ITAD Ruling No. 044-01

April 19, 2001 ITAD RULING NO. 044-01 RP-Australia Art 7 (1) Art. 5 (2) (k) ITAD 2-00/85-00 Joaquin Cunanan & Co . 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave. 1226 Makati City Attention: Mary A . S . Bautista-Villareal Principal, Tax Services Dept. Gentlemen : This refers to your letter dated August 4, 2000 on behalf of your client Lincolne Scott Pty. Ltd. (LSPL), requesting confirmation of your opinion that Lincolne Scott CCF, Inc.'s (LSCCF) payments to LSPL pursuant to their service agreement are not subject to Philippine tax and that the same will qualify as part of LSCCF's deductible business expenses pursuant to Article 5(2)(k) and Article 7(1) of the RP-Australia Tax Treaty. It is represented that LSPL is a non-resident foreign corporation organized and existing under the laws of Australia; that it is not registered as a corporation/partnership licensed to engage in business in the Philippines as evidenced by a Certificate of Non-Registration dated December 20, 1999, issued by the Securities and Exchange Commission; that LSCCF is a domestic corporation organized and existing under Philippine laws; that both companies are engaged in consultancy engineering business and are members of the Lincolne Scott Group of Companies (Group) operating in Australia, New Zealand, Singapore, Thailand, Philippines, Fiji and Hawaii whose Head Office is in Australia; that to streamline operations among its various affiliate companies, the Group provides to them through LSPL, centralized corporate support services in the areas of management, accounting and administration, marketing support and engineering support; that in consideration of the aforementioned services, LSPL and LSCCF entered into an Agreement for Corporate Support Services (Agreement) which duration is continuous and which shall neither involve the grant of a license for the use of LSPL's proprietary rights nor will it involve transfer of technology; that the services under the Agreement will be performed entirely by LSPL in Australia; that in cases where LSPL's corporate support staff need to make occasional visits to the Philippines, such visits shall not exceed a period of six months in any calendar year; and that in consideration of the services rendered, LSCCF agrees to reimburse the amount representing the actual cost incurred by LSPL based on agreed allocation ratios without mark-up or profit element. In reply, please be informed that Article 7(1), in relation to Article 5(2)(k), of the RP-Australia tax treaty provides: "Article 7 Business Profits "(1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. "xxx xxx xxx" "Article 5 Permanent Establishment "(1) For the purpose of this Agreement, the term "permanent establishment" means "fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term "permanent establishment" shall include especially "xxx xxx xxx "(k) a place in one of the Contracting State through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or periods aggregating more than six months in any taxable year or year of income, as the case may be, in relation to a particular project, or to any project connected therewith." Based on the foregoing provisions, the profits of a corporation which is a resident of Australia is taxable only in Australia, unless the Australian corporation carries on business in the Philippines through a permanent establishment situated therein. An Australian corporation may be deemed to have a permanent establishment in the Philippines, among others, if it furnishes services through its employees or personnel for a period or periods aggregating more than six months in any taxable year, in relation to a particular project, or to any project connected therewith. Considering that the services to be rendered by LSPL's staff in their occasional visit to the Philippines will not exceed a period of six months, LSPL cannot be considered to have a permanent establishment in the Philippines. Further, the amounts do not constitute income as they are mere reimbursement of the actual costs and expenses with no mark-up or profit element incurred by LSPL in rendering the services to LSCCF. Such being the case, your opinion that the service fees paid by LSCCF to LSPL are not subject to Philippine income tax pursuant to the RP-Australia Tax Treaty and such will qualify as part of LSCCF deductible business expenses is hereby confirmed. (ITAD Ruling No. 2-00 and 85-00). However, the service fees paid by LSCCF covering the services rendered during the occasional visits to the Philippines by LSPL's corporate staff are subject to the 10% value added tax pursuant to Section 108 of 1997 Tax Code. Accordingly, LSCCF shall be responsible for the payment of VAT on such fees on behalf of LSPL by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by LSCCF as evidence in claiming input tax credit. (Sec. 4. 102-1(b), Revenue Regulation No. 7-95) This ruling is issued on the basis of the foregoing 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group