BIR Ruling [DA-412-04]

July 30, 2004 BIR RULING [DA-412-04] RMC No. 42-99 BIR Ruling No. 341-88 ACB & Co. Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Sts., Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas S i r : This refers to your request for ruling dated July 20, 2004 requesting for confirmation of your opinion that the Japanese personnel of Takenaka Corporation (TC) employed and used in the construction of a Japan Bank for International Cooperation (JBIC) funded project is not subject to compensation income tax pursuant to the Exchange of Notes between the Japanese Government and the Republic of the Philippines for the Overseas Economic Cooperation Fund (OECF), now JBIC, funded projects undertaken in the Philippines. It is represented that Takenaka Corporation (TC) entered into a Joint Venture Agreement with Itochu Corporation to construct and develop the "New Bacolod (Silay) Airport" as the general contractor of a JBIC funded project under the supervision of the Department of Transportation and Communications (DOTC). For the said project, TC will hire and employ Japanese nationals and personnel who will be receiving compensation income. In reply thereto, please be informed that under the Exchange of Notes dated April 28, 1984 between the Japanese Government and the Republic of the Philippines for the Overseas Economic Cooperation Fund (OECF), now JBIC, funded projects undertaken in the Philippines; the following are the standard clauses pertaining to the tax treatment of participating Japanese contractors and nationals, to wit: "The government of the Republic of the Philippines will e xempt the Fund from all fiscal levies or taxes imposed in the Republic of the Philippines on and/or in connection with the Project Loan, the Engineering Service Package Loan and the Commodity as well as interest accruing therefrom." (Emphasis ours.) "The Government of the Republic of the Philippines will, by itself or through its executing agencies or instrumentalities, assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Loan." Moreover, Revenue Memorandum Circular (RMC) No. 42-99 provides the comprehensive tax treatment of the tax implication arising from above-cited Exchange of Notes. It states that Japanese firms or nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan is not subject to income tax, to wit: "B) Income Tax 1. Japanese firms or nationals operating as supplier , contractors or consultants on and/or in connection with any income that may accrue from the supply of products and/or services to be provided under the Project Loan, shall file the prescribed income tax returns. Since the executing government agencies are mandated to assume the payment thereof under the Exchange of Notes, the said Japanese firms or nationals need not pay the taxes due thereunder . xxx xxx xxx 3. In cases where income taxes were previously paid directly by the Japanese contractors or nationals, the corresponding cash refund shall be recovered from the government executing agencies upon the presentation of proof of payments thereof by the Japanese contractors or nationals." (Emphasis ours.) aHTDAc In BIR Ruling No. 341-88 dated July 20, 1988 involving Takaoka Engineering Construction Co., Ltd. of Japan, this office ruled as follows: " Moreover, its foreign personnel is not also liable to individual income tax prescribed under Section 22 of the same Code , as amended. Finally, Takaoka Engineering Co. Ltd. of Japan is not required to file quarterly income tax returns and final or adjustment returns on income derived from the aforesaid project. Likewise, its foreign personnel are not also required to file individual income tax returns on income also derived from the said project ."(emphasis ours) Based on the foregoing, we hereby confirm your opinion that the Japanese personnel employed and used by Takenaka Corporation, in the construction of its "New Bacolod (Silay) Airport" project, funded by JBIC are not subject to income tax and hence, not subject to withholding tax on compensation. However, the necessary income tax returns must still be filed with the Bureau pursuant to RMC 42-99. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group