ITAD Ruling No. 174-02

October 9, 2002 ITAD RULING NO. 174-02 RP-Norway Art. 7 & Art. 5 BIR Ruling No. [DA-055-2-12-98] BIR Ruling No. DA-ITAD-153-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your application for relief from double taxation dated July 16, 2002, on behalf of your client, Jebsens Orient Shipping Services AS (JOSS AS), requesting confirmation of your opinion that the business profits to be derived by JOSS AS from its bareboat charter contract with JOSS Asian Feeders Inc., (JOSS Asian), are not subject to Philippine income tax, pursuant to Article 7(1) of the RP-Norway tax treaty, and consequently, to the 4.5% final withholding tax on charter fees derived by a non-resident owner or lessor of vessels from charters to Filipino citizens or corporations under Section 28(B)(3) of the Tax Code of 1997, as implemented by Section 2.57-1(I)(3) of Revenue Regulations 2-98. It is represented that JOSS AS is a corporation organized and existing under the laws of Norway, with office address at Sandbrugt 5, 5023 Birgen, Norway; that it is not engaged in trade or business in the Philippines and does not maintain a branch or any other place of business in the Philippines; that it does not have any employees or personnel in the Philippines; 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 July 2, 2002; that JOSS Asian is a corporation organized and existing under the laws of Philippines with business address at 2/F Harbor Center II Bldg., Railroad St., South Harbor, Port Area, Manila; that JOSS AS entered into a bareboat charter agreement with JOSS Asian, whereby the former leased a vessel named MV Brinknes to the latter for a period of one year, i.e., from June 21, 2002 to June 21, 2003; that JOSS Asian, as the charterer of the vessel, shall provide for its own provisions and complement of the crew; that said bareboat charter agreement shall be registered with the Maritime Industry Authority (MARINA); that the vessel shall be used by JOSS Asian for the domestic and international transport of cargo; and that JOSS Asian shall pay JOSS AS US$50,947.00 per month for the lease of said vessel. In reply, please be informed that pertinent provisions of the RP-Norway tax treaty provide as follows, 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 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. 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, an oil or gas well, a quarry or any other place of extraction of natural resources; "g) a building site, a construction, assembly or installation project or supervisory activities connected therewith if such site, project or activities continue for a period of more than 6 months: "h) 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; "i) premises used as a sales outlet; AIcECS "j) a warehouse, in relation to a person providing storage facilities for others. xxx xxx xxx" Considering that JOSS AS does not have a permanent establishment in the Philippines to which its business profits may be attributed to, this Office confirms your opinion and so holds that the charter fees which shall be derived by JOSS AS under its bareboat charter agreement with JOSS Asian are not subject to Philippine income tax and consequently to the 4.5% withholding tax imposed under Section 28(B)(3) of the National Internal Revenue Code (Tax Code) of 1997, pursuant to the RP-Norway tax treaty. Accordingly, JOSS Asian is not required to withhold income tax on such charter fees on behalf of JOSS AS. ( BIR Ruling No. [DA-055-2-12-98] ) However, the said fees to be paid by JOSS Asian to JOSS AS for the lease of MV Brinknes shall be subject to the 10% value-added tax pursuant to Section 108 of the Tax Code of 1997 based on the gross receipts diminished by a proportionate amount of the charter fees corresponding to their overseas trading as may be allowed by a Special Permit duly issued by Maritime Industry Authority (MARINA). Accordingly, JOSS Asian, being the payor in control of the payment shall be responsible for the withholding of VAT on such payments on behalf of JOSS AS by filing a separate VAT return for and on behalf of JOSS AS 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 JOSS Asian if it is a VAT-registered taxpayer. In case JOSS Asian 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, JOSS Asian is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of JOSS AS, the first three copies thereof to be given to JOSS AS and the fourth copy to be retained by JOSS Asian as its file copy. [ Sections 4 & 6, Revenue Regulations No. 4-2002 ] Finally, the Bareboat Charter Agreement executed by and between JOSS AS and JOSS Asian shall be subject to the documentary stamp tax imposed under Section 197 in relation to Section 173 of the Tax Code of 1997. ( BIR Ruling No. DA-ITAD-153-02 dated September 3, 2002 ) 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 parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service