ITAD Ruling No. 038-99

November 3, 1999 ITAD RULING NO. 038-99 RP-Netherlands Art. 5; Art. 7 Sec. 28, 105, 108 (A) (2) 049-96 SyCip Gorres Velayo & Co. 3rd Floor Insular Life Bldg. cor Gorordo and Gen. Maxilom Avenues Cebu City Attention: Atty . Lauris L . Dela Pea Tax Division Gentlemen : This refers to your letter dated April 27, 1999 requesting on behalf of Van Seumeren (Philippines) Inc. (VSPI) for a confirmation of your opinion that the remittances of VSPI to Van Seumeren Holland B.V. (VSH) of rental payments for the use of one (1) unit 250 Crawler Crane be exempt from withholding tax pursuant to Article 5 and Article 7 paragraph (1) of the RP-Netherlands Tax Treaty. It is represented that VSPI is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at PDI Condominium, Archbishop Reyes Avenue, Cebu City; that VSH is a non-resident foreign corporation not engaged in business in the Philippines, as evidenced by a certification issued by the Securities and Exchange Commission dated May 6, 1999; that it has its principal office at Molensteyn 3454 ZG DE MEERN, the Netherlands; that VSPI is engaged in the leasing of cranes, specialized equipment for heavy lifting and transportation for onshore and offshore industries on a turnkey basis and sea transportation thereof or any services related thereto or connected therewith; that to augment the machineries and equipment being leased by VSPI, it entered into a Lease Agreement with VSH for the lease of one (1) unit Crawler Crane; that in consideration thereof, VSPI shall pay rental payments of US$23,650 per month or US$5,500 weekly beginning December 1, 1998. In reply thereto, I have the honor to inform you that paragraph (1) Article 7 and Article 5 of the RP-Netherlands Tax Treaty provides as follows: "Article 7" " BUSINESS PROFITS "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through 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 attributable to that permanent establishment." xxx xxx xxx "Article 5 " PERMANENT ESTABLISHMENT "1. For 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 especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, quarry or other place of exploration or extraction of natural resources; (g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; (h) 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 a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." "3. . . . "4. . . . "5. . . . "6. . . . "7. . . . Considering that VSH does not have a permanent establishment in the Philippines to which its business profits/income is attributable, payments received by it under its contract with VSPI are not subject to Philippine income tax/withholding tax prescribed under Section 28 of the Tax Code of 1997. However, said rental payments made by VSPI to VSH for the lease of one (1) unit Crawler Crane shall be subject to the 10% VAT imposed under Sec. 108 (A)(2) in relation to Sec. 105 of the Tax Code of 1997, based on the contract price agreed upon by the parties. VSPI, being the licensee, shall be responsible for the payment of VAT on such rentals in behalf of VSH by filing a separate VAT declaration/return. The said VAT declaration/return can be used by your client as evidence in claiming input tax credit. (BIR Ruling 049-96 dated April 11, 1996; Sec. 4.102-1(b) Revenue Regulations No. 7-95) This ruling is being issued on the basis of the foregoing facts as represented and will be considered null and void if upon investigation it will be disclosed that the facts are different. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group