July 18, 2002; that PPDC is a domestic corporation duly organized and existing under the laws of the Philippines with business address at 11/F BA Lepanto Bldg., 8747 Paseo de Roxas, Makati City; that PPDC initially engaged the services of CSEA for a total period of eight (8) weeks which started on March 19, 2001 and ended May 11, 2001 to provide assistance on the progress and success of key activities of the Bataan Naptha Cracker (BNC) project including but not limited to: Participate in meeting in Manila to: - Revise the BNC project schedule and critical path items and assist in organizing the various activities of PPDC - Review the roles, scope of work of and interactions among the prospective advisors (e.g. commercial, technical, financial and legal) Meet with the various potential offtakers, feedstock suppliers and equity participants in Manila to understand their latest positions and business objectives on the cracker now that the pre-feasibility study has been completed and assist PPDC in building and maintaining a common understanding of the project objectives among these group Assist PPDC in the solicitation of a major off shore equity partner including a possible visit to another Asian country with PPDC or acting on PPDC's behalf. that the above services of CSEA was extended until December 31, 2001, although the actual services rendered in the Philippines during the engagement only involved twenty one (21) days; that the activities shall be charged according to the effort required at the rate set forth below: Advisory on BNC Cracker Project Schedule of Chem Systems Consultant Rates Category Hourly Rate, US$/hours Vice President/Director 380 Senior Consultant 294 Consultant 256 Associate Consultant 162180 Research Associate 138 (1) includes approximately a 10 percent discount on our standard rates that all other fees and expenses shall be paid by CSEA and shall issue invoice to PPDC, for the monthly fees and expenses incurred; and that in addition to the professional fees and other charges outlined above, administrative services including communications, reproduction., courier and computer charges will be billed, in the aggregate at 2% of professional fees. ScTCIE In reply, please be informed that Article 7(1) of the RP-Thailand tax treaty 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 that permanent establishment. xxx xxx xxx" Relative to the above, paragraphs (1) and (2)(k) of Article 5 of the aforesaid treaty provide, viz: Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, 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 specially: "xxx xxx xxx k) 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." xxx xxx xxx" Based on the aforequoted provisions, service fees paid by PPDC to CSEA are not subject to income tax and withholding tax provided the stay of CSEA personnel in the Philippines to render consultancy services to PPDC, as stipulated in the Agreement, does not exceed 183 days and, therefore, does not constitute a permanent establishment for CSEA in the Philippines to which any profits may be attributed to. However, the fees to be paid by PPDC for that portion of the services rendered by CSEA in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PPDC, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to CSEA. In remitting the VAT withheld, PPDC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by PPDC upon filing its own VAT return, if it is a VAT-registered taxpayer. In case PPDC is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, PPDC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of CSEA the first three copies thereof to be given to CSEA and the fourth copy to be retained by PPDC as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2000; Section 7 of RR 14-2002] This ruling is issued based on 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 parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service