ITAD Ruling No. 033-01

March 13, 2001 ITAD RULING NO. 033-01 RP-Singapore - Arts. 5, 12 & 14 NIRC - Secs. 25, 28 & 108 044-97 078-97 UN 296-94 ITAD 39-99 Laya Mananghaya & Co . 22/F Antel 1000 Corporate Centre 139 Valero Street, Salcedo Village Makati City 1227 Attention: Atty . Remigio A . Noval Atty . Carolina A . Racelis Gentlemen : This refers to your letter dated May 24, 2000 requesting confirmation of the following: 1) that rental income to be derived by Walter Wright Mammoet (S) Pte Ltd. (WWM-S) from the Philippines pursuant to a proposed lease transaction between WWM-S and MOF Company Subic, Inc. (MOF) may be exempted from income tax and consequently to the 7.5% withholding tax imposed under Section 28(B)(4) of the Tax Code of 1997; and 2) that the manpower that may be sent by WWM-S to the Philippines to install the machineries and equipment leased, whose stay in the Philippines will not exceed a period aggregating more than 183 days, will not create a permanent establishment for WWM-S in the Philippines, both pursuant to the RP-Singapore Tax Treaty. It is represented that WWM-S is a non-resident foreign corporation organized and existing under the laws of Singapore; that it is not registered as a corporation/partnership in the Philippines as per certification dated April 12, 2000 issued by the Securities and Exchange Commission; that MOF, on the other hand, is a domestic corporation organized and existing under the laws of the Philippines; that on March 15, 2000, an Equipment Rental Agreement was entered into by and between WWM-S and MOF for a minimum period of nine (9) months, unless earlier terminated, and with a right to release in favor of MOF; that the leased machinery and equipment will be used by MOF for its project in the Philippines; that as an incident to the lease transaction, WWM-S intends to send its manpower to the Philippines to install the machinery and equipment leased, whose stay in the Philippines will not exceed a period aggregating more than 183 days; that WWM-S' manpower will stay in the Philippines only for a period of three (3) to four (4) months; that under the Equipment Rental Agreement, the rental charges consist of the Basic Rental Rate and the Overtime Rate; and that MOF shall pay monthly rentals in arrears for the entire rental period for the equipment at the rate/s stipulated in the Agreement. In reply to the first issue, please be informed that Article 12 of the RP-Singapore Tax Treaty provides, viz : "ARTICLE 12 "Royalties "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "(a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; "(b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; "(c) in all other cases, 25 per cent of the gross amount of the royalties. "3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment , or for information concerning industrial, commercial or scientific experience.(Emphasis supplied) xxx xxx xxx Based on the aforequoted provisions, the abovementioned rental payments are covered by the term "royalties," and as such are subject to the preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties. However, Section 28(B)(4) of the Tax Code of 1997 provides, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx "(B) Tax on Nonresident Foreign Corporations. xxx xxx xxx "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived be a nonresident lessor of aircraft machineries and other equipment shall be subject to a tax of seven and one-half percent (7%) of gross rentals or fees." (Emphasis supplied) In view thereof, the rental income derived by Walter Wright Mammoet (S) Pte Ltd. from its lease transaction with MOF Company Subic, Inc. is subject to seven and one-half percent (7%) tax rate on gross rentals, the same not having exceeded the 25% rate imposed on the gross amount of royalties under the RP-Singapore Tax Treaty, contrary to your opinion that the said rental income may be exempted from income tax and consequently to the 7.5% withholding tax imposed under Section 28(B)(4) of the Tax Code of 1997. (UN 296-94, BIR Ruling No. 078-97) TcHEaI Furthermore, the said rental payments to be made by MOF to WWM-S for the lease of equipment are subject to the ten percent (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, MOF, being the lessee shall be responsible for the payment of VAT on such rentals on behalf of WWM-S by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by MOF as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) As regards the second issue, Article 5 of the RP-Singapore Tax Treaty provides, viz : "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" includes specially but is not limited to: xxx xxx xxx "j) 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." On the basis of the aforequoted provisions, since the length of stay of the manpower of WWM-S to be sent to the Philippines for the installation of the machineries and equipment leased will not exceed a period aggregating 183 days, the same will not constitute a permanent establishment of WWM-S to which its profits could be attributed to. However, Article 14 of the same Treaty provides that: "ARTICLE 14 "Personal Services "1. Subject to the provisions of Articles 15, 17, 18, and 19, salaries, wages and other similar remuneration or income for personal (including professional) services derived by a resident of a Contracting State, shall be taxable only in that Contracting State, unless the services are performed in the other Contracting State. If the services are so performed, such remuneration or income as is derived therefrom may be taxed in that other Contracting State. "2. Notwithstanding the provisions of paragraph 1, remuneration or income derived by a resident of a Contracting State for personal (including professional) services performed in the other Contracting State shall be taxable only in the first-mentioned Contracting State if: "(a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 90 days in the case of professional services and 183 days in other cases, in the calendar year concerned; and "(b) the remuneration or income is paid by, or on behalf of, a person who is a resident of the first-mentioned Contracting State; and (c) the remuneration or income is not borne directly by a permanent establishment which that person has in the other Contracting State." "3. The term "professional services" includes independent, scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. xxx xxx xxx Hence, the salaries, wages or similar remuneration which will be derived by the manpower of WWM-S to be sent to the Philippines for the installation of the machineries and equipment leased may not be subject to Philippine income tax if the length of their stay in the Philippines will not exceed a period aggregating 183 days, and provided that their services shall not constitute professional services as defined in the RP-Singapore Tax Treaty. Otherwise, the said income shall be subject to the rate of tax provided for under Section 25(A) of the Tax Code of 1997 on non-resident alien engaged in trade or business within the Philippines. (BIR Ruling Nos. 044-97 & ITAD 39-99) This ruling is issued on the basis of the 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.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group