ITAD Ruling No. 155-04

December 23, 2004 ITAD RULING NO. 155-04 Articles 5, 7 and 15 of Philippines-New Zealand tax treaty Sec. 2.57.2 (B) of the Revenue Regulations No. 30-03 Sec. 28(B)(1) of the Tax Code of 1997 BIR Ruling No. DA-ITAD-169-02 BIR Ruling No. DA-ITAD-38-03 BIR Ruling No. DA-ITAD-120-04 C. L. Manabat & Company Certified Public Accountant 3rd to 6th Floor, Salamin Bldg. 197 Salcedo St., Legaspi Village 1229 Makati City Attention: Atty . Ophelia G . Jimenez Tax Partner Gentlemen : This refers to your letter dated June 16, 2004, on behalf of your client, PB Power (NZ) Limited, formerly Design Power New Zealand Limited, (PB Power for brevity), requesting confirmation of your opinion that PB Power has sufficiently set-up a permanent establishment in the Philippines and is, thus, subject to ten percent (10%) withholding tax creditable against its income liability for the taxable year 2003. It is represented that PB Power is a corporation organized and existing under the laws of New Zealand with principal address at P.O. Box 668, Wellington, New Zealand; that PB Power is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated June 28, 2004; that PB Power entered into several General Services Agreements dated November 10, 2001, June 21, 2002 and July 1, 2003, respectively, with CE Cebu Geothermal Power Company, Inc., Visayas Geothermal Power Company, Inc., and CE Casecnan Water & Energy Company, Inc., all corporations duly organized and existing under the laws of the Philippines; that each General Service Agreement renewed the original General Service Agreement dated July 18, 2000, appointing PB Power as contractor to provide engineering services to support the operation and maintenance of CE Cebu Geothermal Power Company, Inc., CE Luzon Geothermal Power Company, Inc., Visayas Geothermal Power Company, Inc., and CE Casecnan Water & Energy Company, Inc. facilities; that pursuant to the said Agreements, PB Power sent its employees to the Philippines, and one of the employees, Mr. John B. Christian was present in the Philippines for more than one hundred eighty three (183) days during a twelve (12) month period covering the fiscal year of 2003; that per certification issued by PB Power dated November 18, 2004, the project revenues derived by PB Power through its employee, Mr. Christian, in the Philippines for the current financial year ending December 31, 2004 will be in excess of Seven Hundred and Twenty Thousand Pesos (P720,000.00). In reply, please informed that Article 7 of the Philippines-New Zealand tax treaty provides, viz : "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 b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those being sold, or other business activities of the same or a similar kind as those being carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in that other State In relation thereto, paragraphs (1) and (2) of Article 5 and Article 15 of the same treaty provide, viz : "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. DaCTcA "2. The term 'permanent establishment' includes especially but is not limited to: a) A place of management; b) A branch; c) An office; d) A factory; e) A workshop f) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) A place of exploration or natural resources; h) A building site or construction, installation or assembly project, or supervisory activities in connection therewith where such site, project or activity continues for more than six months; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for the period more than 184 days; and j) A warehouse, in relation to a person providing storage mainly for some other person or persons; k) A place for the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any twelve month period . (Emphasis supplied) "xxx xxx xxx" Based on the foregoing, it is clear that if a resident corporation of Netherlands carries on business in the Philippines through a permanent establishment situated therein, the profits of the said corporation attributable to such permanent establishment shall be subject to Philippine income tax. For this purpose, a Netherlands corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its personnel, continue (for the service or connected project) within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. (BIR Ruling No. DA-ITAD-120-04 dated November 2, 2004) Accordingly, since PB Power rendered services to the aforesaid corporations in the Philippines through its employee Mr. John B. Christian, and, since Mr. Christian stayed in the Philippines beyond 183 days in performing his job as a consultant, PB Power is considered to have established a permanent establishment in the Philippines and is, therefore, subject to Philippine tax for income received from all sources within the Philippines and, shall be subject to withholding tax at the rate of 10 percent (10%) from November 10, 2001 up to December 31, 2003 and 15 percent (15%) withholding tax rate from January 1, 2004 onwards. (Sec. 28(B)(1) of the Tax Code of 1997 and Sec. 2.57.2(B) of the Revenue Regulations No. 30-03) Furthermore, Article 15 of the Philippines-New Zealand tax treaty provides: "Article 15 "DEPENDENT PERSONAL SERVICES" "1. Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an 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. EDSHcT "2. Notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of one of the Contracting States 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 that other State for a period or a periods not exceeding in the aggregate 183 days in the year of income of fiscal year, as the case may be, of that other State; and "b) the remuneration is paid, or on behalf of, an employer who is not a resident of that other State; and "c) the remuneration is not deductible in determining the taxable profits of a permanent establishment or a fixed base which the employer has in that other State. "3. Notwithstanding the preceding provisions of this Article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of one of the Contracting States may be taxed in that Contracting State. "xxx xxx xxx" Based on the aforecited provisions, remuneration derived by Mr. Christian in rendering the project shall be subject to Philippine income tax unless the following conditions concur: (a) he is present in the Philippines for a period not exceeding an aggregate of 183 days in the year of income of fiscal year, as the case may, in the Philippines; (b) the remuneration is paid by, on or behalf of, the employer (PB Power) in the Philippines; and (c) the remuneration is not deductible in determining the taxable profits of a permanent establishment or a fixed base which PB Power has in the Philippines. Therefore, compensation received by Mr. John B. Christian from PB Power for the rendition of subject services may likewise be subject to Philippine incomes tax, depending on the foregoing conditions. This ruling is issued based on the 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 Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service