BIR Ruling [DA-226-98]

June 9, 1998 BIR RULING [DA-226-98] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Center Ayala Avenue Makati City Attention: Atty . George J . Lavadia Gentlemen : This refers to your letter dated October 10, 1997 requesting for a ruling that the fees or payments to be made by your client, Philippine International Air Terminals Co., Inc. (PIATCO), to Pacific Consultants International (PCI) for certain engineering design services are exempt from Philippine income tax pursuant to the RP-Japan Tax Treaty. llcd It is represented that PIATCO is a domestic corporation with principal office address at 7th Floor Don Pablo Building, 14 Amorsolo Street, Legaspi Village, Makati City; that it is the successful project proponent for the construction and operation of the New International Passenger Terminal (Terminal III) at the Ninoy Aquino International Airport under the build, operate and transfer (BOT) scheme; that PCI is a non-resident Japanese corporation with principal office address at 7-5 Sebido I-Chome, Tama-shi, Tokyo 206, Japan; that PCI is primarily an engineering design and consultancy firm; that on August 15, 1997, PIATCO and PCI entered into an Agreement whereby the latter was appointed as a design engineer and design architect to perform certain engineering design services for the said project; that the design services will be performed and completed in Japan; and that in support of your request, you submitted the following documents 1. Agreement between PIATCO and PCI dated August 15, 1997; 2. SEC Certificate of Registration of PIATCO; 3. Duly certified and authenticated Articles of Incorporation of PCI; and 4. SEC certificate of non-registration of PCI. In reply, please be informed that pursuant to Article 14 of the RP-Japan Tax Treaty, pertinent portion of which reads: "ARTICLE 14 "(1) Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities or he is present in that other Contracting State for a period or periods exceeding in the aggregate 120 days in the calendar year concerned . If he has such a fixed base or remains in that other Contracting State for the aforesaid period or periods, the income may be taxed in that other Contracting State but only so much of it as is attributable to that fixed base or is derived in that other Contracting State during the aforesaid period or periods . cdt "(2) The term "professional services" includes, especially, independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." It is clear from the foregoing that the engineering design services to be rendered by PCI involved rendering of professional services. As such, if the services will be performed in Japan, the fees to be remitted by PIATCO to PCI are considered income derived from sources outside the Philippines. But if, on the other hand, the Japanese consultants of PCI are present in the Philippines for an aggregate period of 120 days in a calendar year, then the income to be derived by PCI shall be subject to Philippine income tax at the rate of 35% imposed under then Section 25(b)(1) of the Tax Code of 1977 [now Section 28(B)(1) of the Tax Code of 1997] for the taxable year 1997 and 34% starting January 1, 1998 as imposed under Section 28(B)(1) of the Tax Code of 1997. Such being the case, since the Japanese consultants have no fixed base regularly available to them in the Philippines for the purpose of performing engineering design services, and considering further that a non-resident foreign corporation is subject to income tax on income derived from sources within the Philippines, the fees to be paid by PIATCO to PCI are not subject to Philippine income tax and consequently to the 35% and 34% withholding tax imposed under Sec. 28(B)(1) in relation to Sec. 57(A) both of the Tax Code of 1997. Moreover, the aforementioned fees are not considered as rentals or royalties within the purview of Section 42(A)(4) of the Tax Code of 1997, since there is no transfer into this country of technology, equipment or other property, where the payee has proprietary interest. Specifically, under sub-paragraph (c) thereof, there must be a transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no such transfer of technology as the fees to be paid by PIATCO to PCI are for the engineering design services to be performed in Japan. Thus, the fees are not considered as royalties, but constitute compensation for labor or personal services performed without the Philippines. Accordingly, the fees are considered income from sources without the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997, and considering further that PCI is a non-resident foreign corporation, said fees are not subject to Philippine income tax. (BIR Ruling No. 36-90 dated March 27, 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. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)