ITAD Ruling No. 131-03

August 18, 2003 ITAD RULING NO. 131-03 Article 5&7, RP-Australia BIR Ruling No. ITAD 85-00 Bernaldo Mirador Law Offices U-1810-11 Cityland Condominium 10 Tower 1 6815 Ayala Avenue North, Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your application for relief from double taxation dated April 11, 2001, on behalf of Conveyor Design Engineering Pty. Ltd. (CDEP) and Prince Ace Corporation (PAC), requesting confirmation that the income from services rendered to Philex Mining Corporation (PMC) are not subject to Philippine income tax pursuant to Article 5(2)(k) and Article 7(1) of the RP-Australia tax treaty. It is represented that CDEP is a corporation organized and existing under the laws of Australia with principal office address at Point Frederick NSW, 2250 Australia; 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 July 17, 2001; that CDEP is engaged in the business of cable haul conveyor engineering, component designing and manufacturing, and project management including building commissioning and operating the subject cable system; that PAC is a domestic corporation organized and existing under the laws of the Philippines with principal office address at Unit 4, 3rd Floor, FADI Bldg., #4 West Capitol Drive corner San Rafael St., Bario Kapitolyo, Pasig City; that PMC is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at Philex Building cor Brixton and Fairlane Streets, Pasig City, Philippines; that PMC owns a Cable Haul Conveyor System located at Padcal, Tuba, Benguet, which PMC desires to re-engineer to cope with its hard rock mining environment, to reduce its present operating and maintenance cost, and to optimize its availability by hiring the services of an independent contractor; that PMC entered into a Refurbishment, Parts Supply, Maintenance and Consultancy Agreement with CDEP and PAC dated September 19, 2001; that CDEP and PAC as contractors agree to perform the work as "brain" and "legs and arms" of the project, respectively; that PAC shall attend to and be responsible for all functions required under the Agreement for services, activities and facilities required in the Philippines; that CDEP shall be responsible for receiving the payment from PMC due under the agreement and for the distribution of payments among the two contractors pursuant to their separate agreements, as well as attend to and be responsible for all activities required under the agreement other than the specified responsibilities of PAC; that the work of CDEP will be performed in Australia and on need basis, may send its representatives to the Philippines to check compliance with the plans but such visits would not exceed a period of six months; that per certification executed by PMC vice-president for operations, Mr. Fernando G. Agustin, dated October 29, 2002, Messrs. Mark Elliot and John Clack representing CDEP necessarily come to the Philippine at intermittent intervals approximately averaging one visit every six months and lasting three (3) to five (5) days per visit. In reply, please be informed that Article 7(1), in relation to Article 5(2)(k), of the RP-Australia tax treaty provides: "Article 7 BUSINESS PROFITS "1. The profits of an enterprise of one of the Contracting States shall in the taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. . . "Article 5 PERMANENT ESTABLISHMENT "1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "2. The term "permanent establishment" shall include especially xxx xxx xxx (k) a place in one of the Contracting States through which an enterprise of the other Contracting State furnishes services, including consultancy services for a period or periods aggregating more than six months in any taxable year or year of income, as the case may be, in relation to a particular project, or to any project connected therewith." xxx xxx xxx" Based of the foregoing provisions, the profits of a corporation which is a resident of Australia is taxable only in Australia, unless the Australian corporation carries on business in the Philippines through a permanent establishment situated therein. An Australian corporation may be deemed to have a permanent establishment in the Philippines if, among others, it furnishes services through its employees or personnel for a period or periods aggregating more than six months in any taxable year, in relation to a particular project, or to any project connected therewith. Considering that the services are rendered by CDEP in Australia and, on need basis, may send its representatives to the Philippines to check compliance with the plans but which visits do not exceed a period of six months; CDEP cannot be considered to have a permanent establishment in the Philippines. (BIR Ruling No. ITAD 132-00) Such being the case, your However, the fees paid by PMC for the services actually rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PMC being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of CDEP by filing a separate VAT return for and on behalf of CDEP 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 the PMC if it is a VAT-registered taxpayer. In case PMC 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, PMC is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of CDEP, the first three copies thereof to be given to CDEP and the fourth copy to be retained by PMC as its file copy. [Sections 4 & 6, Revenue Regulations No. 4-2002] (DA-ITAD 53-02) On the other hand, the service fees paid by PMC to PAC, as a domestic corporation, as co-contractor of CDEP are subject to the 32% regular corporate income tax or the minimum corporate income tax (MCIT), pursuant to Sections 23(E) and 27(A) and (E), all of the Tax Code of 1997, whichever is applicable. Moreover, such service fees received by PAC from PMC are subject to 10% VAT in accordance with Section 4.102-1(a)(14) of Revenue Regulations No. 7-95, as amended by Revenue Regulation No. 6-97. 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service