ITAD Ruling No. 083-05

August 22, 2005 ITAD RULING NO. 083-05 Arts. 5, 7 & 15-Philippines-Korea tax treaty BIR Ruling No. ITAD-069-00 BIR Ruling No. DA-ITAD-038-03 Kepco Ilijan Corporation 18th Floor Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City Attention: Mr . Kwan-Hwai Treasurer Gentlemen : This refers to your letter dated January 26, 2005, requesting tax treaty relief on behalf of KOREA ELECTRIC POWER CORPORATION ("KEPCO"), pursuant to the Philippines-Korea tax treaty. HTASIa It is represented that KEPCO is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Korea with registered office address at 167 Samseong-Dong, Gangnam-Gu, Seoul 135-791, Korea; that it is neither registered as a corporation nor as a partnership licensed to engage in business in the Philippines per certification issued by the Securities and Exchange Commission dated January 20, 2005; that KEPCO ILIJAN CORPORATION ("KEILCO"), on the other hand, is a corporation duly organized and existing under Philippine laws, with an existing Energy Conversion Agreement (ECA) with the National Power Corporation (NPC) for the operation and maintenance of the 1200 MW Ilijan Natural Gas Fired Combined Cycle Power Plant ("Power Station") located in Batangas City; that on November 9, 2000, KEPCO and KEILCO entered into a Management and Technical Service Agreement (MTSA); that pursuant to the terms and conditions of the MTSA, KEPCO shall provide the following managerial and technical advisory services to KEILCO to assist the latter in the development and implementation of the Project under the ECA: a) consulting and advisory services which includes advisory services in respect of technical and engineering matters, the training of KEILCO's staff/personnel and the supply or procurement of equipment, instruments, tools, spare parts and other materials and supplies for the Power Station; b) t echnical support services as enumerated in Section 2.2.2, Article 2 of the MTSA; c) administrative support services as may be necessary to ensure the construction, management, operation and maintenance of the Power Station in accordance with the rules, procedures and standards set forth in the MTSA as specifically enumerated in Section 2.2.3, Article 2 of the MTSA and all incidental services related thereto; that in consideration for the aforementioned services, KEILCO shall pay to KEPCO annual fees, to be prorated and paid on a monthly basis; that the services shall be done in Korea subject to a few exceptions wherein it is necessary to perform certain services in the Philippines for purposes of verifying and confirming all the works done in Korea; that, as shown in the submitted copy of passport pages of KEPCO's personnel who arrived in the Philippines, the aggregate number of days of their stay in the Philippines is one hundred seventeen (117) days from November 9, 2002 up to November 9, 2003, and, eighty-one (81) days on November 9, 2003 up to November 9, 2004. In reply, please be informed of Article 7(1) and, in relation thereto, Article 5 of the Philippines-Korea tax treaty which respectively provides, viz: "Article 2 "BUSINESS PROFITS "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch: c) our office: d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities far others. "3. a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months; b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitutes a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period ; and c) a place of exploration of natural resources constitutes a permanent establishment only if it exists for more than six months. "xxx xxx xxx" Based on the aforequoted provisions, the profits of KEPCO is taxable only in Korea, unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. For this purpose, KEPCO may be deemed to have a permanent establishment in the Philippines if, among others, it furnishes services in the Philippines through its personnel for a period or periods exceeding in the aggregate 183 days within any twelve-month period. The documents submitted to this Office show that the personnel of KEPCO rendered services under the MTSA, for an aggregate period not exceeding 183 days within a twelve-month period. Thus, KEPCO is not deemed to have a permanent establishment by virtue of the rendition of said services in the Philippines to which its profits could be attributable. In view thereof, this Office is of the opinion and so holds that the profits derived by KEPCO from the rendition of services under the MTSA shall not be subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5(3)[b] of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-202-02 dated November 25, 2002; BIR Ruling No. ITAD-069-00 dated April 07, 2000) However, services performed for the year November 2004-November 2005 and the succeeding years covered by the MTSA would not constitute a permanent establishment for KEPCO for as long as its employees do not render services in the Philippines for a period exceeding in an aggregate period of 183 days in any twelve month period. Moreover, as regards the remuneration to be paid to KEPCO's personnel who will render services in the Philippines, Article 15 of the same treaty provides, viz: "Article 15 "DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Article 16 (Directors' Fees), 18 (Pensions and Annuities), 19 (Government Service), 20 (Students and Apprentices), and 21 (Professors and Teachers), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in that other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: "a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and TAHcCI "b) the remuneration is paid by, or on behalf of an employer who is not a resident of the outer State, and "c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. "xxx xxx xxx" Based on the above provision, the remuneration derived by KEPCO's personnel in connection with their visit to the Philippines shall be subject to Philippine income tax if their presence in the Philippines exceeds in the aggregate 183 days in a calendar year, and if their remuneration is paid by an enterprise which is a resident of the Philippines, and finally, if the remuneration is borne by a fixed base which KEPCO has in the Philippines. Inasmuch as the presence of KEPCO's personnel in the Philippines did not exceed in the aggregate, a period of more than 183 days for the years 2002 and 2003 per year, their remuneration for said taxable years shall not be subject to Philippine income tax, pursuant to Article 15 of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-038-03 dated February 21, 2003) Finally, the provision of the above services in the Philippines by KEPCO fall within the definition of sale or exchange of services subject to 10 percent value-added tax (VAT) under Section 108(A)(6) of the National Internal Revenue Code of 1997. Accordingly, the portions of the subject service fees to be paid by KEPCO to KEILCO for services performed in the Philippines pursuant to the MTSA are subject to 10 percent VAT. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002 shall apply. Pursuant to these regulations, KEILCO, the resident withholding agent and payor in control of payment shall be responsible for withholding the 10 percent VAT on such payments before remitting them to KEPCO. In remitting to the Bureau of Internal Revenue the VAT withheld on such payments, KEILCO shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, KEILCO may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. On the other hand, if it is a non-VAT registered taxpayer, KEILCO may include as part of the cost of the services provided to it by KEPCO the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or asset, whichever is applicable. In addition, KEILCO is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies thereof to be given to KEPCO upon its request, and the fourth copy to be retained by KEILCO. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service