ITAD Ruling No. 124-02

July 19, 2002 ITAD RULING NO. 124-02 RP-US, Art. 5 & 7 BIR Ruling No. ITAD-65-00 Norgate Apparel Manufacturing, Inc. Molave St., Ceris I Subdivision Canlubang, Laguna Attention: Minoru Sakata VP-Treasurer Gentlemen : This refers to your letter dated February 4, 2002 requesting for a ruling on whether the commission income paid by your company to Tomen America, Inc. (Tomen) falls within the purview of ordinary business profits and therefore is exempt from Philippine income tax pursuant to Article 8(1) of the RP-US tax treaty. It is represented that Tomen is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office address at 111 West 40th Street, New York, NY10018, USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 20, 2002; that Norgate Apparel Manufacturing, Inc. (Norgate) is a corporation duly organized and existing under Philippine laws and engaged in the business of manufacture and export of wearing apparels; that on January 22, 2002, Tomen and Norgate entered into a Service Contract whereby the former agreed to look and procure for possible buyers of Norgate apparels in the USA; that in the conduct of the aforesaid services provided by Tomen, all transactions and communications are being done through electronic mail and couriers; that no representative of Tomen has arrived or stayed in the Philippines and it is the Sales Officers of Norgate who goes to the USA for the negotiation with the prospective buyers; and that Norgate shall pay to Tomen service commissions as consideration of the above services. In reply, please be informed that Article 7 paragraph 1 of the RP-US tax treaty provides as follows: ECDHIc "Article 8 Business Profits 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, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. "xxx xxx xxx" Moreover, Article 5 paragraphs 1 and 2 of the same treaty provide, viz: "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. 2. The term "fixed place of business" includes but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. (emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of the USA carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. For this purpose, a corporation which is a resident of the USA may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. Considering that the furnishing of services is performed by Tomen in its office in the USA and none of its personnel will arrive or stay in the Philippines, Tomen is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the commission income derived by Tomen from services rendered to Norgate is not subject to Philippine tax pursuant to Article 8(1) in relation to Article 5(1) and (2) of the RP-US tax treaty. ( BIR Ruling No. ITAD-65-00 dated April 6, 2000 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. THcaDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service