ITAD Ruling No. 125-03

August 11, 2003 ITAD RULING NO. 125-03 Articles 5 and 7, RP-UK Tax Treaty BIR Ruling No. 009-03 Punongbayan & Araullo 19th Flr., Tower I, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated June 19, 2003 requesting confirmation of your opinion regarding the taxability of the income derived by Euro Dismantling Services, Ltd. (EDS-UK) from Philippine sources, including the value-added tax consequence for services performed by EDS-UK employees, and the taxability of the income derived by EDS-UK employees who will visit the Philippines. It is represented that EDS-UK is a non-resident foreign corporation organized and existing under the laws of the United Kingdom with principal address at Loxley Manor, Loxley Road, Sheffield, S6 6RW, United Kingdom; that EDS-UK is a demolition contractor undertaking demolition, decontamination, dismantling, asbestos removal, and land regeneration; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated June 11, 2003 issued by the Securities and Exchange Commission; that, on the other hand, Pilipinas Shell Petroleum Corporation (Shell-Phil) is a duly organized domestic corporation with principal address at 156 Valero Street, Salcedo Village, Makati City. That on May 20, 2003, EDS-UK entered into two contracts (Contracts) with Shell-Phil whereby the former shall carry out the Pililla Refinery and the Tabangao Process 1 Refinery Above Ground Demolition Projects (Projects); that the Projects shall be respectively carried out at the Pililla Refinery, a lubricating oil refinery of Shell-Phil at Malaya, Pililla, Rizal which is about 60 kms. Southeast of Manila and with a total land area of 40 hectares, and at the Tabangao Process 1 Refinery, a single process train (distiller and platformer) refinery of Shell-Phil located at Tabangao, Batangas; that EDS-UK will demolish all above ground facilities within the said refineries, move equipment and materials as advised by Shell-Phil, backfill identified areas to leave the site in a clean and safe condition; that the Pililla Refinery Contract shall be effective on May 1, 2003 and shall expire not later than October 31, 2004 while the Tabangao Process 1 Refinery Contract shall be effective July 1, 2003 and shall expire not later than March 31, 2004. That the Projects will involve the following activities: (1) mobilization and demobilization; (2) demolition of all tanks, including all pipelines with tankpits; (3) demolition of all pipe-trenches and pipe bridges outside the tankpits; (4) demolition of the process area, power plant, utilities (boilers and water treatment area), jetties (pipeworks only), vent stack; (5) demolition of sheds and substations; (6) demolition of all concrete paving, slabs, foundation in the process area, utilities, power plant, area around and underneath all buildings; (7) demolition and removal of bitumen roadways and pavement, bitumen tankterps and basin area; and (8) plot clearing; that under the terms and conditions of the Contracts, all payments by Shell-Phil to EDS-UK will be in Philippine Peso; that on June 6, 2003, EDS-UK subcontracted (Subcontract) to Euro Decommissioning Services Philippines, Inc. (EDS-Phil), a wholly-owned subsidiary of EDS-UK, that portion of the Contracts that necessarily has to be performed in the Philippines (onshore portion); that under the Subcontract, it was established under the "Whereas" clauses that EDS-UK shall provide specialist procedures and health and safety documentation, offshore head office support, and supply specialist cold cutting shear and processing equipment from countries outside the Philippines; that EDS-Phil shall provide the management, labor, technical expertise and specialist equipment required for the decommissioning and demolition of the Projects, specifically the following: cCaSHA 1) supply of local management; 2) supply of equipment, materials, transportation, tools, consumables and temporary facilities except those which will be exported by EDS-UK from Great Britain, or other places, to the Philippines; 3) supply of local manpower requirement of the Project; 4) make arrangement for staff amenities that may be required by EDS-UK, which shall include housing, transportation, medical and security arrangements; 5) make arrangements for the processing of all requirements and permits for the Project as may be required under Philippine laws and by Shell-Phil, including permits and licenses from the Bureau of Immigration, Bureau of Internal Revenue, Local Government Units concerned, Bureau of Customs, and Philippine National Police; and 6) facilitate and assist in the importation and exportation of all equipment and materials that will be imported and exported by EDS-UK to and from the Philippines; that EDS-Phil shall invoice EDS-UK on a monthly basis and all payments to be made to by EDS-UK to EDS-Phil shall be in US Dollar. In reply, please be informed that 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. "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 or partly carried on. 2. The term "permanent establishment" shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) a building site or construction or assembly project which exists for more than 183 days. 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 are taxable only in the United Kingdom, unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. Such enterprise may be deemed to have a permanent establishment in the Philippines if it furnishes services within the Philippines through its employees or other personnel for a period exceeding in the aggregate 183 days within any twelve-month period. Considering that EDS-UK subcontracted to EDS-Phil the onshore portion of the contracts so that the actual services are performed in the Philippines by EDS-Phil and that the EDS-UK employees who will furnish services (on-site visits and monitoring of Projects) in the Philippines will not stay in the aggregate beyond 183 days in any 12-month period, then EDS-UK 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 Shell-Phil to EDS-UK are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the RP-UK tax treaty. As regards the taxability of income derived by EDS-UK employees who will visit the Philippines, please be informed that Art. 14 of the RP-UK tax treaty provides, viz : Article 14 DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Articles 15, 16, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and c) the remuneration is not borne by a permanent establishment of a fixed base which the employer has in the other State. "xxx xxx xxx" Accordingly, the income derived by EDS-UK employees who will do on-site visits and monitoring of Projects in the Philippines shall be taxable only in UK if all the conditions in the above-quoted provisions are present. The absence of any of the said conditions shall subject the income of such personnel or employee to Philippine income tax in the same manner as an individual citizen and a resident alien individual under Section 24 in relation to Section 25(A) of the National Internal Revenue Code of 1997 (NIRC). In view of the representation that the EDS-UK employees who will render service in the Philippines will stay therein for a period of less than 183 days during the fiscal year, and that their remuneration is paid by EDS-UK and is not borne by a permanent establishment or fixed base in the Philippines of EDS-UK, then the remuneration paid to such employees is not subject to Philippine income tax and consequently, to withholding tax. However, the fees to be paid by Shell-Phil to EDS-UK for services actually rendered in the Philippines consisting of on-site visits and monitoring of Projects are subject to 10% VAT pursuant to Section 108 of the Tax Code of 1997. Accordingly, Shell-Phil, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to EDS-UK. In remitting the VAT withheld, Shell-Phil shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Shell-Phil if it is a VAT-registered taxpayer. In case Shell-Phil is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset", whichever is applicable. In addition, Shell-Phil is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon request of EDS-UK, the first three copies thereof be given to EDS-UK and the fourth copy to be retained by Shell-Phil. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] Finally, since EDS-Phil. is a domestic corporation, any income/profits it derives from the subcontracting agreement with EDS-UK are subject to the 10% value-added tax and ordinary corporate income tax or Minimum Corporate Income Tax (MCIT) whichever is applicable pursuant to Sections 108, and 27(A) or 27(E) of the Tax Code of 1997. ( BIR Ruling No. DA-ITAD 009-03 dated January 16, 2003 ) This ruling is issued on the basis of the facts presented. 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. TAEcCS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service