Exemption from Income Tax and Consequently to 35% Withholding Tax

September 24, 1990 BIR RULING NO. 188-90 25 036-90 188-90 Gentlemen : This refers to your letter dated August 2, 1990 requesting confirmation of your opinion that the design services fee to be remitted by your client, NEC Technologies Philippines, Inc. (NTEP), to Taisei Corporation (Taisei) of Japan in the amount of Y20,700,000.00 is exempt from Philippine income/withholding tax. aisadc Documents submitted disclose that NTEP is a domestic corporation organized and existing under Philippine laws as per S.E.C. Reg. No. 166738, with principal office at Mactan Export Processing Zone (MEPZ), Lapu-Lapu City, Philippines; that Taisei is a non-resident foreign corporation organized and existing under Japanese laws, with principal place of business in Shinjuku Center Building, 1-25,1, Nishi-Shinjuku, Shinjuku Tokyo 163, Japan; that NTEP entered into a Basic Design Preparation Agreement with Taisei, dated October 26, 1989, whereby the latter agreed to perform the basic design of NTEP's factory building to be constructed at the MEPZ and that for said services NTEP agreed to pay Taisei Y20,700,000.00 upon completion of the basic design. You represented that the aforesaid basic design agreement was executed and signed and the obligations and terms thereunder were performed and completed in Japan. You cited Article 14 of the RP-Japan Tax Treaty which provides as follows: cd "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 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 xxx xxx xxx (2) The term "professional services" includes, . . . the independent activities of . . . engineers, architects, . . . " (Emphasis supplied). In reply, please be informed that your opinion is hereby confirmed pursuant to the aforequoted pertinent provisions of the RP-Japan Tax Treaty. The engineering design services involved rendering of professional services. As such, since the services will be performed in Japan, fees to be remitted by NTEP to Taisei are considered income derived from sources outside the Philippines. Accordingly, since a non-resident foreign corporation is subject to income tax only on income derived from sources within the Philippines, fees to be paid by NTEP to Taisei are not subject to income tax and consequently to the 35% withholding tax prescribed by Section 25(b)(1), in relation to Section 50(a) of the Tax Code, as amended (BIR Ruling No. 221-89). aisadc Very truly yours, (SGD.) JOSE U. ONG Commissioner