ITAD Ruling No. 126-02

August 2, 2002 ITAD RULING NO. 126-02 RP-UK, Article 5 & 7 NIRC, Sec. 180 BIR Ruling No. DA-ITAD-42-01 Pillsbury Pure Foods Co., Inc. 10th Floor, Philamlife Tower 8767 Paseo de Roxas 1200 Makati City Attention: Ma. Rosette L. Oquias Finance Manager and Controller Gentlemen : This refers to your letter dated December 3, 2001 requesting confirmation of you opinion that the training fees paid by your company, Pillsbury Pure Foods Co., Inc. (Pillsbury), to Profitability Business Simulations (PBS) are exempt from Philippine withholding tax pursuant to the RP-UK tax treaty. It is represented that PBS is a non-resident foreign corporation duly organized and existing under the laws of the United Kingdom with principal office address at The Barn at Bottom Farm, Checkendon, Oxfordshire, RG 8 ONR United Kingdom; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated December 12, 2001; that Pillsbury is a corporation duly organized and existing under Philippine laws; that on March 6, 2001, an Agreement was entered into by and between PBS and Pillsbury whereby the former agreed to render training services in the form of course or seminar to the latter; that in consideration of the above services, Pillsbury shall pay PBS the amount of One Thousand Seven Hundred Twenty Five Pounds (1,725.00) per 2-day course representing course fees plus Twenty Pounds (20.00) per head representing manual costs; and that in the conduct of the aforesaid training, Iain Fitzgerald, a resource speaker from PBS, arrived and stayed in the Philippines from June 16, 2001 to June 20, 2001. In reply, please be informed that Article 7 of the RP-UK tax treaty provides 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" In this connection, Article 5 of the same treaty provides, viz : "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 activities 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." (emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of the United Kingdom does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the same shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of the United Kingdom 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 exceeding in the aggregate 183 days within any twelve-month period. Considering that the duration of stay of Iain Fitzgerald in the Philippines for the purpose of performing the training services required is less than 183 days, more particularly for the periods June 16 to June 20, 2001, PBS 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 income derived by PBS from services it rendered to Pillsbury is not subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5(3)(b) of the RP-UK tax treaty. ( BIR Ruling No. ITAD-42-01 dated April 10, 2001 ) Moreover, the gross receipts derived from the services rendered within the Philippines by PBS to Pillsbury shall be subject to the 10 percent value added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code of 1997 respectively. Accordingly, Pillsbury being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of PBS by filing a separate VAT return for and on behalf of PBS using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from Pillsbury if it is a VAT-registered taxpayer. In case Pillsbury 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, whichever is applicable. In addition, Pillsbury is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of PBS, the first three copies thereof to be given to PBS and the fourth copy to be retained by Pillsbury as its file copy. ( Articles 4 & 6, Revenue Regulations 4-2002 ) This ruling is issued on the basis of the foregoing facts as represented. However, if on investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service