January 6, 2020

ITAD BIR RULING NO. 005-20

Articles 5 (Permanent Establishment) and 8

(Business Profits) Philippines-United States of
America tax treaty

R.G. Manabat and Co.

9th Floor, The KPMG Center
6787 Ayala Avenue
1226 Makati City

Attention: AAA
_______________

Gentlemen :

This refers to the tax treaty relief application filed on June 11, 2014 requesting
confirmation that income derived by Remington Outdoor Company, Inc. ("Remington")
from the supply and delivery of firearms to the Armed Forces of the Philippines ("AFP") is
exempt from income tax pursuant to the Convention between the Government of the
Republic of the Philippines and the Government of the United States of America with
Respect to Taxes on Income ("Philippines-United States tax treaty"). cSEDTC

FACTS

Remington is a foreign corporation organized and existing under the laws of the
United States and a resident thereof based on its Restated Certificate of Incorporation and
Certificate of Residence issued by the Internal Revenue Service of the United States.
Remington is engaged in the design, manufacture and marketing of firearms, ammunition
and related products for hunting, shooting sports, law enforcement and military markets. 1 It
is not registered as a corporation or partnership in the Philippines based on the Certificate of
Non-Registration of Company issued by the Securities and Exchange Commission. On the
other hand, AFP is the military forces of the Philippines, which consists of the Army, the
Navy (including the Marine Corps) and the Air Force. 2

On October 23, 2013, AFP, as procuring entity, and Remington, as supplier, entered
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into a Contract Agreement ("Agreement") where Remington agreed to supply and deliver
50,629 units of assault rifle to AFP. The contract price is US$_______________ or
Php_______________. The supply was pursuant to the Notice of Award and Notice to
Proceed issued by the Department of National Defense ("DND") to Remington. DND is a
government agency with mandate to safeguard the country against external and internal
threats to national peace and security and to provide support for social and economic
development. DND supervises the Armed Forces of the Philippines, the Government
Arsenal, the Philippine Veterans Affairs Office, the National Defense College of the
Philippines, and the Office of Civil Defense, and supervises and administers the AFP
Modernization Program. 3

Based on a certification issued by DND, Remington conducted maintenance training

in the Philippines on August 6-7, 2014 on the use of the procured firearms. The training was
conducted by John Michael Iliff and Michael Duane Haugen of Remington, and attended by
fifty students at the NCO Club House, Fort Bonifacio in Taguig City. AIDSTE

Based on a sworn statement issued by Remington, the income subject of this ruling is
not under investigation, on-going audit, administrative protest, claim for refund or issuance
of a tax credit certificate, collection proceeding, or judicial appeal.

RULING

In reply, please be informed that under Section 28 (B) (1) of the National Internal
Revenue Code of 1997, as amended ("Tax Code"), income derived by a foreign corporation
not engaged in trade or business is subject to income tax at the rate of 30%, to wit:

"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
subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%)."

However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the
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extent required by any treaty obligation binding upon the Philippine government, to wit:

"SEC. 32. Gross Income. —

xxx xxx xxx

(B) Exclusions from Gross Income. — The following items shall not be included in
gross income and shall be exempt from taxation under this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. — Income of any kind, to the extent required by
any treaty obligation binding upon the Government of the Philippines."

For this purpose, paragraph 1, Article 8 and paragraphs 1, 2 and 5, Article 5 of the
Philippines-United States tax treaty provide as follows:

"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."

"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. SDAaTC

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;

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 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."

Under Article 8, business profits derived by a resident of a Contracting State in the

other Contracting State may be taxed in the other State if the resident has a permanent
establishment in the other State and the profits are attributable to the permanent
establishment. Under Article 5, a permanent establishment means a fixed place through
which a resident of Contracting State engages in a trade or business. The term permanent
establishment includes especially a seat of management, a branch, an office, a store or other
sales outlet, and a factory. It also includes the furnishing of services by a resident of a
Contracting State, through employees or other personnel thereof, where such activity
continues in the other Contracting State for a period or periods aggregating more than 183
days.

Accordingly, since Remington is not engaged in trade or business in the Philippines,

and it does not have a branch, an office, or other fixed place of business in the country, and it
did not furnish services in the Philippines for more than 183 days, but for a period of two
days only on August 6-7, 2014, to conduct maintenance training on the use of the firearms it
delivered to AFP, Remington shall not be deemed to have a permanent establishment in the
Philippines under paragraphs 1 and 2, Article 5 of the Philippines-United States tax treaty.
This being the case, income payments made by AFP to Remington for the supply and
delivery of the said firearms shall be exempt from income tax pursuant to paragraph 1,
Article 8 of the Philippines-United States tax treaty.

With respect to value-added tax ("VAT"), the firearms imported by AFP is subject to
VAT at the rate of 12% under Section 107 (A) of the Tax Code, unless the AFP can show a
specific provision of law exempting it from VAT on importation of firearms. Section 107
(A) provides: AaCTcI

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 "SEC. 107. Value-Added Tax on Importation of Goods. —

(A) In General. — There shall be levied, assessed and collected on every

importation of goods a value-added tax equivalent to ten percent (10%) based
on the total value used by the Bureau of Customs in determining tariff and
customs duties plus customs duties, excise taxes, if any, and other charges, such
tax to be paid by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined on the basis
of the quantity or volume of the goods, the value-added tax shall be based on
the landed cost plus excise taxes, if any Provided, further, That the President,
upon the recommendation of the Secretary of Finance, shall, effective January
1, 2006, raise the rate of the value-added tax to twelve percent (12%) . . ." 4

Moreover, the furnishing of services in the Philippines by Remington is also subject

to VAT at the rate of 12% under Section 108 (A) of the Tax Code, unless the AFP can show
a specific provision of law exempting it from VAT on procurement of services. Section 108
(A) provides:

"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties selling
price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor: Provided, that the
President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . .

The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration . .
." 5

Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005, 6 AFP shall

withhold VAT on payments made to Remington, being a nonresident foreign corportion. In
remitting the VAT withheld, AFP shall use BIR Form No. 1600 (Remittance Return of VAT
and Other Percentage Taxes Withheld). VAT withheld shall be remitted within ten (10) days
following the end of the month the withholding was made. acEHCD

This ruling is issued on the basis of the facts as represented. However, if upon
investigation it shall be disclosed that the actual facts are different, then this ruling shall be
without force and effect insofar as the herein parties are concerned.

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 Very truly yours,

(SGD.) CAESAR R. DULAY

Commissioner of Internal Revenue
Footnotes
1. https://www.remingtonoutdoorcompany.com/.
2. http://www.afp.mil.ph/index.php.
3. http://www.dnd.gov.ph/transparency/about-dnd/mission-vision-and-core-values.html.
4. The recommendation of the Secretary of Finance to increase the VAT rate from 10% to 12%
was approved by the President through a memorandum issued by the Executive Secretary on
January 31, 2006. The increase in VAT from 10% to 12% took effect on February 1, 2006.
5. Ibid.
6. Consolidated Value-Added Tax (Regulations of 2005), as amended by Revenue Regulations
No. 4-2007.

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