ITAD Ruling No. 120-00

August 29, 2000 ITAD RULING NO. 120-00 RP-US Art. 5 & 8 201-88; 198-87; 129-87 Ongkiko Kalaw Manhit & Acorda Law Offices 4TH Floor, Cacho-Gonzalez Building 101 Aguirre Street, Legaspi Village Makati City Attention: Atty. Mariano C . Ereco Partner Gentlemen : This refers to your letter dated February 8, 2000, requesting confirmation of your opinion that your client, Toshiba International Corporation ("TIC"), is not subject to Philippine income tax and consequently to the withholding tax of 32% under the provisions of Section 28 (B) of the Tax Code of 1997, pursuant to the RP-US Tax Treaty. It is represented that TIC is a corporation organized under the laws of the State of California, USA; that it is a non-resident foreign corporation and is not engaged in trade or business in the Philippines; that it has a contract with United Engineers International, Inc. ("UEI"), also a non-resident foreign corporation, to supply turbines, generators, plant control system, main power transformers and start-up auxiliary transformer, all of which shall be manufactured by Toshiba Corporation in Japan; that the title to these equipment shall be transferred by TIC to UEI abroad; that these equipment will be supplied by UEI to San Roque Power Corporation ("SRPC") for use in the San Roque Multipurpose Project situated in San Roque, San Manuel, Pangasinan; and that the title to these equipment shall likewise be transferred by UEI to SRPC abroad. It is further represented that in addition to supplying the above-mentioned equipment, TIC will provide "inland-transportation, installation and erection, including supervision, field testing, start-up and commissioning of turbines, generators, main transformers and start-up transformer and plant control system" at the project site in San Roque, San Manuel, Pangasinan; that TIC is currently negotiating with MOF Company (Subic), Inc. for the inland transportation/delivery of the equipment to the site; that the installation, erection, testing, start-up and commissioning will be subcontracted to Toshiba Plant Kensetsu Co., Ltd. (TPK), a corporation organized and existing under the laws of Japan, which, however, is in the process of registering a branch in the Philippines; that the activities of TPK are not devoted wholly or almost wholly to TIC and are done in the ordinary course of its business under arm's length conditions; that TIC will have no employees in the Philippines for the works subcontracted to the independent contractors; and finally, that Raytheon Ebasco Overseas Ltd. ("REOL") which is the principal contractor for the project of SRPC will pay TIC for the works done on the project site and in turn, TIC will pay its independent sub-contractors MOF Company (Subic), Inc. and Toshiba Plant Kensetsu Co., Ltd. EcICSA In reply thereto, please be informed that Article 5 paragraph 5 of the RP-US Tax Treaty provides that "(5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in an ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that resident, he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the resident were not made under arm's length conditions." Moreover, Article 8, paragraphs 1 and 6 of the same treaty further provides: "Article 8 (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, a tax may be imposed by that other Contracting State on the business profits of the resident but only so much of them as are attributable to the permanent establishment. xxx xxx xxx (6) The term "business profits" means income derived from any trade or business whether carried on by an individual corporation or any other person, or group of persons including the rental of tangible personal (movable) property. xxx xxx xxx" Under the aforequoted provisions of the RP-US Tax Treaty, business profits of TIC shall only be taxable in the Philippines if it has a permanent establishment in the Philippines. However, nothing in the foregoing facts as represented will show that TIC has established a permanent establishment in the Philippines. While it enters into contract with a subcontractor, TPK, it cannot constitute a permanent establishment since TPK has a separate and distinct personality from TIC and its activities are not devoted wholly or almost wholly to TIC and are done in the ordinary course of its business under arm's length conditions. Therefore, in view of the absence of a permanent establishment of TIC in the Philippines, any payment made by REOL to TIC, although may constitute business profits under Article 8, paragraph 6 of the RP-US Tax Treaty, shall not be subjected to Philippine income tax pursuant to Article 8, paragraph 1 of the same treaty. ESITcH In this regard, this office already had the occasion to rule in BIR Ruling No. 201-88 dated May 6, 1988, that where an entity is deemed not to have carried on business in the Philippines through a permanent establishment, its income shall not be taxable under Philippine jurisdiction. Accordingly, this Office rules as it hereby holds that TIC under the represented facts does not have a permanent establishment in the Philippines and that as a result thereof, the income derived by it under the arrangement is not subject to the Philippine income tax and consequently, to the withholding tax of 32% imposed under Section 28 (B) of the Tax Code of 1997. (BIR Rulings Nos. 201-88, 198-87 and 129-87) On the other hand, should TPK establish a branch office in the Philippines, it shall be considered a permanent establishment of TPR and not of TIC. Hence, any income derived by TPK from its contract with TIC shall be subjected to withholding tax at the rate of 32% pursuant to Section 28 (B) of the Tax Code of 1997. This ruling is being issued on the basis of the 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 & Inspection Group