ITAD Ruling No. 154-02

September 3, 2002 ITAD RULING NO. 154-02 Article 5, 7 & 14, RP-UK BIR Ruling No. DA-ITAD-126-02 Department of Finance Roxas Boulevard corner Vito Cruz St. Manila Attention: Atty. Emmanuel P. Bonoan Gentlemen : This refers to your letter dated August 20, 2002 requesting confirmation that the fees payable to Allen & Overy by the Government of the Republic of the Philippines (ROP) are not subject to Philippine withholding tax on income, pursuant to Article 7 in relation to Article 5 and Article 14 of the RP-UK tax treaty. It is represented that the partnership of Allen & Overy is an international law firm duly organized and existing under and by virtue of the laws of the United Kingdom, engaged in providing legal services for all forms of dispute resolution; 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 August 29, 2002; that Allen & Overy entered into a contract with the ROP in connection with the arbitration proceedings brought against the ROP by the Societe Generale de Surveillance S.A. (SGS) before the International Centre for Settlement of Investment Disputes (ICSID) in Washington D.C., U.S.A.; that, as counsel in the ICSID arbitration proceedings, Allen & Overy will conduct a detailed review of SGS' request for arbitration and related papers review relevant authorities and principles of law, provide urgent and relevant legal advice to ROP, make correspondence on behalf of ROP, prepare and submit legal documents and represent ROP before the ICSID arbitration tribunal, if necessary; that all such services and activities of Allen & Overy will be rendered outside the Philippines; that it is anticipated, however, that during the engagement, a few of its lawyers will occasionally come to the Philippines and will stay for a limited period of one to three days to consult with ROP officials and gather data; that the aggregate stay in the Philippines of said visiting lawyers will be approximately fifty (50) days within any twelve-month period; that in consideration for the legal services, ROP shall pay Allen & Overy monthly fees based on the hours expended by its lawyers for the arbitration proceedings. In reply, please be informed that Article 7(1) in relation to Article 5 of the RP-UK tax treaty provides, viz : "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. ASHICc "xxx xxx xxx" "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 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. "xxx xxx xxx" Based on the aforequoted provisions, the profits of Allen & Overy shall be taxable only in the United Kingdom (UK) unless it carries on business in the Philippines through a permanent establishment situated therein. For this purpose, an enterprise which is a resident of UK may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such enterprise, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days within any twelve-month period. Inasmuch as all the services and activities of Allen & Overy are represented to be rendered outside the Philippines and that its lawyers who, in connection with the said services, are anticipated to arrive in the Philippines shall stay only for a limited period of approximately fifty (50) days in any twelve-month period, Allen & Overy is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. As regards the compensation of Allen & Overy's lawyers who will come to the Philippines, Article 14 of the same treaty provides, viz : "Article 14 "Dependent Personal Services "1. Subject to the provisions of Articles 15, 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. "2. Notwithstanding the provisions of paragraph 1 of this Article, 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 the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and "(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and "(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. "xxx xxx xxx" Based on the above, the remuneration derived by Allen & Overy's lawyers in connection with their visit to the Philippines shall be subject to Philippine income tax when their stay in the Philippines exceeds in the aggregate 183 days in a fiscal year or if the remuneration is paid by an enterprise which is a resident of the Philippines or if the remuneration is borne by a fixed base which Allen & Overy has in the Philippines. Considering that the said lawyers of Allen & Overy will stay in the Philippines only for a limited period of approximately 50 days in any twelve-month period and their remuneration is borne by Allen & Overy, a UK resident which has no fixed base in the Philippines, said remuneration is not subject to Philippine income tax. In view thereof, this Office confirms your opinion and so holds that the fees derived by Allen & Overy from services rendered to ROP are not subject to Philippine withholding tax on income pursuant to Articles 7, 5 and 14 of the RP-UK tax treaty. ( BIR Ruling No. DA-ITAD-126-02 dated August 02, 2002 ) The payment of service fees by ROP, however, covering that portion of the services rendered in the Philippines shall be subject to the ten per cent (10%) VAT, pursuant to Section 108 of the Tax Code of 1997. Accordingly, ROP being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of Allen & Overy by filing a separate VAT return for and on behalf of Allen & Overy 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 ROP to consider the passed-on VAT withheld as forming part of the cost of service purchased or treat it as expense, whichever is applicable. In addition, ROP is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Allen & Overy, the first three copies thereof to be given to Allen & Overy and the fourth copy to be retained by ROP as its file copy. 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. SAHIDc Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service