January 16, 2003

ITAD RULING NO. 009-03

RP-UK, Art. 7 & Art. 5

BIR Ruling No. ITAD
27-00/69-007

SGV & Co.

6760 Ayala Avenue
1226 Makati City

Attention: E. C. Alcantara
Tax Division

Gentlemen :

This refers to your application for tax treaty relief dated March 8, 2002 on
behalf of your client, Balfour-Cleveland Consortium, requesting confirmation of
your opinion that a non-resident foreign corporation which does not perform any
service and is not considered to have carried business through a permanent
establishment in the Philippines is not subject to income/withholding tax and VAT
in the Philippines pursuant to Article 7 of the RP-UK tax treaty in relation to
Article 5 of the same treaty.

It is represented that Balfour-Cleveland Consortium (the Consortium) is a

corporation duly existing and organized under the laws of United Kingdom; 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 28, 2002; that the Consortium was awarded
a contract with the Philippine Government Department of Public Works and
Highways (DPWH) for the design, fabrication and supply of structural steel
bridges with advisory services; that the principal contract cover two portions,
namely, (1) the "offshore portion" consisting of the design and delivery of U.K.
supplied bridges covered by the Contract for the Supply of Steel Truss and Beam
Bridges for the provision of advisory services of the DPWH Bridge Replacement
Project between DPWH and the Consortium, and (2) the "onshore portion"
consisting of advisory services; that the Consortium has retained to undertake the
offshore portion of the contract while the onshore portion has been subcontracted
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 to First Philippine Balfour Beatty (FPBB) in accordance with the Subcontract
Agreement dated October 30, 2001; that FPBB is a corporation organized and
existing under the laws of the Philippines with principal office at 3rd Floor,
Benpres Bldg., Exchange Road corner Meralco Avenue, Pasig City; that pursuant
to the terms of the offshore portion of the principal contract, the Consortium has
undertaken to design, fabricate, build and construct structural bridges in the U.K.
and subsequently deliver the manufactured product to DPWH, the importer of
record, which shall in turn be responsible for the installation of the bridges in the
Philippines; that the liability of the Consortium to DPWH shall be deemed
terminated upon the delivery of the structural bridges to DPWH; and that the
Consortium shall not be engaged in the onshore installation or construction of the
super structure, hence no service shall be performed in the Philippines. DIETcH

In reply, please be informed that pertinent portions of Article 7 and Article

5 of the RP-UK tax treaty, provide as follows:

"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 of them as is directly or
indirectly attributable to that permanent establishment.

"xxx xxx xxx"

"Article 5

"PERMANENT ESTABLISHMENT

"1. For the purpose 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. ...

"a) ...

"3. An enterprise of a Contracting State shall likewise be deemed

to have a permanent establishment in the other Contracting State if:

"a) it carries on supervisory activities within that other

Contracting State for more than 183 days in connection with a
building site, or a construction or assembly project which is being
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 undertaken, in that other Contracting State; or

"b) it furnishes services, including consultancy services, in

that other Contracting State through its employees 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."

"xxx xxx xxx"

Based on the foregoing provisions, the profits of a corporation which is a

resident of the United Kingdom is taxable only in United Kingdom, unless the UK
corporation carries on business in the Philippines through a permanent
establishment situated therein. A UK corporation may be deemed to have a
permanent establishment in the Philippines if, among others, the furnishing of
services of that corporation in the Philippines through its employees or other
personnel in connection with a building site or a construction or assembly project
is for a period or periods aggregating more than 183 days within any twelve-month
period. TacESD

Considering that the Consortium subcontracted to FPBB the Advisory

portion of the contract, such that the actual services are performed in the
Philippines by FPBB and not by the Consortium nor by any of its personnel, the
Consortium is not deemed to have a permanent establishment in the Philippines to
which its business profits may be attributed to. Therefore, this Office is of the
opinion and so holds that the payments by DPWH to the Consortium are not
subject to Philippine income tax and VAT pursuant to Article 7 in relation to
Article 5 of the RP-UK tax treaty, and Section 108 of the Tax Code of 1997,
respectively.

On the other hand, since FPBB is a domestic corporation, any

income/profits it derives from the subcontracting agreement with the Consortium
are subject to the 10% value-added tax and ordinary corporate income tax pursuant
to Sections 108 and 27(A) of the 1997 Tax Code.

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

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 By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner
Legal Service
Bureau of Internal Revenue

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