ITAD Ruling No. 093-05

September 1, 2005 ITAD RULING NO. 093-05 Arts. 5 & 7, Philippines-United Kingdom tax treaty BIR Ruling No. DA-ITAD 009-03 Laya Mananghaya & Co . Certified Public Accountants & Management Consultants 22/F, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Atty. Raymund S. Gallardo Partner, Tax & Corporate Services Floripe B. Garcia Assistant Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated July 4, 2005 on behalf of your client, Qinetiq Limited (Qinetiq, for brevity), requesting confirmation that Qinetiq has no permanent establishment in the Philippines and thus, its income derived from the upgrade of the three Jacinto Class Patrol Vessels (JCPVs) of the Armed Forces of the Philippines (AFP) are not subject to Philippine tax and to the corresponding withholding tax pursuant to the provisions of the Philippines-United Kingdom (RP-UK) tax treaty and to the 10% value-added tax (VAT) pursuant to Sections 105 and 108 of the Tax Code of 1997. It is represented that Qinetiq is a nonresident foreign corporation organized and existing under the laws of the United Kingdom with principal office at 85 Buckingham Gate, London SW1E6PD, United Kingdom; that Qinetiq is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of` Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 21, 2005; that Qinetiq was awarded a contract (Memorandum of Agreement) by the AFP for the upgrade of the three (3) JCPVs otherwise known as Weapons System Upgrade; that the contract is divided into two portions, namely: (1) the "offshore portion" consisting of the delivery, management and delivery in the UK of certain equipments, as stated in Annex B Schedule of Requirements (UK) of the Memorandum of Agreement; and cIHSTC (2) the "onshore portion" consisting of functional testing, repair and installation of the equipments, as stated in Annex C Schedule of Requirements (Philippines) of the Memorandum of Agreement. that the offshore portion was retained by Qinetiq while the onshore portion was subcontracted by Qinetiq to Qinetiq Philippine Company Inc. (QPCI) by virtue of Enabling Agreement No. CU004-02735; that QPCI is a corporation organized and existing under the laws of the Philippines with principal address at 22/F 139 Valero Street, Salcedo Village, Makati City; that pursuant to the subject Enabling Agreement, QPCI will supply management services as set out by Qinetiq in the Task Authorization Form the detailed work involved and the required timescales. Hence, no actual services were performed by Qinetiq in the Philippines. In reply, please be informed that pertinent portions of Article 7 and Article 5 of the RP-UK tax treaty provide as follows: "Article 7 "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 directly or indirectly attributable to that permanent establishment. SDHITE "xxx xxx xxx" "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly of partly carried on. "2. . . . "3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: "a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or "b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. "xxx xxx xxx" Based on the foregoing provisions, the profits of a corporation which is a resident of the United Kingdom is taxable only in United Kingdom, unless the UK corporation carries on business in the Philippines through a permanent establishment situated therein. A UK corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel in connection with a building site or a construction or assembly project is for a period or periods aggregating more than 183 days within any twelve-month period. Considering that Qinetiq subcontracted to QPCI the onshore portion of the contract which consist of functional testing, repair and installations performed in the Philippines by the latter and not by the former nor by any of its personnel, Qinetiq is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, this Office is of the opinion and so holds that the payments by AFP to Qinetiq are not subject to Philippine income tax and VAT pursuant to Article 7 in relation to Article 5 of the RP-UK tax treaty, and Section 108 of the Tax Code of 1997, respectively. (BIR Ruling No. DA-ITAD 009-03 dated January 16, 2003) IcCEDA On the other hand, since QPCI is a domestic corporation, any income/profit it derives from the subcontracting agreement with Qinetiq are subject to the 10% value-added tax and ordinary corporate income tax pursuant to Sections 108 and 27(A) of the 1997 Tax Code. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service