ITAD Ruling No. 053-04

May 21, 2004 ITAD RULING NO. 053-04 Articles 2 (General Provisions), 3 (Fiscal Residence), 5 (Permanent Establishment), 8 (Business Profits) and 16 (Dependent Personal Services) Philippines-United States of America tax treaty BIR Ruling Nos. DA-ITAD 169-02 and 44-04 Pilipinas Shell Petroleum Corporation Shell House 156 Valero Street, Salcedo Village 1227 Makati City Attention: Mr. Redentor R. Gabinete Taxation Manager Gentlemen : This refers to your letter dated May 4, 2004 requesting confirmation on the following: 1. That the Shell affiliates and joint venture companies Motiva Company, Motiva Enterprises LLC, Equilon Enterprises LLC, Shell Information Technology International, Inc., and Shell Oil Company, (collectively, the "Shell Companies" ) are all residents of the United States of America (US) for purposes of the Philippines-US tax treaty; 2. That the activities carried out by the Shell Companies (through employees thereof) for the office in the Philippines ( "Philippine Office" ) of the Shell Group will not constitute a permanent establishment; and 3. That remuneration of the subject employees will be exempt from Philippine income tax if, primarily, the employees' lengths of stay in the Philippines are less than 90 days in the taxable year concerned. It is represented that the Shell Group is currently considering the establishment of the Philippine Office ; that the Philippine Office will provide to the Shell Companies business outsourcing activities in the fields of human resources, and accounting and finance (accounts payable, accounts receivable, general ledger accounting, stock accounting, fixed assets, and US tax accounting) (collectively, the " outsourced services "); that the Philippine Office will be a branch of a corporation incorporated and registered in the Netherlands, which in turn is wholly-owned by a Shell holding company also in the Netherlands; that the Philippine Office will initially employ around 200 Filipinos, but may later on increase them to 600; that, on the other hand, the Shell Companies are all foreign companies engaged primarily in the oil products sector, and that they are all formed (in the case of Motiva Enterprises LLC and Equilon Enterprises LLC ) or incorporated (in the case of Motiva Company, Shell Information Technology International, Inc . and Shell Oil Company ) and existing under the laws of the US and are all taxpayers of that country, as confirmed by the relevant Certifications issued by the Secretary of the State of Delaware on April 6, 2004; that the Shell Companies are not registered as corporations or as partnerships and are not licensed to engage in trade or business in the Philippines, as confirmed by the relevant Certificates of Non-Registration issued by the Securities and Exchange Commission on April 21, 2004. That during the pre-registration and start-up phase of the Philippine Office , the Shell Companies will be sending their employees to the Philippines to be involved in the following activities: setting-up of the Philippine Office , coordinating and assisting with the registration of the Philippine Office with the various government agencies concerned like the Securities and Exchange Commission and the Philippine Economic Zone Authority, recruitment and hiring of local employees, initial training of the local employees who will perform the outsourced services , setting-up and installation of the information technology infrastructure, and other preparatory activities meant to ensure the smooth transfer from the Shell Companies to the Philippine Office of the procedures relative to the outsourced services; and that, owing to the preparatory and auxiliary nature of the activities, the Shell Companies will not be charging the Philippine Office any service fees for carrying out the activities. 1. The Shell Companies are all residents of the US for purposes of the Philippines-US tax treaty . The term "resident of a Contracting State" is generally defined in tax treaties as a person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. In the case of a person other than an individual like a company or a corporation, it is considered a resident of a Contracting State by reason of its place of incorporation and/or place of effective management being in that State. Under paragraph 1(b), Article 3 (Fiscal Residence) of the Philippines-US tax treaty, the term "resident of the US" means: (i) "a US corporation, and (ii) any other person (except a corporation or any entity treated as a corporation for US tax purposes) resident in the US for purposes of US tax . . .," and under paragraph 1(e)(i), Article 2 (General Provisions) of the same treaty, the term "US corporation" means a corporation (or any unincorporated entity treated as a corporation for US tax purposes) which is created or organized in or under the laws of the US or any state thereof or the District of Columbia." Applying the above definitions, the Shell Companies , all being US legal entities formed (in the case of Motiva Enterprises LLC and Equilon Enterprises LLC , and therefore, unincorporated entities which must be treated as corporations for US tax purposes to be embraced within the meaning of "US corporation") or incorporated (in the case of Motiva Company, Shell Information Technology International, Inc. and Shell Oil Company ) in and under the laws of the US (in particular, the State of Delaware), and all being taxpayers of that country, are all residents of the US for purposes of the Philippines-US tax treaty. ( BIR Ruling No. DA-ITAD 44-04 ) 2. The activities carried out by the Shell Companies (through employees thereof) for the Philippine Office will constitute a permanent establishment if undertaken for more than 183 days . Paragraph 2(j), Article 5 (Permanent Establishment) of the Philippines-US tax treaty treats as a "permanent establishment," "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," regardless of the nature of the services being preparatory or auxiliary. Where a permanent establishment exists, paragraph 1, Article 8 (Business Profits) of the tax treaty provides that "the other State may tax business profits attributable to the permanent establishment." Applying these provisions, the activities carried out by the Shell Companies (through employees thereof) for the Philippine Office will constitute a permanent establishment if undertaken for more than 183 days. Where a permanent establishment exists, business profits attributable to the activities will be subject to Philippine income tax. However, since, as represented, the Shell Companies will not charge the Philippine Office any service fees for the activities they will carry out for that office, no income will accrue to the companies in return that will be subject to income tax, even if the activities themselves already constitute a permanent establishment for the companies. On the other hand, if there is an instance that the Philippine Office (or its head office or that head office's other offices worldwide) will pay the Shell Companies any service fees for the activities, such fees will be subject to income tax if attributable to a permanent establishment. ( BIR Ruling No. DA-ITAD 169-02 dated September 26, 2002 ) 3. The remuneration of the subject employees will be exempt from Philippine income tax if, primarily, the employees' lengths of stay in the Philippines are less than 90 days in the taxable year concerned. Paragraphs 1 and 2, Article 16 (Dependent Personal Services) of the Philippines-US tax treaty govern the taxation of remuneration (salaries and other benefits) derived by the subject employees of the Shell Companies who will carry out the activities for the Philippine Office , to wit: "1. Except as provided in Article 20 (Governmental Functions), wages, salaries, and similar remuneration derived by an individual who is a resident of one of the Contracting States from labor or personal services performed as an employee, including income from services performed by an officer of a corporation, may be taxed by that Contracting State. Except as provided by paragraphs 2 and 3 and in Articles 20 (Governmental Functions), 21 (Teachers), and 22 (Students and Trainees), such remuneration derived from sources within the other Contracting State may also be taxed by that other Contracting State. 2. Remuneration described in paragraph 1 derived by an individual who is a resident of one of the Contracting States shall be exempt from tax by the other Contracting State if a) He is present in that other Contracting State for a period or periods aggregating less than 90 days in the taxable year; b) He is an employee of a resident of, or of a permanent establishment maintained in, the first-mentioned Contracting State; and c) The remuneration is not borne as such by a permanent establishment which the employer has in that other Contracting State. xxx xxx xxx" Applying the above provisions, the remuneration of the subject employees will be exempt from Philippine income tax if, primarily, the lengths of their stay in the country are less than 90 days in the taxable year concerned. ( BIR Ruling No. DA-ITAD 169-02 dated September 26, 2002 ) This ruling is issued on the basis of 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 herein parties are concerned. TaDAHE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service