ITAD Ruling No. 061-00

2000 ITAD RULING NO. 061-00 Articles 5 & 8, RP-Singapore Tax Treaty Section 34 (A) (1) (a), Tax Code of 1997 110-90 Mary Assumption S. Bautista Principal, Tax Services Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City M a d a m : This refers to your application for relief from double taxation dated September 7, 1999, on behalf of your client, MONTGOMERY WATSON NEW ZEALAND LIMITED (MWNZ), requesting for confirmation of your opinion that the charges to be paid by the latter for the services rendered by MONTGOMERY WATSON AMERICAS, INC. (MWAI) are not subject to income tax, and that said charges are deductible business expenses of MWNZ, pursuant to the RP-US Tax Treaty and the National Internal Revenue Code (Tax Code) of 1997. It is represented that MWNZ is a foreign corporation organized and existing under the laws of New Zealand; that it was authorized by the Securities and Exchange Commission on February 5, 1998 to establish a branch office in the Philippines and to engage in the business of providing construction, planning, and design of project delivery systems, operations management, and effective/innovative solutions to problems relating to water, wastewater, industrial treatment, drainage, flood control, dam, reservoir and other infrastructure development, taking into account the need to protect, conserve and preserve the land, water and air surroundings, among others; that MWAI is a corporation organized under the laws of the State of California, United States of America (USA), with no permanent establishment in the Philippines, as per certification dated August 5, 1999 issued by the Securities and Exchange Commission; that a subcontractor agreement was entered into by and between MWNZ (Philippine Branch) and MWAI, whereby MWAI shall provide assistance to the said branch office with the design and planning of a water supply and infrastructure program relative to the Program Management Assignment with Maynilad Water Services Inc.; that the said services shall be performed by MWAI mostly in the USA, and in case the work is to be done in the Philippines, the stay of the MWAI's employees shall not exceed 183 days for the entire duration of the project; and that as consideration for services rendered, MWAI shall charge MWNZ for its employees time at standard hourly rates and invoiced monthly for the total hours loaned in US dollars. llcd In reply, please be informed that Article 8 of the RP-US Tax Treaty provides as follows: "Article 8 "BUSINESS PROFITS "(1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment."(Emphasis supplied) Moreover, Article 5(1) and (2) of the same treaty provides, viz: "Article 5 "PERMANENT ESTABLISHMENT "(1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "(2) The term 'fixed place of business' includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlet; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (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."(Emphasis supplied) Considering that the services to be performed by MWAI's personnel under the said Subcontractor Agreement will be performed mostly in the USA, and in case it should be performed in the Philippines, the same shall not exceed an aggregate period of 183 days, MWAI does not have a permanent establishment in the Philippines to which the fees or income could be attributable. Such being the case, the amount to paid by MWNZ (Phil. Branch) are not subject to Philippine income tax and consequently to the 35% withholding tax prescribed under Section 28(B)(1) in relation Section 57(A) of the Tax Code of 1997. (BIR Ruling No. 110-90) Furthermore, Section 34 (A)(1)(a) of the same Code provides that there shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession. Since the payments of MWNZ (Phil. Branch) to MWAI are "directly attributable to the conduct of trade or business" of MWNZ being incurred in connection with its contract with Maynilad Water Services Inc. relative to the said Program Management Assignment, the same may be claimed as deductible expenses of MWNZ (Phil. Branch). This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue