ITAD Ruling No. 132-00

September 19, 2000 ITAD RULING NO. 132-00 RP-Australia Art. 7 (1) Art. 5 (2) (k) 2-00 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave. 1226 Makati City Attention: Mary A . S . Bautista-Villareal Principal, Tax Services Dept. Gentlemen : This refers to your letter dated December 22, 1999 requesting on behalf of your client Lincolne Scott Australia Pty. Ltd (LSAPL), confirmation of your opinion that the service fees paid by Lincolne Scott CCF, Inc.(LSCI) to LSAPL are not subject to Philippine income tax, pursuant to Article 5(2)(k) and Article 7(l) of the RP-Australia Tax Treaty. It is represented that LSAPL is a corporation organized and existing under the laws of Australia; that it is not licensed to engage in business in the Philippines as evidenced by a Certificate of Non-Registration dated December 20, 1999, issued by the Securities and Exchange Commission; that it entered into Agreement For Staff Secondments with LSCI, a domestic corporation engaged in building design services; that LSCI secured the services of LSAPL to assist in the design services through the latter's employees who visited the Philippines during the Rockwell project implementation in Makati for a total period of 141 days; and that in consideration for services rendered, LSAPL has charged LSCI the staff costs plus a 10% mark-up. In reply, please be informed that Article 7(l), 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 be 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 purpose 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 State through which an enterprise of the other Contracting State furnishes services, including consultancy services, for a period or period 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." Based on 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 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, among others. Considering that the services rendered by LSAPL's employees in Rockwell Project did not exceed a period of six months, LSAPL cannot be considered to have had a permanent establishment in the Philippines. (ITAD Ruling No. 2-00) Such being the case, your opinion is hereby confirmed. The service fees paid by LSCI to LSAPL are not subject to Philippine income tax pursuant to the RP-Australia Tax Treaty. However, the service fees made by LSCI to LSAPL are subject to the 10% value added tax pursuant to Section 108 of 1997 Tax Code. Accordingly, LSCI shall be responsible for the payment of VAT on such fees on behalf of LSAPL by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by LSCI as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulation No. 7-95) IHDCcT This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group