ITAD Ruling No. 207-02

November 26, 2002 ITAD RULING NO. 207-02 Art. 7 (1) & 5 (1 & 2) of RP-Netherlands Tax Treaty Sec. 28 & 42 of Tax Code of 1997 BIR Ruling No. 101-02 Joaquin Cunanan & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. Alexander B. Cabrera Partner, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated May 31, 2001, requesting confirmation of your opinion that the income derived by Marco Polo Hotels Consultancy B.V. (MP) as consultant of your client, Halifax Davao Hotel Inc. (Halifax), is exempt from Philippine income/withholding taxes pursuant to the RP-Netherlands tax treaty. It is represented that MP is a corporation organized and existing under the laws of Netherlands with principal address at Emmaplein 5, 1075 AW, Amsterdam, The Netherlands; 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 dated June 8, 2001 issued by the Securities and Exchange Commission (SEC); that on May 16, 1996, MP and Halifax entered into an International Consultancy Agreement whereby the former is appointed by the latter as its consultant; that MP, being the consultant, shall provide consultancy advice and assistance regarding the operations and management of the hotel from outside of the Philippines; that in consideration for the said services, Halifax shall pay MP a consultancy fee equivalent to basic pay of 0.5% of the Hotel's Gross Revenue for each fiscal year and an incentive fee of 5.25% for the first two fiscal years and 6.5% of the Hotel's Gross Operating Profit for the third fiscal year and onwards; that the consultancy services are done at the consultant's office address at Emmaplein 5, 1075 AW, Amsterdam, The Netherlands, and shall commence on May 16, 1996 for a period of five (5) years and may be renewed at the discretion of MP for another 5 years, and thereafter for another 5 years under the same terms and conditions by mutual consent of the parties provided that an agreement has been reached at least twelve (12) months before the expiry of each of the respective terms. In reply, please be informed that Article 7 of the RP-Netherlands tax treaty provides as follows: "Article 7 "Business Profits "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other 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 that permanent establishment. "xxx xxx xxx" "Article 5 "Permanent Establishment "1. For the purposes of this Convention, the term 'permanent establishment' means of a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve month period. "xxx xxx xxx" Based on the foregoing provisions, an enterprise which is a resident of the Netherlands is taxable only in the Netherlands unless it carries on business in the Philippines through a permanent establishment situated therein. The term "permanent establishment", as has been defined under Article 5 of the tax treaty, includes the furnishing of consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Thus, technical or consultancy services rendered outside the Philippines, or even if these are rendered within the Philippines but the rendition thereof is for an aggregate period of less than 183 days during a given taxable year, shall not constitute a permanent establishment for the foreign enterprise. Moreover, the aforementioned fee is not within the contemplation of "Rentals and Royalties" under Section 42(A)(4) of the Tax Code of 1997 since there is no transfer into the Philippines of technology, equipment or other property where the payee has proprietary interest. To be considered thereunder, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no transfer of technology in this country as the service fees to be paid by HALIFAX to MP constitute payment for the aforementioned technical support services performed outside of the Philippines. Thus, the fees paid to MP shall not be considered as royalties but shall constitute compensation for labor or personal service performed outside the Philippines and therefore considered income from sources without the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997. In view thereof, this Office is of the opinion and so holds that since the services covered by the subject Consultancy Agreement are rendered by MP outside the Philippines, and are considered income from sources without the Philippines, the payments made by HALIFAX to MP for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the Tax Code of 1997. ( BIR Ruling No. DA-ITAD-101-02 dated May 28, 2002 ) This ruling is issued on the basis of 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 of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service