ITAD Ruling No. 155-02

2002 ITAD RULING NO. 155-02 Articles 5&7, RP-Australia BIR Ruling No. ITAD-85-00 AMEC Engineering Pty. Ltd. Level 8, 81 St., George Terrace Perth WA 6000 P.O. Box Z5217, Perth WA 6831 Attention: Mr. R. Sillitoe Financial Controller Gentlemen : This refers to your letter dated March 22, 2000, requesting for relief from withholding and income tax on the technical services rendered by AMEC Engineering Pty. Ltd. (AMEC) to Malampaya CGS Alliance (Malampaya) based in Subic Bay over a 12 week period. It is represented that AMEC is a non-resident company duly organized under the laws of Australia with official address at 43 63 Sturt Street, Adelaide, South 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 dated August 8, 2000 issued by the Securities and Exchange Commission; that Malampaya is a Subic Bay Metropolitan Authority registered enterprise organized and existing under the laws of the Philippines with office address at Bldg. 664 Waterfront Rd Subic Bay Freeport Zone, Olongapo City; that AMEC has provided welding and non destructive examination services to Malampaya per certification dated June 21, 2000; that AMEC is represented by Christopher Bage whose duration of appointment shall approximately be for two (2) months extended by mutual agreement and the commencement date will be January 15, 2000 in Subic; that the welding inspector rates: Day Rate US$472.50 per 10 hour day, Standby Rate US$0.00 limited to 1 day in seven, Weekly Rate based on 10 hours per day + 1 off standby day US$2835.00, Hourly Rate US$47.25 for all hours worked, Overseas Allowance Rate US$78.75 per day. In reply, please be informed that Article 7(1) in relation to Article 5(1) and (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. 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 a) that permanent establishment; or xxx xxx xxx." Moreover, paragraphs (1) and (2)(k) of Article 5 of the aforesaid treaty provide, viz: 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. HCacTI 2. The term permanent establishment shall include especially (a) a place of management; 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." Under the foregoing provisions, it is clear that if a corporation which is a resident of Australia does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Australian corporation shall not be subject to Philippine income tax. An Australian corporation may be deemed to have a permanent establishment in the Philippines if the furnishing of services by such corporation, through its employees or other personnel, in a particular or connected project, continue within the Philippines for a period or periods aggregating more than six months in any taxable year. Inasmuch as it has been represented that the subject technical services will be rendered by AMEC to Malampaya over a 12 week period, said furnishing of technical services cannot constitute a permanent establishment for AMEC in the Philippines, the same not having exceeded the aggregate period of six months as provided in the Philippines-Australia tax treaty. Thus, this Office is of the opinion and so holds that any income derived by AMEC from rendering these technical services to Malampaya is not subject to Philippine income tax . (BIR Ruling No. ITAD 85-00 dated August 1, 2000 ) However, the fees paid by Malampaya to AMEC for services performed in the Philippines shall be subject to the 10 percent value added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, being the payor in control of the payment, Malampaya shall be responsible for the withholding of VAT on such fees on behalf of AMEC by filing a separate VAT return for and on behalf of AMEC 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 Malampaya as a VAT-registered taxpayer. In case Malampaya 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, Malampaya is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of AMEC, the first three copies thereof to be given to AMEC and the fourth copy to be retained by Malampaya as its file copy. ( Sections 4 and 6, Revenue Regulations 4-2002 ) DcTaEH This ruling is 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 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