ITAD Ruling No. 092-00

August 1, 2000 ITAD RULING NO. 092-00 RP-Malaysia Art. 5 & 7 179-95 Roxas Delos Reyes Laurel & Rosario 19/F PDCP Building 8737 Paseo de Roxas Avenue Makati City 1200 Attention: Maria Portia E . Rosell Gentlemen : This refers to your letter dated February 2, 2000) applying for the availment of tax treaty relief on behalf of your client, Eng Teknologi Holdings Bhd (ETHB), pursuant to Article 7 of the RP-Malaysia Tax Treaty. It is represented that Engtek Phils. Inc. ("ETPI") is a corporation organized and existing under the laws of the Philippines with business address at Blk. 16 Ampere St., LISP, Cabuyao Laguna; that ETPI is a subsidiary of the ETHB; that ETHB is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Malaysia and with business address at Plot 69-70 Persiaran, Kampung Jawa, Bayan Lepas Industrial Zone, Penang, Malaysia; that ETHB is not registered to engage in business in the Philippines as evidenced by Securities and Exchange Commission certification dated February 2, 2000; that on April 30, 1999, ETPI and ETHB entered into a Management Services Contract whereby ETPI engaged the services of ETHB to perform management and organizational direction, financial management, marketing strategies and information technology advice and services; that the Management Services Contract shall be effective from May 1999 until December 1999, renewable upon mutual agreement of the parties herein; and that ETPI agrees to pay ETHB a management fee in an amount equivalent to one percent (1%) of ETPI's total monthly sales volume. In reply, please be informed that Article 7 of the RP-Malaysia Tax Treaty provides: "Article 7 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 thereof as is attributable to that permanent establishment." cdlex To establish the existence of permanent establishment there must be a fixed place of business in the Contracting State wherein the business of the enterprise is wholly or partially carried on which include especially, a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce, a farm or plantation and a building site or construction, installation or assembly project which exist for more than six (6) months. Since the ETHB has no fixed place of business nor legal presence in the Philippine then no permanent establishment exist. While it has a subsidiary in the Philippine, the ETPI, the same does not constitute a permanent establishment pursuant to Article 5, paragraph 7 of the RP-Malaysia Tax Treaty, to wit: "Article 5 (7) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." In view thereof, this Office is of the opinion, and so holds, that since ETHB has no permanent establishment in the Philippines, the business profits received by ETHB from ETPI are no subject to Philippine income tax. (BIR Ruling No. 179-95) 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.) LILIAN B. HEFTI OIC, Deputy Commissioner Legal & Inspection Group