ITAD Ruling No. 134-00

September 19, 2000 ITAD RULING NO. 134-00 RP-Germany, Art. 5 & 7 028-90 Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Vic C . Mamalateo Tax Partner Gentlemen : This refers to your application for tax treaty relief dated June 28, 2000 on behalf of your client, MaK MOTOREN GmbH Philippine Branch ( MaK ), relative to the proper tax treatment of the business profits derived by Schaltanlagen-Elektronik-Gerate GmbH & Co . KG ( SEG ) pursuant to the RP-Germany Tax Treaty. It is represented that MaK is a foreign corporation organized under the laws of the Federal Republic of Germany and licensed to engage in trade or business in the Philippines by the Securities and Exchange Commission; that MaK is primarily engaged in the business of managing or acting as a managing agent of entities within the areas of power generation and transmission and other systems thereof, whether hydro-electric, nuclear or conventional, and to provide consulting services such as project management, investment and technical advice for commercial, industrial, manufacturing and other kinds of enterprises within the areas of power generation and transmission and other systems; that on February 4, 1999, MaK entered into a service contract with CIP II Power Corporation, a domestic corporation organized and existing under and by virtue of Philippine laws, for supervision of the installation and commissioning of the electrical part of the Power Station CIP II; that the consideration for such agreement is DM 189,136.00; that MaK sub-contracted the project to SEG, a non-resident foreign corporation organized and existing under the laws of the Federal Republic of Germany with business address at Krefelder Weg 47 D-47906, West Germany; that as a result of the sub-contract, SEG sent two supervisors to the project site to do the technical inspection and supervision of the project; and that these personnel stayed in the Philippines for less than six months at any one time during the taxable year 1999. In reply, please be informed that Article 7(1) of the RP-Germany Tax Treaty states that: "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 attributable to that permanent establishment." IHDCcT Also, Article 5(1) and (2) of the said treaty provides: "Article 5 PERMANENT ESTABLISHMENT "1. For the purposes of this Agreement 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 warehouse, in relation to a person providing storage facilities for others; g) a mine, quarry or other place of extraction of natural resources; h) a building site or construction or assembly project or supervisory activities in collection therewith, where such site, project or activity continues for a period of more than six months." The aforequoted Article 7 of the RP-Germany Tax Treaty allows the Philippines to tax the business profits of an enterprise which is a resident of Germany if such enterprise has a permanent establishment located in the Philippines. Inasmuch as the SEG does not have a permanent establishment in the Philippines to which its business profits or income may be attributed, income derived by SEG, arising from the service contract it entered into with MaK , for the supervision of the installation and commissioning of the electrical parts of the Power Station CIP II, is not subject to Philippine income tax. However, the services rendered in the Philippines by SEG to CIP II Power Corporation shall be subject to 10% value-added tax pursuant to Section 108(A)(5) of the Tax Code of 1997. Thus, MaK as a contractor of SEG, shall, before making payment for services rendered by SEG to CIP II Power Corporation, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return using BIR Form No. 1600. The duly validated VAT declaration/return is sufficient evidence for MaK in claiming input tax credit (Section 4. 110-3(b) of Revenue Regulation No. 7-95). This ruling is being issued on the basis of the foregoing representations. However, if upon investigation it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. THAECc Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group