BIR Ruling [DA-048-96]

January 31, 1996 BIR RULING [DA-048-96] Sycip, Gorres, Velayo, & Co. 2nd Flr. Philamlife Bldg. Jones Avenue, Cebu City Attention: Atty . Lauris L . de la Pea Tax Division Gentlemen : This refers to your letter dated March 18, 1994 requesting confirmation of your opinion that the service fee to be remitted by your client, NEC Technologies Philippines, Inc. (NTEP), to NEC Corporation of Japan (NEC-Japan) in the amount of US$54,587.51 in 1993 and the subsequent fees which shall be based at the prevailing rates upon mutual agreement by both parties are exempt from Philippine income/withholding tax. It is represented that NTEP is a domestic corporation organized and existing under the Philippine laws with principal office at Mactan Export Processing Zone, Lapu-lapu City, Philippines; that NEC Corporation is a non-resident foreign corporation organized and existing under the laws of Japan with principal office located at 5-7-1, Shiba 5-Chome, Minato-ku, Tokyo 108, Japan; that NTEP maintains highly sensitive electronic equipment in its production facilities which need periodic calibration to maintain their efficiency and accuracy; that the calibration service required is so highly technical and is not readily available locally, and is provided to NTEP by NEC-Japan as the lead company of the NEC Group of Companies worldwide; that NTEP and NEC-Japan entered into a Calibration Service Agreement on September 1, 1993 wherein the latter will render to the former calibration services at least once a year; that such agreement is automatically renewed at the end of each year unless otherwise terminated by either party; that the duration of the services to be rendered by NEC-Japan does not exceed two (2) weeks at any one instance, the date of which would be determined upon the request by NTEP; that NTEP shall pay NEC-Japan a calibration service fee equivalent to US$54,587.51 for 1993; that the subsequent annual calibration service fees shall be fixed at the prevailing rates upon mutual agreement by both parties; and that NEC-Japan has no permanent establishment here in the Philippines and the aforementioned services are to be performed only in a very short period which will not exceed 183 days within a year. cdtech In reply, please be informed that paragraph (1), Article 7 of the RP-Japan Tax Treaty provides as follows: "1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting 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 that other Contracting State but only so much of them as is attributable to that permanent establishment." In view of the foregoing, your opinion is hereby confirmed. Considering that as represented, NEC-Japan does not have a permanent establishment in the Philippines, the service fees to be paid and remitted by NTEP to NEC-Japan are not subject to tax in the Philippines. (BIR Ruling No. 068-88 dated March 3, 1988). 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 considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)