Quezon City BUREAU OF INTERNAL REVENUE RULING 000-00 002-004 Person to Contact: Chief, Law Division Tel. Nos.

926-55-36 / 927-09-63

January 12, 2004 Date: _________________

SYCIP GORRES VELAYO & CO. 6760 Ayala Avenue Makati City Attention: Mr. J.A. Osana Tax Division Gentlemen: This refers to your letter dated January 19, 2001 requesting for a confirmatory opinion that the payments made by SHELL PHILIPPINES EXPLORATION, B.V. (SPEX for brevity) to its non-resident foreign subcontractors who are not residents of tax treaty countries for the testing and installation work done in the Philippines under the circumstances described hereunder shall be subject to the 8% tax on gross income imposed under P.D. 1354. The facts, as you represent, are as follows: SPEX is a corporation formed and organized under the laws of the Netherlands, and it operates in the Philippines through a branch duly licensed by the Securities and Exchange Commission. SPEX is a petroleum service contractor of the government of the Philippines under Service Contract No. 38 (SC 38 for brevity) covering an area in offshore Northwest Palawan. In its capacity as a petroleum service contractor, petroleum operation of SPEX and its co Ventures in SC 38 are under the supervision and control of the Department of Energy. SPEX and its subcontractors are entitled to fiscal incentives under special laws, i.e., PD No. 87 otherwise known as The Oil Exploration and Development Act of 1972 and PD No. 1354. In connection with its petroleum operations, SPEX enters into supply contracts for certain equipment to be used in its petroleum operations with certain non-resident foreign corporations duly organized under the laws of countries that have no tax treaties with the Philippines. Under the subject supply contacts, such non-resident foreign corporations are required to supply and/or manufacture and sell to SPEX certain equipment originating from a foreign country. The transfer of title to SPEX over the equipment shall take place at the port of loading (for shipment by air of sea) outside the Philippines. The same shall

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be imported to the Philippines by SPEX free from all taxes and duties, pursuant to P.D. No. 87, as amended. To ensure that the subject equipment are installed properly in its facilities located in offshore N.W. Palawan, Batangas or other locations, SPEX requires the non-resident foreign corporations to send some technical personnel in the Philippines to perform installation and testing services. The installation and testing service are performed over a period not exceeding 183 days. SPEX shall pay the non-resident foreign corporations a service fee for installation and testing and that the service fee is separate and distinct from the purchase price of the equipment. You now request a confirmatory opinion on the following:
1. The income derived by the non-resident foreign corporations domiciled in non-treaty countries from their supply of equipment to SPEX where the transfer of title to SPEX takes place outside the Philippines shall not be subject to Philippine income tax. Said non-resident foreign corporations shall be considered as subcontractors under P.D. No. 1354 as regards their performance of installation and testing services for SPEX; therefore, the service fees shall be subject to the 8% final tax, in lieu of all national and local taxes.

2.

In reply thereto, please be informed that under Section 28(B) (1) of the 1997 Tax Code, non-resident foreign corporations domiciled in non-treaty counties are subject to income tax on their gross income received during each taxable year from all sources within the Philippines. Since the transfer of title to SPEX over the equipment supplied by the non-resident foreign corporations shall take place at the port of loading (for shipment by air or sea) outside the Philippines, any income derived by such nonresident foreign corporations from the supply of such equipment shall be considered as income received from sources without the Philippines. In view thereof, this Office hereby confirms your opinion that:
1. The income derived by the non-resident foreign corporation domiciled in non-treaty countries from their supply of equipment to SPEX where the transfer of title to SPEX takes place outside the Philippines shall not be subject to Philippine income tax.

With respect to the installation and testing work performed in the Philippines, such nonresident foreign corporations shall be considered as subcontractors of SPEX, and their service fees shall be subject to the 8% final tax, imposed under P.D. No. 1354. Section 1 of Presidential Decree (P.D.) NO. 1354 explicitly provides that:
Sec. 1. Tax on subcontractors. Every subcontractor, whether domestic or foreign, entering into a contract with a service contractor engaged in petroleum operations in the Philippines shall be liable to a final income tax equivalent to eight percent (8%) of its

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gross income derived from such contract, such tax to be in lieu of any and all taxes, whether national or local: Provided, however, that any income received from all other sources within and without the Philippines in the case of domestic subcontractors and within the Philippines in the case of foreign subcontractor shall be subject to the regular income tax under the National Internal Revenue Code. The term gross income means all income earned or received as a result of the contract entered into by the subcontractor with a service contractor engaged in petroleum operations in the Philippines under Presidential Decree. No. 87. (Emphasis supplied.)

Under Section 2 (b) of Revenue Regulations No. 15-78, which implements P.D. No. 1354, a Subcontractor is defined as follows:
(b) Subcontractor means a foreign or domestic entity engaged by a service contractor for a specific undertaking in pursuance of a service contract under Presidential Decree No. 87, excluding administrative contracts defined under subparagraph (f) hereof. (Emphasis supplied.)

Since the said non-resident foreign corporation, in providing installation and testing services to SPEX, was engaged by the latter for a specific undertaking pursuant to SC 38, the former is considered a subcontractor within the meaning of the aforecited definition above. Hence, this Office hereby confirms your opinion that:
2. Said non-residents foreign corporations shall be considered as subcontractors under P.D. No. 1354 as regards their performance of installation and testing services for SPEX; therefore, the service fees shall be subject to the 8% final tax, in lieu of all national and local taxes.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void.

Very truly yours, (Original Signed) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue

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