ITAD Ruling No. 231-02

December 27, 2002 ITAD RULING NO. 231-02 Articles 5 & 7, RP-US tax treaty Secs. 28 & 42, NIRC BIR Ruling No. ITAD-166-02 BIR Ruling No. DA-ITAD-124-02 PNOC Petrochemical Development Corporation 11th Floor, BA Lepanto Building 8747 Paseo de Roxas 1227 Makati, Metro Manila Attention: Ms. Dionisia L. Mascardo Manager, Finance & Treasury Department Gentlemen : This refers to your letter dated July 25, 2002 requesting confirmation that: a) the consultancy/retainer services fees to be paid by your company to Nexant, Inc. (Nexant) are not subject to Philippine withholding tax, pursuant to Article 8 of the RP-US tax treaty; and b) only services rendered within the Philippines are subject to the value-added tax (VAT). IcDCaS It is represented that Nexant is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office address at 44 South Broadway, White Plains, New York, USA; 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 June 17, 2002; that PNOC Petrochemical Development Corporation (PNOC) is a corporation duly organized and existing under Philippine laws; that on February 13, 2002 Nexant and PNOC entered into a Retainer/Consultancy Services Contract effective December 31, 2001, whereby the former will review and update the Philippine Petrochemical Master Plan; that the updated Master Plan must ensure that the Petrochemical industry will strategically fit with the national energy plan and maximize synergy with other industries, upstream and downstream of industry; that the contract will have a duration of approximately twelve (12) weeks, starting December 31, 2001 up to March 25, 2002, subject to extension as may be agreed upon by both parties; that in the conduct of the aforesaid services, a representative of Nexant shall stay in the Philippines but only for a period of eight (8) days; and that PNOC shall pay Nexant professional fees and reimbursable costs as follows: a) Professional Fees in accordance with the stipulated rates in the proposal but shall not exceed US$115,000.00 including two percent (2%) administrative fee; b) Reimbursable out of pocket expenses of Nexant assigned personnel for travel, hotel, food, living and other incidental expenses up to a maximum of US$20,000; and c) Reimbursable expenses for reports and data from third party firms at an estimated cost of US$10,000 for local market research activities. In reply, please be informed that Article 8 paragraph 1 of the RP-US tax treaty provides viz : "Article 8 Business Profits "1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. "xxx xxx xxx" Moreover, Article 5 paragraphs 1 and 2 of the same treaty provide, viz : "Article 5 Permanent Establishment "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "2. The term "fixed place of business" includes but is not limited to: "a) A seat of management; "b) A branch; "c) An office; "d) A store or other sales outlet; "e) A factory; "f) A workshop; "g) A warehouse; "h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and "j) 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. (Emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, it is clear that a corporation which is a resident of the USA may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. THESAD In the instant case, considering that Nexant's personnel who, in connection with the furnishing of consultancy services, will arrive and stay in the Philippines only for a period of eight (8) days, Nexant is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. (BIR Ruling No. DA-ITAD-124-02 dated July 19, 2002) Moreover, Section 28(B)(1) in relation to Section 42(A)(3) of the National Internal Revenue Code of 1997 (NIRC) provides, viz : "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation . "(1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c) and (d): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). ( Emphasis supplied ) "SEC. 42. Income from Sources Within the Philippines . "(A) Gross Income From Sources Within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx "(3) Services . Compensation for labor or personal services performed in the Philippines; xxx xxx xxx Based on the afore-cited provisions, a nonresident foreign corporation is taxable only on income derived from sources within the Philippines so that if a nonresident foreign corporation furnishes and performs services in the Philippines, the service fees therefrom is taxable in the Philippines. Considering that the services of Nexant to PNOC under the said Consultancy Services Contract is rendered outside the Philippines, the services fees to be paid by PNOC to Nexant are considered income derived from sources outside the Philippines. ( BIR Ruling No. ITAD-166-02 dated September 23, 2002 ) In view thereof, since Nexant's personnel who, in. connection with the furnishing of consultancy services, will arrive and stay in the Philippines only for a period of eight (8) days, Nexant is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Furthermore, since the herein services are rendered outside the Philippines, the services fees to be paid by PNOC to Nexant are considered income derived from sources outside the Philippines. Hence, this Office confirms your opinion and so holds that the consultancy fees derived by Nexant from services rendered to PNOC are not subject to Philippine tax pursuant to Article 8(1) in relation to Article 5(2)[j] of the RP-US tax treaty and Section 28(B)(1) in relation to Section 42(A)(3) of the NIRC of 1997. However, the payments of service fees to Nexant covering that portion of the services rendered in the Philippines shall be subject to the ten per cent (10%) VAT, pursuant to Section 108 of the Tax Code of 1997. Accordingly, PNOC being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of Nexant by filing a separate VAT return for and on behalf of Nexant 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 PNOC. In addition, PNOC is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Nexant, the first three copies thereof to be given to Nexant and the fourth copy to be retained by PNOC as its file copy. 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