ITAD Ruling No. 130-00

September 1, 2000 ITAD RULING NO. 130-00 RP-Norway, Arts. 5, 7 & 15 Ms. Griselda J.G. Bausa Director, Energy Resource Development Bureau Department of Energy Energy Center, Merritt Road, Fort Bonifacio Taguig, Metro Manila M a d a m : This is with reference to your letter dated February 12, 1999 to the Secretary of Finance, which was referred to this Office on February 17, 1999 relative to the proposed Agreement between the Government of the Philippines and the Government of the Kingdom of Norway regarding Financing of the Technical Assistance to the Philippine Petroleum Resource Assessment Project. It is represented that the objectives of the Project are: (1) to develop a petroleum resource classification system; (2) to establish an inventory of the Philippine petroleum resources; (3) to enhance the technical capability of the Philippine Department of Energy's Oil and Gas Division in petroleum resource assessment; and Norway shall provide a financial grant not exceeding NOK 5,548,000 (Norwegian Kroner) to be used exclusively to finance the Project. ASaTCE In connection therewith, you are requesting comment on Nos. 4 and 6 of Article IV of the proposed agreement on the contributions and obligations of the Philippines, through the Department of Energy to the Project, specifically: xxx xxx xxx "4. Seek exemption from any internal revenue tax of the Consultant payable under the laws of the Philippines in respect of the emoluments paid by Norway, in accordance with the Convention between the Government of the Kingdom of Norway and the Government of the Republic of the Philippines for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, signed in Manila in November, 1997; "5. . . . "6. Defray or pay any cost, if any, of the customs duties, sales tax and other taxes, fees and levies on all equipment, materials and supplies financed by the Grant and imported into the Philippines for the benefit of the Project." In reply thereto, please be informed as follows: (1) Articles 5 and 7 of the RP-Norway Tax Treaty provide: "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; EIDaAH f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a building site, a construction, assembly or installation project or supervisory activities connected therewith if such site, project or activities continue for a period or periods of more than 6 months; h) the furnishing of services, including consultancy services, performed within a Contracting State by an enterprise of the other Contracting State through employees or other personnel, where the activities of that nature are carried out (for the same or a connected project) for a period or periods aggregating more than 6 months within a twelve-month period; i) premises used as a sales outlet; j) a warehouse, in relation to a person providing storage facilities for others." "Article 7 BUSINESS PROFIT 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 or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." Thus, if the consulting company (the Consultant) has no permanent establishment situated in the Philippines, it is not subject to any corporate income tax. On the other hand, the presence of a permanent establishment in the Philippines will subject the business profits of such Consultant to corporate income tax imposed under Section 28 (A) of the National Internal Revenue Code of 1997 (NIRC) on resident foreign corporation. Corollary to the above-quoted provisions is Article 15 (1) (2) of the same treaty which states that: "Article 15 DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Articles 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. EICDSA 2. Notwithstanding the provisions of paragraph 1 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 that other State for a period or periods not exceeding in the aggregate 183 days in. any twelve-month period; and b) the remuneration is paid by, or on behalf of, an employer who is a resident of the State of which the recipient is a resident, and whose business activities do not wholly or mainly consist of hiring out of labour; and c) the remuneration is not reasonably connected with the activities of a permanent establishment or a fixed base which the employer has in that other State. However, to the extent that the above-mentioned remuneration is exempt from tax in the first-mentioned State, or upon the application of this Article will be exempt from tax in that State, the remuneration may be taxed in the other State." Accordingly, the remuneration of the personnel or employee of the Consultant who will render consultancy services in this country shall be taxable only in Norway if all the conditions in the above-quoted provision are present. The absence of any of the said condition 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 Tax Code of 1997. (2) Since under the proposed Agreement, the financial grant not exceeding NOK 5,548,000 (Norway Kroner) shall be used exclusively to finance the Project, the provision of Article IV(6) of the proposed Agreement to the effect that the Government of the Republic of the Philippines through the Department of Energy shall assume the payment of the customs duties, VAT and other taxes, fees and levies on all equipment, materials and supplies financed by the Grant and imported into the Philippines for the benefit of the Project is in order. The payment of said taxes shall be shouldered by the Government of the Republic of the Philippines through the Department of Energy. TaCDIc This ruling is being issued on the basis of facts as represented. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Undersecretary of Finance Commissioner of Internal Revenue