VAT Ruling No. 054-99

May 14, 1999 VAT RULING NO. 054-99 22 (a) & (b) 25 (a) (1) 023-99 054-99 Punongbayan & Araullo 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic . C . Mamalateo Tax Partner Gentlemen : This refers to your letters dated May 7, 1997, November 4, 1997 and September 11, 1998, requesting for confirmation of your opinion on the tax consequences of the income payments received by a non-resident foreign corporation and its personnel from a domestic corporation under the Consultancy Services Agreement it entered into for the construction of a high rise residential building in Makati City, viz: "1. Payments received by RMJM London Limited for the architectural, mechanical, electrical and sanitary engineering professional services relative to the Consultancy Services Agreement with UCPB Properties, Inc. are not subject to Philippine income tax/withholding tax; "2. The necessary site visits of RMJM personnel in the Philippines for a period not exceeding 183 days in any one year will not create a taxable presence for RMJM in the Philippines; and "3. The fees paid to RMJM are exempt from the value-added tax since the fees are for services done abroad." As represented, RMJM London Limited (RMJM), a non-resident foreign corporation based in London, has entered into a Consultancy Services Agreement with UCPB Properties, Inc. (UCPB), a domestic corporation, for the construction of Forbes Tower known as Project Valero located at Valero Street, Makati City; that under the Agreement, RMJM shall render the normal architectural, mechanical, electrical and sanitary engineering professional services for UCPB but that the aforesaid services will be executed by the RMJM team outside of the Philippines; and that all necessary site visits will not require an employee of RMJM to visit the Philippines for more than 183 days in any one year; that the architectural services will generally include the architectural design services for the total development, including soft landscape design plans and specifications and detailed interior design of common areas, including a mock-up unit for marketing purposes; that the mechanical, electrical and sanitary services include the design of building services systems; that the said services include the preparation of tender drawings and specifications for the services as mentioned, periodic inspection, and attending monthly coordination/progress meetings and approving the contractor's testing and commissioning procedures and inspecting works on completion; that for the rendition of the services already stated, RMJM shall be paid a 1.4% percentage fee of the total final construction cost, inclusive of fixed furniture and fittings, travel accommodation, professional indemnity insurance, RMJM's Quality Assurance System, interior design to resident's facilities, common areas, apartment kitchens and bathrooms, IDD telephone charges necessary for the design services, design development and construction documents, including details and drawings and appropriate tender/bid, procurement and construction documents; that the construction of the said project will go on from March 1996 to February 1998; that all invoices will be payable to RMJM in U.S. dollars at the exchange rate current at the time of payment and within thirty (30) days of the invoice date; and that RMJM is an independent consultant and is solely liable to its employees for their salaries and all benefits to which they are entitled under the law. llcd In reply, please be informed that under Article 7 of the RP-UK tax treaty, a UK corporation is taxable in the Philippines if it carries on business through a permanent establishment situated in this country. Article 5 of the same tax treaty provides, that a UK corporation is considered to have a permanent establishment in the Philippines if " it furnishes services, including consultancy services, in that other Contracting State through its employee or other personnel (other than agents of an independent status within the meaning of paragraph (7) of this Article) for a period exceeding in the aggregate 183 days within any twelve month period ." [Art. 5, 3(b)] In the instant case, RMJM London executed its consultancy work outside the Philippines but furnished some services in the Philippines through actual site visits of its employees for a period of less than 183 days in any one year of the project duration Such being the case, it had no permanent establishment in the Philippines and, therefore, it is not subject to Philippine income tax. With respect to the RMJM personnel, since the necessary site visits in the Philippines were actually conducted for less than 183 days, as per proofs submitted, their income for services rendered in the Philippines are, likewise, exempt from Philippine income tax under Article 14 of the said RP-UK tax treaty. However, since the RP-UK Tax Treaty is limited only to income taxes, it does not cover business taxes like the value-added tax imposed under Title IV of the Tax Code. Hence, the gross receipts for technical services rendered by RMJM is subject to 10% value-added tax which UCPB may pay and file in behalf of the former. (BIR Ruling No. DA-023-99 dated January 15, 1999). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. LibLex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Local & Enforcement Group