ITAD Ruling No. 085-00

August 1, 2000 ITAD RULING NO. 085-00 RP-Australia Art. 7 (1) Art. 5 (2) (k) 02-00 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave. 1226 Makati City Attention: Mary A . S . Bautista-Villareal Principal, Tax Services Dept . Gentlemen : This refers to your letter dated December 22, 1999 requesting on behalf of your client, Lincolne Scott Pty. Ltd. (LSPL), confirmation of your opinion that reimbursement of costs by Lincolne Scott CCF, Inc. (LSCI) to LSPL for the latter's participation in the bidding process relative to the Rockwell Project is not subject to Philippine income tax, pursuant to Article 5(2)(k) and Article 7(1) of the RP-Australia Tax Treaty. It is represented that LSPL is a corporation organized and existing under the laws of Australia; that it is not licensed to engage in business in the Philippines as evidenced by a Certificate of Non-Registration dated December 20, 1999, issued by the Securities and Exchange Commission; that LSCI is a corporation organized and existing under Philippine laws; that Leighton Contractors Philippines Inc. (Leighton) is a domestic corporation engaged in detailed design and contract administration services such as mechanical, electrical, plumbing, fire protection and vertical transportation services; that LSCI was a sub-contractor of Leighton with respect to the Rockwell Center Project in Makati City; that during the bidding process LSPL was invited to join the Leighton team to bid for the Rockwell Center Project; that during the bid phase, LSPL will be compensated by Leighton at agreed rates which are below cost; that should the team be successful in winning the project, Leighton will pay LSPL, a success fee; that LSCI, in turn, agreed to reimburse LSPL the shortfall between the actual cost and the fees paid by Leighton during the bid phase up to a maximum of P2,500,000.00; and that should the bid be successful, the Main Contract will be assigned by LSPL to LSCI. In reply, please be informed that Article 7(1), in relation to Article 5(2)(k), of the RP-Australia Tax Treaty provides: "Article 7 Business Profits (1) The profits of an enterprise of one of the 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. xxx xxx xxx "Article 5 Permanent Establishment (1) For the purposes of this Agreement, the term "permanent establishment" means a fixed placed of business through which the business of an enterprise is wholly or partly carried on. (2) The term "permanent establishment" shall include especially xxx xxx xxx (k) a place in one of the Contracting State through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or periods aggregating more than six months in any taxable year or year of income, as the case may be, in relation to a particular project, or to any project connected therewith." Under the foregoing provisions, it is clear that if a corporation which is a resident of Australia does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Australian corporation shall not be subject to Philippine income tax. An Australian corporation may be deemed to have a permanent establishment in the Philippines if the furnishing of the services by such corporation, through its employees or other personnel, in a particular or connected project, continue within the Philippine for a period or periods aggregating more than six months in any taxable year. Considering that the participation of LSPL in the bidding phase relative to the Rockwell Project were done mostly in Australia and the portion of the work done in the Philippines did not exceed a period of six months, then it cannot be considered to have a permanent establishment in the Philippines. Such being the case, your opinion is hereby confirmed. The reimbursement of costs paid by LSCI to LSPL is not subject to Philippine income tax pursuant to RP-Australia Tax Treaty. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group