Remittance of Calibration Fees to a Foreign Corporation is Not subject to Philippine income Tax and Consequently, to the 35% Withholding Tax

June 26, 1991 BIR RULING NO. 125-91 25 (b) (1) 000-00 125-91 Gentlemen : This refers to your letter dated January 5, 1991 requesting for confirmation of your opinion to the effect that the remittance of calibration service fees to NEC Corporation of Japan (NEC Japan for brevity) by your client, NEC Technologies Philippines, Inc. (NEC Phil. for brevity), is exempt from Philippine income/withholding tax pursuant to Article 14 of the RP-JAPAN Tax Treaty and consequently, from the 35% withholding tax provided for in Section 50 (a) in relation to Section 25 (b) (1) of the National Internal Revenue Code of 1977, as amended. cdta It is represented that NEC Phil., a domestic corporation, is engaged in the manufacture of communication equipment and parts at its factory and plant site at Mactan Export Processing Zone, Lapu-Lapu City; that in the manufacture of said equipment and parts, NEC Phil. uses highly sensitive electronic equipment which need periodic calibration; that in view of the unavailability of the highly technical calibration services locally, NEC Philippines, on December 26, 1990, entered into a Calibration Service Agreement with NEC Japan, a non-resident foreign corporation organized and existing under Japanese laws; that the agreement provides, inter alia, that upon demand of NEC Philippines, NEC Japan will provide calibration services to NEC Philippines once every six (6) months for a period of two (2) weeks each, with NEC Philippines paying NEC Japan an initial amount of US$9600 subject to future adjustments for every such calibration rendered; that NEC Japan, in the performance of said calibration services, will periodically consign to NEC Philippines a calibrating equipment in accordance with the terms of the Consignment Agreement made and entered into by and between them, and will send its personnel to the Philippines only once every six months and will return again to Japan after a period of two (2) weeks during which time the services are to be performed; that the calibration service fee shall be paid by NEC Phil. to NEC Japan through telegraphic transfer in U.S. dollars within thirty (30) days after receipt of the invoice/statement of account; and finally, that the said Calibration Service Agreement shall be valid for only one (1) year effective from February 6, 1991, although the Central Bank (CB) may revoke the said Agreement for non-compliance with or for violation of the terms and conditions set forth in the CB's approval letter, or amend the approval in accordance with any government regulation which might be issued regarding Service Agreement. In reply, please be informed that Article 14 of the RP-Japan Tax Treaty provides as follows: "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 the 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. cdta "(2) The term "professional services" includes . . . the independent activities of . . . engineers, . . . " (emphasis supplied). Furthermore, paragraphs (1) and (2) of article 5 of said Treaty provides as follows: "Article 5 "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. "(2) The term "permanent establishment" includes especially: a. a store or other sales outlet; b. a branch; c. an office; d. a factory; e. a workshop; f. a warehouse; g. a mine, an oil or gas well, as quarry or other place of extraction of natural resources." From the given facts and the treaty provisions above-cited, it is deemed that neither does NEC Japan have a permanent establishment in the Philippines nor does it perform calibration services in this country for a period exceeding an aggregate of 120 days at any given calendar year. Consequently, the income derived by NEC Japan in respect of the calibration services rendered by its personnel, within one year period reckoned from February 6, 1991, shall be taxable only in Japan. Wherefore, it is the opinion of this Office as it hereby holds that the remittance by NEC Philippine to NEC Japan of fees paid for calibration services rendered by the latter's personnel (i.e. engineers/technicians) in an independent character is not subject to Philippine income tax and consequently, to the 35% withholding tax prescribed under Section 50 (a) in relation to Section 25 (b) (1) of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner