ITAD Ruling No. 169-02

September 26, 2002 ITAD RULING NO. 169-02 Articles 5, 7 & 15, Philippines-Norway Tax Treaty BIR Ruling No. ITAD-130-00 Department of Energy Energy Center, Merrit Road, Fort Bonifacio Taguig, Metro Manila Attention: Ms. Griselda J.G. Bausa Director, Energy Resource Development Bureau Gentlemen : This refers to your letter dated March 1, 2001 requesting confirmation that Dr. Alfred I. Kjemperud , a Norwegian consultant on the subject project of the Government of the Republic of the Philippines and the Government of the Kingdom of Norway, is required to pay Philippine income tax, pursuant to the Philippines-Norway tax treaty. It is represented that, on August 12, 1999, an Agreement Regarding Financing of the Technical Assistance to the Philippine Petroleum Resource Assessment Project (Project) was entered into by the Government of the Republic of the Philippines through the Department of Energy (DOE) and the Government of the Kingdom of Norway through the Norwegian Agency for Development Cooperation (NORAD) ; that the Norwegian government agreed to finance the technical assistance aspect of the Project by providing the Philippines a grant not exceeding 5,548,000 Norwegian kroners; that NORAD shall, subject to Norwegian tender process and in consonance with the requirements of the Project , assist the DOE in selecting a consulting company that will implement the Project ; that a contract for this purpose approved by NORAD shall be entered into by the DOE and the consulting company selected; that, pursuant thereto, The Bridge Group A/S (Bridge) , a company organized and existing under the laws of Norway, was selected, and that a Contract Concerning the Financing and Implementation of the Philippine Petroleum Resource Assessment Project was consequently entered into by the DOE and Bridge ; that, under the Contract, Bridge shall carry out the Project for 18 months beginning in the third quarter of year 2000; that, if the Project has not been completed after 18 months, the Project shall continue until Bridge's obligations to it have been fulfilled; that a staff consisting of Dr. Kjemperud (overall leader) and five other personnel was employed by Bridge to administer the Project ; that Dr. Kjemperud , a citizen and resident of Norway and with valid Norwegian Passport No. 97-K0200041-15, commenced his stay in the Philippines on August 21, 2000, and, considering the time period of the Project for 18 months, will most likely stay in the country until February 2002. Based on the foregoing, it is your opinion that Dr. Kjemperud is required to pay Philippine income tax pursuant to the Philippines-Norway tax treaty, in particular, the Dependent Personal Services article thereof which provides: EScHDA "1. Subject to the provisions of Articles 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 the other State. 2. Notwithstanding the provisions of paragraph 1 remuneration derived by 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 that other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period; and b) the remuneration is paid by, or on behalf of, an employer who is a resident of the State of which the recipient is a resident, and whose business activities do not wholly or mainly consist of hiring out of labour; and c) the remuneration is not reasonably connected with the activities of a permanent establishment or a fixed base which the employer has in that other State. However, to the extent that the above-mentioned remuneration is exempt from tax in the first-mentioned State, or upon the application of this Article will be exempt from tax in that State, the remuneration may be taxed in the other State. xxx xxx xxx" In reply, please be informed that according to paragraph 2 of the above-cited Article, remuneration derived by Dr. Kjemperud in administering the Project shall be exempt from Philippine income tax if the following conditions concur: (a) he is present in the Philippines for a period not exceeding an aggregate of 183 days within a twelve-month period; (b) the remuneration is paid by, or on behalf of, an employer ( Bridge ) which is a resident of Norway, and whose business activities do not wholly or mainly consist of hiring out of labour; and (c) the remuneration is not reasonably connected with the activities of a permanent establishment which the employer ( Bridge ) has in the Philippines. Otherwise, such remuneration may be taxed in the Philippines. Based on the foregoing, inasmuch as Dr. Kjemperud shall stay in the Philippines for 18 months and therefore exceeds 183 days within a twelve-month period, remuneration derived by him during his stay in the Philippines shall be subject to Philippine income tax. ( BIR Ruling No. ITAD 130-00 dated September 1, 2000 ) Pursuant to Section 25(A)(1) of the Tax Code of 1997 , a nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines . In the case of Dr. Kjemperud , inasmuch as his stay in the Philippines in the calendar year 2000 did not exceed 180 days, particularly from August 21 to December 31, he is considered a nonresident alien not doing business in the Philippines and his remuneration is subject to 25 percent final income tax imposed under Section 25(B) of the Tax Code . For calendar year 2001, Dr. Kjemperud shall be considered a nonresident alien doing business and his remuneration, similar with that of a resident citizen or resident alien, is subject to the graduated tax rates of 5 percent to 32 percent imposed under 25(A)(1) of the Tax Code , with allowance for personal and additional exemptions. Such remuneration shall be subject to 10 percent creditable withholding tax as required under Section 2.57.2(6) of Revenue Regulations 2-98 . Also, as required under Section 51(A)(1)(d) of the Tax Code, Dr. Kjemperud should file an income tax return for income derived in 2001, and pay the tax due thereon less the 10 percent creditable tax already withheld or to be withheld. More so, assuming that Bridge finishes the Project within 18 months, i.e., from August 2000 to February 2002, Dr. Kjemperud shall be again considered a nonresident alien not doing business for calendar year 2002 and his remuneration subject to 25 percent final income tax. Otherwise, he remains a nonresident alien doing business and continues to be taxed as such. The principles laid down in the foregoing paragraphs will also apply to remuneration derived by the other personnel employed by Bridge to the Project . Finally, as regards the profits derived by Bridge in managing and implementing the Project , please be informed that paragraph 1, Business Profits article of the same tax treaty provides: "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." According to the above-mentioned paragraph, such profits are subject to Philippine income tax if they are attributable to a permanent establishment. Furnishing of services giving rise to a permanent establishment is defined in paragraph 2(h), Permanent Establishment article of the tax treaty as: "the furnishing of services, including consultancy services, performed within a Contracting State by an enterprise of the other Contracting State through employees or other personnel, where the activities of that nature are carried out (for the same or a connected project) for a period or periods aggregating more than 6 months within a twelve-month period;" Thus, the implementation and management of the Project by Bridge (through employees or other personnel thereof) give rise to a permanent establishment if the activities concerned are carried out for a period of more than 6 months within a twelve-month period. Inasmuch as such activities will be carried out for 18 months (or longer), Bridge is considered to have a permanent establishment in the Philippines, and profits derived by Bridge as such are subject to Philippine income tax. (BIR Ruling No. ITAD 130-00 dated September 1, 2000). Such profits are treated as income of a nonresident foreign corporation subject to 32 percent final income tax as provided under Section 28(B)(1) of the Tax Code . Also, such profits are subject to 10 percent value-added tax as provided under Section 108(A)(6) of the Tax Code . TAacHE Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service