Aranas Consunji Barleta

September 28, 2007 BIR RULING [DA-515-07] 42 (C) (3) DA-121-04 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Tordesillas cor. De la Costa Sts. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated December 27, 2006 requesting on behalf of your client, Takenaka Corporation (Takenaka), for an opinion that the payments it had made for TI Joint Venture (TIJV) to P.T. Bukaka Teknik Utama (Bukaka for brevity) by virtue of a Supplier Agreement are income derived from sources without the Philippines and for this reason exempt from income and withholding taxes, pursuant to Section 23 (F) and Section 28 (B) (1), in relation to Section 42 (A) (3) of the 1997 Tax Code and as well not taxable under the RP-Indonesia Tax Treaty. EAcIST The facts as you represented are as follows: Takenaka is a foreign corporation duly licensed to transact business in the Philippines with office address at the 18th Floor, Tower 2, The Enterprise Center, 6766 Ayala Avenue corner Paseo de Roxas, Makati City. Takenaka entered into a Joint Venture Agreement with Itochu Corporation named as TIJV for the development of New Bacolod (Silay) Airport under the Selected Airports (Trunkline) Development Project of the Department of Transportation and Communications (DOTC), of which Takenaka is the lead partner and contractor. TIJV entered into a Supply Agreement with Bukaka, a foreign corporation organized and existing in Indonesia whose principal office is situated at Bukaka Industrial Complex, JI Raya Bekasi Cibinog, Km 19.5 Cileungsi Bogor 16820 Indonesia. Bukaka is not engaged in trade or business in the Philippines as shown in its Certificate of Non-Registration issued by the Securities and Exchange Commission (SEC). The Supply Agreement provides for the supply by Bukaka to TIJV of equipment and materials for the Passenger Boarding Bridges in the amount of JPY96,030,837.00, which shall be paid from TIJV JPY account in Tokyo. The said Agreement further states that the Supplier covenants "to design, manufacture, supply and deliver the Passenger Boarding Bridges". In their contract, it is also stated that all services shall be performed outside of the Philippines, and instead will be performed in Indonesia, where the supplier's office and factory is located, the same shall not involve any transfer of technology, know-how or other intellectual property rights. aCIHAD In reply, please be informed that Section 28 (B) (1) of the 1997 Tax Code, as amended by Republic Act (RA) No. 9337, provides: "Sec. 28. Rates of Income Tax on Foreign Corporations. "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). Moreover, Section 23 (F) of the same Tax Code states that: "Sec. 23. General Principles of Income Taxation in the Philippines . xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." According to Section 23 (F), a foreign corporation like Bukaka is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, Bukaka's income is considered derived from sources without the Philippines following Section 42 (C) (3) of the 1997 Tax Code, viz: "SEC. 42. Income from sources within the Philippines . "xxx xxx xxx "(C) Gross Income From Sources Without the Philippines. The following items of gross income shall be treated as income from sources without the Philippines: "xxx xxx xxx "(3) Compensation for labor or personal services performed without the Philippines; CTAIDE Based on the afore-cited provision, before the payment can be considered as income from sources within the Philippines, the services must have been performed in the Philippines. As the Passenger Loading Bridges, subject of the Supply Contract Agreement are designed and manufactured in Indonesia, the situs of the income from the same are considered as income from without the Philippines. Hence, the payments made by Takenaka to Bukaka under the supplier agreement are not subject to income and withholding taxes. This position finds support in ITAD Ruling No. 92-04 involving a Sales and Marketing Agreement between Hyatt International-SEA (Pte) Limited (Hyatt) and New Coast Hotel, Inc. (NCHI). Hyatt is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Singapore and is not registered to do business here in the Philippines. NCHI, on the other hand, is a Philippine domestic corporation. The foregoing ruling held that: "It is clear from the aforequoted provisions that a nonresident foreign corporation is taxable only on income derived from sources within the Philippines. However since the services to be rendered by Hyatt to NCHI shall be provided outside the Philippines, fees to be remitted by NCHI to Hyatt in consideration for said services shall not be subject to Philippine income tax and consequently to withholding tax." Moreover, a parallelism may be drawn with circumstances embodied in BIR Ruling No. DA-121-04 dated March 16, 2004. In the said Ruling, the domestic company, Cocochem, entered into a Contract for supply of a fatty alcohol hydrogenation reactor (hereinafter referred to as "Equipment") with Lurgi, a nonresident foreign corporation duly organized and existing under the laws of Germany. Under the said Contract, Lurgi will undertake to provide the design, manufacture, supply of engineering services and materials for the Equipment. This Office proceeds to rule that the payments made by Cocochem to Lurgi are not subject to income and withholding taxes, viz: acTDCI "Under the Contract for Supply of Equipment, the Equipment will be designed, manufactured, completed and delivered in Germany. Further, Lurgi shall conduct the pre-qualification and evaluation of both the domestic contractor and the foreign contractor's credentials in Germany. Thus, since the services that will be rendered by Lurgi in Germany are not subject to tax, all income payments, which Lurgi shall receive from Cocochem shall not be subject to Philippine income and withholding taxes, as well as VAT." Furthermore, in BIR Ruling [DA-223-04] dated April 29, 2004, the BIR likewise had the opportunity to rule that: "The situs of tax for services is the place where the service is rendered. Under the Philippine source of income rules for income tax purposes, service income will be considered Philippine source income only if the services are rendered in the Philippines. Conversely, if the services are rendered outside the Philippines, the service income will be considered as foreign source income. . . ." Thus, payments made by Takenaka, in behalf of TIJV to Bukaka under the Supplier Agreement are not subject to Philippine income and withholding taxes. It is to be noted further that under Article 7 of the RP-Indonesia Tax Treaty, viz: "BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to: ECcaDT (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. xxx xxx xxx" Applying the foregoing provision, the payments made by Takenaka to Bukaka will only be subject to Philippine income tax and consequently to withholding taxes if Bukaka maintains a permanent establishment in the Philippines. The term "permanent establishment" has been defined under Article 5 of the RP-Indonesia Tax Treaty as follows: caCSDT "PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a farm or plantation, (g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (h) a place of exploration of natural resources; HEDaTA (i) a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; (j) an assembly or installation project which exists for more than three months; (k) premises used as a sales outlet; (l) a warehouse, in relation to a person providing storage facilities for others; (m) the furnishing of services, including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 183 days within any twelve-month period." Based on the foregoing discussion, since Bukaka does not have any office or presence in the Philippines which may be construed as a permanent establishment as defined above, we hereby confirm your opinion that Takenaka's payments to Bukaka for the supply of equipment is not subject to Philippine income taxes and consequently to withholding taxes. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. LexLib Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service