ITAD Ruling No. 067-02

April 24, 2002 ITAD RULING NO. 067-02 RP-US, Articles 8 and 5 BIR Ruling No. DA-050-1-31-97 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower, Citibank Plaza 8741 Paseo de Roxas Makati City Attention: Atty. Perry L. Pe Atty. Jayson L. Fernandez Gentlemen : This refers to your letter dated September 28, 2001 on behalf of your client; CEBU AIR, INC. ("CAI"), requesting for confirmation that the rentals to be paid by CAI to PEGASUS AVIATION IV, INC. ("Pegasus") and PALS I, INC. ("PALS") are exempt from Philippine income tax pursuant to Article 8 in relation to Article 5 of the RP-US tax treaty. It is represented that Pegasus and PALS are foreign corporations organized and existing under the laws of the State of Delaware, U.S.A., with principal place of business at Four Embarcadero Center; 35/F, San Francisco, California 94111, U.S.A.; that both corporations are engaged in the business of, among others, leasing out aircraft to airline companies all over the world; that both are not licensed to engage in trade or business in the Philippines per Certifications dated September 19, 2001 and October 01, 2001, respectively; issued by the Securities and Exchange Commission; that CAI, on the other hand, is a corporation organized and existing under Philippine laws and holder of legislative franchise granted under Republic Act No. 7151 to establish, operate and maintain transport services for the carriage of passengers, mail, goods and property by air, both domestic and international; that on August 22, 2001, CAI entered into Aircraft Lease Agreements with Pegasus and PALS over two Boeing 757-236 aircraft to be used by CAI in its domestic and international operations; that CAI shall pay rental fees to Pegasus and PALS; that the term of the lease shall be for a period of seven years, unless otherwise terminated prior to the expiration date of the lease. In reply, please be informed that Article 8(1) in relation to Article 5 of the RP-US tax treaty provides, viz : "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. ESHAcI "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. "xxx xxx xxx" In view thereof, considering that neither Pegasus nor PALS has a permanent establishment in the Philippines to which the rental income may be attributed to, this Office confirms your opinion and so holds that the payments that will be received by Pegasus and PALS under their respective Aircraft Lease Agreement with Cebu Air, Inc. are not subject to Philippine income tax and consequently to the 7.5% withholding tax imposed under Section 28(B)(4) of the Tax Code. ( BIR Ruling No. DA-050-1-31-97 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service