ITAD Ruling No. 065-00

2000 ITAD RULING NO. 065-00 RP-US Article 5, 8 UN-351-10-2-95; 031-95; 49-96 Romulo, Mabanta, Buenaventura Sayoc & De Los Angeles 30TH Floor, Citibank Tower Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: Priscilla B . Valer Gentlemen : This refers to your letter dated February 3, 2000 requesting on behalf of your client, Lehman Brothers, Inc. ("Lehman") confirmation that the fees payable to Lehman by PNOC Exploration Corporation (PNOC) are not subject to Philippine withholding tax pursuant to Article 8 in relation to Article 5 of the RP-US Tax Treaty. It is represented that Lehman is an investment bank engaged in providing financial services; that it is organized and existing under the laws of the State of Delaware, U.S.A; that it is not registered to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission (SEC) dated February 11, 2000; that Lehman was engaged by PNOC to be its financial advisor in a proposed acquisition of a stake in a project ("the Project") under a Financial Advisory Services Agreement (AGREEMENT 1) dated June 23, 1999; that under AGREEMENT 1, Lehman shall render financial advisory services required by PNOC in order to determine the financial viability and optimum level of PNOC's participation in the Project, including general business and financial analysis, transaction feasibility analysis and pricing and valuation of the prospective acquisition; that the culmination of Lehman's advisory services was the submission to PNOC of a Project Valuation Report at which time PNOC shall pay Lehman a flat fee; and that except for data gathering which requires occasional visits to the Philippines, most of Lehman's advisory projects, such as data analysis, valuation and report preparation were rendered outside the Philippines. Upon completion of the valuation study, PNOC decided to pursue an actual participation in the Project; that the parties proposed to sign another Financial Advisory Services Agreement (AGREEMENT 2), which is effective September 1, 1999, for the implementation of the proposed acquisition; that under AGREEMENT 2, the financial advisory services required of Lehman shall consist of assisting PNOC in the negotiations and related strategy concerning the acquisition, evaluation of financing, structures and co-ordinating necessary interaction with government agencies for the implementation of the proposed acquisition; that in consideration for the advisory services, PNOC will pay Lehman a monthly retainer fee; that if the proposed acquisition is successfully completed, PNOC shall pay Lehman an agreed flat fee against which the monthly retainer will be credited; and that it is expected that the aggregate stay of Lehman's personnel during their occasional visits to the Philippines in connection with the performance of the financial advisory services under AGREEMENT 1 and AGREEMENT 2 will be approximately 90 days and definitely, the aggregate duration of their stay in the Philippines will be less than 183 days. In reply, please be informed that Article 8 of the RP-US Tax Treaty, states: Article 8 "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. xxx xxx xxx" On the other hand, Article 5 of the RP-US Tax Treaty provides: Article 5 "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. xxx xxx xxx" Under the aforementioned provisions, it is clear that if a corporation which is a resident of the United States does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the US-resident corporation shall not be subject to Philippine income tax. In reference to Article 5(j) of the RP-US Tax Treaty, a corporation which is a resident of the United States may be deemed to have a permanent establishment in the Philippines if the furnishing of services by such US-resident corporation, through its employees or other personnel, continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the performance of Lehman's advisory services under AGREEMENT 1 and AGREEMENT 2 with PNOC will only be for less than an aggregate of 183 days, Lehman cannot be considered to have a permanent establishment in the Philippines. Hence, service fees paid to Lehman by PNOC under AGREEMENT 1 and AGREEMENT 2 are not subject to Philippine income tax. However, the fees paid by PNOC to Lehman for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PNOC, being the lessee of Lehman for the advisory services rendered under AGREEMENT 1 and AGREEMENT 2, shall be responsible for the payment of VAT on said services in behalf of Lehman by filing a separate VAT declaration/return and the said VAT declaration/return can be used by PNOC, as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) [BIR Ruling No. 49-96 dated April 11, 1996] Therefore, while payments made by PNOC to Lehman for services rendered in the Philippines under AGREEMENT 1 and AGREEMENT 2 are not subject to income taxes in the Philippines, the same are subject to the 10% value-added tax. 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