BIR Ruling [DA-316-99]

May 21, 1999 BIR RULING [DA-316-99] C & E Corporation Meralco Avenue corner General Araneta Street Pasig City Attention: Ms. Lourdes P. Reyes Finance/Administrative Manager & Treasurer Gentlemen : This refers to your letter dated July 7, 1998 requesting for a ruling that the fees or payments to be made by C & E Corporation to Chiyoda Corporation (Chiyoda) for certain engineering design services are exempt from Philippine income tax pursuant to the RP-Japan Tax Treaty. It is represented that C & E Corporation is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with SEC Reg. No. ASO95-001483 dated February 15, 1998 and the Board of Investments (BOI) with Certificate of Registration No. 96-168 dated August 9, 1996; that on August 22, 1996, a Subcontract Agreement was entered into by C & E Corporation and Chiyoda whereby the parties agreed that all work and services, i.e., the supply of drawings and related services for the engineering services for LPG Terminal, Mabini, Batangas of Petron Corporation shall be performed by Chiyoda, as the subcontractor; that the subcontractor understands that this work is a portion of the work and services to be performed by C & E Corporation for Petron Corporation; that the Chiyoda shall perform the work and services outside the Philippines; that as full compensation for the work, C & E Corporation shall pay Chiyoda the amount of US$80,000; and that in support of your request, you submitted the following documents: (a) BIR Form TC-001; (b) BOI Certificate of Registration; (c) SEC Registration; (d) Articles of Incorporation and By-Laws; (e) Sub-contract Agreement and Quotation; (f) SEC Certificate for Chiyoda Corporation not engaging in trade or business in the Philippines; and (g) Photocopy of the Articles of Incorporation of Chiyoda Corporation. SaCDTA 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 based 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. "(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. xxx xxx xxx" It is clear from the foregoing that the engineering services to be rendered by Chiyoda involved rendering of professional services. As such, since the services will be performed in Japan, the fees to be remitted by C & E Corporation to Chiyoda are considered income derived from sources outside the Philippines. But if, on the other hand, the Japanese consultants of Chiyoda are present in the Philippines for an aggregate period of 120 days in a calendar year, then the income to be derived by Chiyoda shall be subject to Philippine income tax at the rate of 34% imposed under Section 28(B)(1) of the Tax Code of 1997. Such being the case, since Chiyoda does not have a fixed base regularly available in the Philippines for the purpose of performing engineering 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 C & E Corporation to Chiyoda are not subject to Philippine income tax and consequently to the 34% withholding tax imposed under Section 28(B)(1), in relation to Section 57(A) both of the Tax Code of 1997. EcAISC 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 not such transfer of technology as the fees to be paid by C &E Corporation to Chiyoda are for the engineering 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 Chiyoda is a non-resident foreign corporation, said fees are not subject to Philippine income tax. (BIR Ruling No. 036-90 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)