ITAD Ruling No. 159-00

October 23, 2000 ITAD RULING NO. 159-00 RP-Thailand Art. 5 (2) (k) & Art. 7 ITAD 42-00 PNOC Petrochemical Development Corporation 11/F, BA Lepanto Building 8747 Paseo de Roxas, 1227 Makati Metro Manila Attention: Ms . Dionisia L . Mascardo Gentlemen : This refers to your letter dated May 18, 2000, on behalf of Chem Systems East Asia Limited (Chem Systems), requesting confirmation of your opinion that the consultancy services to be paid by PNOC Petrochemical Development Corporation (PNOC) to Chem Systems are not subject to Philippine income/withholding/value-added tax (VAT) pursuant to Articles 5(2)(k) and 7 of the RP-Thailand Tax Treaty. It is represented that PNOC is a corporation duly organized and existing under Philippine laws with principal office at 11/F, BA Lepanto Bldg., 8747 Paseo de Roxas, Makati City, Philippines; that PNOC was mandated to take the lead role in organizing a consortium that will put up the first Naptha Cracker in the Philippines known as the Bataan Naptha Cracker Project (BNC Project); that Chem Systems is a corporation organized and existing under the laws of the State of Delaware, United States of America, having its business operation in Thailand under the protection granted by the 1968 United States/Thailand Treaty of Amity & Economic Relation; that there is a need to fast tract the integration and implementation of the Bataan Naptha Cracker Project; that PNOC engaged the services of Chem Services as consultant for a total period of seventeen (17) weeks starting March 6, 2000; that Chem Systems shall provide personnel with adequate qualifications and experiences and of such number as may be required for the best fulfillment of the service; that PNOC shall pay Chem Systems the amount of $100,000.00 payable in four equal payments on the following dates: April 20, 2000, May 20, 2000, June 20, 2000, and the last and final payment shall be upon final acceptance of the work by PNOC; and that PNOC agrees to pay Chem Systems for reimbursable expenses up to a maximum of $15,000.00. In reply, please be informed that Article 7(l) in relation to Article 5(2)(k) of the RP-Thailand tax treaty provides: "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 or has carried 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. "Article 5 Permanent Establishment xxx xxx xxx 2. The term "permanent establishment" includes especially: xxx xxx xxx (k) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx xxx xxx" While Chem Systems earns business profits from the consultancy services it renders to PNOC, such services shall be rendered in the Philippines for a period not exceeding 183 days during the entire duration of the contract (the consultancy period will only involve 17 weeks from March 6, 2000 ending June 30, 2000). Thus, Chem Systems is deemed not to have a permanent establishment in the Philippines wherein business profits can be attributed. Such being the case, this Office hereby confirms that the service fees paid by PNOC to Chem Systems are not subject to income tax and withholding tax under the above-mentioned provisions. Further, such fees are considered ordinary and necessary/expenses on the part of PNOC considering the nature of the services rendered pursuant to the provision of Chapter VII, Section 34(A)(1) of the 1997 Tax Code of the Philippines which reads as follows: "CHAPTER VII Allowable Deductions Sec. 34. Deduction from Gross Income Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A, (B) and (c); and 28(A)(1), there shall be allowed the following deductions from gross income: (A) Expenses (1) Ordinary and Necessary Trade, Business or Professional Expenses (a) In general There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of trade, business or exercise of profession. xxx xxx xxx" However, the fees paid by PNOC to Chem Systems for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Section 108 of the Tax Code. Accordingly, PNOC shall be responsible for the payment of VAT on behalf of Chem Systems by filing a separate VAT declaration/return using BIR Form 1600 and the said VAT declaration/return can be used by PNOC, as evidence in claiming input tax credit for the consultancy services rendered under the Bataan Naptha Cracker Project. (Sec. 4.102-1(b); Revenue Regulation No. 7-95). This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. DHcTaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group