Exemption from Filing of the Corporate Income Tax Return

July 4, 1989 BIR RULING NO. 136-89 25 000-00 136-89 Gentlemen : This refers to your letters dated November 24 and December 29, 1988 stating that Kawasaki Heavy Industries, Ltd. (KHI) is a corporation organized and existing under the laws of Japan; that under a Joint Venture Agreement, KHI and the Philippine Government agreed to undertake on a joint venture basis, the construction, operation and management of a ship repair facility; that per Joint Venture Agreement, you are the executing entity of said project; that you are registered with the Securities and Exchange Commission with a capital structure of 60% Government and 40% KHI; that in accordance with R.A. No. 1459, as amended, KHI was granted by the Securities and Exchange Commission license to establish a representative office in the Philippines to do the following: (1) Oversee the implementation of the Joint Venture Agreement between the Philippine Government and K.H.I.; (2) Conduct and make surveys and studies of market, economics, and financial conditions in the Philippines; and (3) Advise and render assistance to local distributors/indentors and customers in the Philippines; that in accordance with R.A. No. 5455, KHI was granted by the Board of Investments authority to establish a representative office in the Philippines and engage in the aforementioned activities; that under the Technical Service Agreement entered into between you and KHI pursuant to the Joint Venture Agreement, KHI shall provide you with technical assistance in the management and operation of said project by sending such technical personnel as may be required by you, and you shall pay technical service fees directly to KHI in Japan accordingly; that the KHI Manila Representative Office maintains an office and staff to perform its licensed activities and incurs administrative expenses as in the process; and that it is not engaged in any income-generating business activity of whatever kind. casia Based on the foregoing representations, you now request in effect a ruling on the following tax-related issues: "1. Is KHI classified as a resident foreign corporation or a non-resident foreign corporation, for Philippine Tax purposes? "2. When PSEC remits technical service fees to KHI in Japan, what kind and rate of withholding tax shall be applied? "3. Is the KHI Manila Representative Office subject to income tax in the Philippines and therefore required to file income tax returns? If yes, what income and deduction items, shall it declare and claim? Shall the technical fees which PSEC pays directly to KHI in Japan be declared by the KHI Manila Office as income from sources within the Philippines? Shall the withholding tax which PSEC deducts and remits to the BIR be claimed as tax credit against the income tax liability of the KHI Manila Office? Should tax crediting result in excess credits, shall the same be refunded by the BIR to KHI (thru its Manila Office)? "4. Are the technical service fees remitted by PSEC to KHI Head Office in Japan subject to the 15% branch profit remittance tax under Sec. 25(a)(5) of the Tax Code considering that KHI does not maintain a local branch but only a representative office? "5. Is the KHI Manila Office subject to the value-added tax (VAT)? If yes, what "gross receipts" shall it report for VAT purposes? (Incidentally, PSEC, which pays technical fees directly to KHI in Japan, is EPZA-registered, exempt from contractor's tax, and thus exempt from VAT under Sec. 103(u) of the Tax Code, as per BIR Ruling No. 0-00-354-87 dated November 9, 1987). Assuming that KHI Manila Office is subject to VAT, do the technical service sold to PSEC (an entity exempt from VAT by virtue of its exemption from contractor's tax under the EPZA law, a special law) qualify for zero rating?" In reply, please be informed as follows: 1. Questions 1, 2 and 3 being interrelated are hereby answered jointly. KHI Manila Representative is not a resident foreign corporation since it is not engaged in any income generating business in the Philippines. A resident foreign corporation is a foreign corporation engaged in trade or business in the Philippines [Sec. 20(h), Tax Code] Accordingly, KHI Manila is not subject to income tax; hence, it is exempt from filing of the corporate income tax return. (BIR Ruling No. 370-87) KHI is a non-resident foreign corporation since it is a foreign corporation not engaged in trade or business in the Philippines [Sec. 20(i), Tax Code]. The technical service fees which you remit to KHI are considered royalties since they are in consideration for the "technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme." [Sec. 36(a)(3)(F), Ibid ] Said technical service fees being Philippine source income of KHI are subject to Philippine corporate income tax at the rate of 35% [Sec. 25(b)(1), Ibid ] which shall be withheld by you as the payor-corporation and paid in the same manner and subject to the same conditions as provided in Sec. 51 of the Tax Code [Sec. 50(a), Ibid ] 2. KHI does not maintain a branch in the Philippines. Hence, by paying directly the technical service fees to KHI in Japan, it cannot be said that there is remittance of profits, directly or indirectly, from the branch to its head office. Your Question No. 4 is, therefore, answered in the negative since, the 15% branch profit tax imposed under Section 25(a)(5) of the Tax Code is a tax on any profit remitted by a branch to its head office. 3. KHI Manila Office is not subject to VAT since it is not engaged in any income-generating business activity in the Philippines. A person is subject to VAT if it renders service "in the course of trade or business." (Sec. 99, Tax Code) Moreover, under Section 22(a)(1) of the Tax Code, as amended, for Philippine income tax purposes, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines; otherwise, pursuant to Section 22(b) of the same Code, he shall be considered as a non-resident alien individual not engaged in trade or business in the Philippines, and subject to 30% income tax on his entire income received from all sources within the Philippines. Such being the case, and since the period within which KHI's "Dispatched Personnel" and/or "Temporary Dispatched Personnel" would render service in the Philippines treated as your regular employee or consultant and assumed to have entered into an employment contract with you pursuant to the Technical Service Agreement you entered with KHI is for at least six (6) months only, the remuneration or compensation income received by said KHI Dispatched Personnel and/or Temporary Dispatched Personnel from you as a consequence thereof, is therefore, subject to the 30% income tax under Section 22(b) of the Tax Code. The same is likewise true insofar as its expatriates in its Philippine representative office are concerned. aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner