BIR Ruling [DA-216-98]

June 2, 1998 BIR RULING [DA-216-98] Sebastian Liganor Galinato & Tierra Unit 1409 Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City Attention: Atty . Katherine Agnes M . C . Arnaldo Gentlemen : This refers to your letter dated April 14, 1998 requesting confirmation of your opinion that for income tax purposes, the quality assurance inspector for the Ninoy Aquino International Airport Passenger Terminal III Project (IPT 3), Japan Airport Consultants, Inc. (JAC), is a resident foreign corporation subject to the corporate income tax imposed under Section 28(A)(1) of the Tax Code of 1997; and that income payments made by your client, Philippine International Air Terminals Co., Inc. (PIATCO) to JAC is subject to the corresponding 5% expanded withholding tax under Revenue Regulations No. 6-85, as amended. cdpr It is represented that PIATCO is a corporation duly organized and existing under the laws of the Philippines with principal office address at 3/F PAIR-PAGS Center, NAIA Compound, Ninoy Aquino Avenue, Pasay City; that on July 12, 1997 PIATCO entered into a Concession Agreement with the Government of the Republic of the Philippines (GRP) for the financing, construction, management and operation of the Ninoy Aquino International Airport Passenger Terminal HI (IPT 3) under a build-operate-and-transfer-arrangement; that the Concession Agreement provides for the appointment, jointly by the GRP and the concessionaire, of a Quality Assurance Inspector (QAI) for the IPT 3 Project., that after pre-qualification and submission of several proposals, GRP and PIATCO selected and appointed JAC, a corporation organized and existing under the laws of Japan, as the, QAI; that the terms of this appointment were embodied in an agreement for the provision of Quality Assurance Services executed by the GRP, PIATCO and JAC on January 14, 1998; that JAC has not established a branch office in the Philippines for the purpose of the said Agreement; that essentially, the services of the QAI enumerated under the Agreement are to be performed (and, in fact, are presently being undertaken) in the Philippines; that the services include the review of the design for IPT 3 and the inspection of the construction works; that the review of the design commenced last January 16, 1998; that the construction is estimated to cover a period of thirty (30) months from the date of the commencement of the works; that the quality assurance services under the Agreement are being provided by JAC through its own employees; and that JAC is obligated to conduct periodic inspection of the works throughout the construction period, and to undertake the final inspection thereof for the purpose of the issuance of the certificate of completion. prll In reply, please be informed that your opinion is hereby confirmed. Section 22 (H) of the Tax Code of 1997 defines "resident foreign corporation" as a foreign corporation engaged in trade or business within the Philippines. However, Section 3(d) of the Foreign Investments Act of 1991 clarifies what constitutes "doing business". "Doing business" includes soliciting orders, service contracts, opening offices, whether called liaison offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic, business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. By providing quality assurance services to GRP and PIATCO in connection with the IPT 3 Project, JAC's activities constitute acts which imply a continuity of commercial dealings and contemplate works in progressive prosecution of the purpose of JAC as a business organization. JAC is, therefore, doing business in the Philippines and should be deemed a resident foreign corporation for income tax purposes. Moreover, Article 5(6) of the RP-Japan Tax Treaty states: "An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy service, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph (7) applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. . ." LibLex Considering that the quality assurance services under the aforementioned Agreement are being provided by JAC through its own employees and the activities of JAC in connection with the IPT 3 Project will continue within the Philippines for more than an aggregate period of six (6) months within the taxable year, it is deemed to have a permanent establishment in the Philippines as defined in Article 5(6) of the said treaty. Such being the case, since JAC is carrying on business in the Philippines through a permanent establishment, it is also deemed a resident foreign corporation for income tax purposes under the RP-Japan Tax Treaty. Moreover, income payments made by PIATCO to JAC relative to the IPT 3 Project shall be subject to the 5% expanded withholding tax under Revenue Regulations No. 6-85, as last amended by Revenue Regulations No. 2-98. (BIR Ruling Nos. 032-95 dated February 14, 1995; 237-90 dated December 19, 1990) 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. aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)