ITAD Ruling No. 197-00

December 7, 2000 ITAD RULING NO. 197-00 RP-Malaysia Art. 5 & 7 179-95 ITAD 92-00 Roxas Delos Reyes Laurel & Soriano 19/F PDCP Building, 8737 Paseo de Roxas Avenue Makati City 1200 Attention: Anna Melissa L . Rosario Maria Portia E . Rosell Gentlemen : This refers to your letter dated August 15, 2000, on behalf of your client the ENG Teknologi Holdings Bhd (ETHB), requesting confirmation of your opinion that business profits received from Engtek Precision Philippines Inc. (EPPI), a Philippine subsidiary, are not subject to Philippine Income tax pursuant to the SP-Malaysia Tax treaty. It is represented that ETHB is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Malaysia and with business address at Plot 69-70 Persiaran Kampung Jawa, Bayan Lepas Industrial Zone, Bayan Lepas, Penang, Malaysia 11900; that ETHB is not registered to engage in business in the Philippines as evidenced by Securities and Exchange Commission certification dated February 2, 2000; that EPPI, a subsidiary of ETHB, is a corporation organized and existing under the laws of the Philippines, with business address at L10 Phase II-A Special Export Processing Zone II Carmelray Industrial Park I, Canlubang, Laguna; that EPPI is engaged in the business of manufacturing, producing, assembling, processing, importing, exporting, wholesaling and marketing of electronics and mechanical machinery products, parts, components and accessories therefor including precision engineering and servicing of semi-conductor and hard disk drive components and peripherals; that on April 11, 2000, EPPI and ETHB entered into a Management Services Contract whereby the latter is engaged to perform certain management services and organizational direction, financial management, marketing strategies and information technology advice to EPPI; that such contract shall be effective from October 1, 1999 until December 2000, renewable upon mutual agreement of the parties herein; and that EPPI agrees to pay ETHB a monthly Management Fee in an amount equivalent to one percent (1%) of EPPI's total monthly sales volume plus a fixed fee of Two Thousand Six Hundred US Dollars (USD2,600.00) per month for the period January 1, 2000 to December 31, 2000. In reply, please be informed that Article 7 of the RP-Malaysia 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 business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much thereof as is attributable to that permanent establishment. HAICcD Moreover, Article 5 of the above treaty provides as follows: "Article 5 " Permanent Establishment "1. For the purposes of this Agreement, the term permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. . . . "3. . . . "4. . . . "5. . . . "6. . . . 7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise) shall not of itself constitute either company a permanent establishment of the other." In view of the foregoing, the existence of EPPI as a subsidiary of ETHB does not of itself constitute a permanent establishment of ETHB. This was likewise held in BIR Ruling No. ITAD-92-00 dated August 1, 2000. Such being the case, this Office hereby confirms your opinion that since ETHB has no permanent establishment in the Philippines, the business profits it received from rendering corporate management services to EPPI are not subject to Philippine income tax pursuant to Article 5 and 7 of the RP-Malaysia Tax Treaty. (BIR Ruling No. ITAD-92-00) This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group