Taxability of Japanese Nationals

September 5, 1989 BIR RULING NO. 192-89 102 25 000-00 192-89 S i r : This refers to your letter dated July 21, 1989, in effect, requesting a ruling on the taxability of Japanese Nationals working under the Highland Integrated Rural Development Project. cdt It is represented that one of the five projects covered by the Exchange of Notes dated June 27, 1989 between the Japanese Ambassador to the Philippines Tsuneo Tanaka and the Philippine Secretary of Foreign Affairs Raul S. Manglapus, is the Highland Integrated Rural Development Project in La Trinidad; that the Exchange of Notes, among others, states under Par. 6(1)(d) that the Republic of the Philippines will take necessary measures "to exempt Japanese Nationals from customs duties, internal taxes and other fiscal levies which may be imposed in the Republic of the Philippines with respect to the supply of products and services under the verified contracts"; and that the consultant contract between the Provincial, Government of Benguet, Republic of the Philippines and Nippon Giken Inc., Japan, is understood to be one of such verified contracts provided in the Exchange of Notes dated June 27, 1989; and that under Par. 3(1) of said Exchange of Notes, term nationals whenever used in the present arrangements means "Japanese physical persons or Japanese juridical persons controlled by Japanese physical persons in the case of Japanese nationals." In reply, please be informed that based on the foregoing, Nippon Giken, Inc., a firm duly organized and existing under the laws of Japan with principal office at Nagoya, Japan, shall not be liable for corporate income tax under Section 25(a)(1) of the Tax Code, as amended, imposed on resident foreign corporations engaged in trade or business in the Philippines. It is not also liable for the 10% value-added tax on its importation of equipment as well as on its sale of services to the province of Benguet pursuant to Sections 101 and 102 of the same Code. Its Japanese personnel are not also liable to the individual income tax prescribed under Section 22 of the same Code. Moreover, Nippon Giken Inc., is not required to file quarterly income tax returns and final or adjustment return on income derived from the aforesaid project. Likewise, its foreign personnel are not also required to file individual income tax return on income also derived from the said project. It is understood, however, that the aforesaid tax exemption privilege is accorded only to Japanese contractors on taxes for which they are directly liable; thus, when they buy goods or services from local sources, the sellers who are the persons liable for the value-added tax, are not precluded from including the VAT in their billings, in which case, the VAT merely becomes part of the cost of goods. (Refer to Phil. Acetylene vs. CIR, G.R. No. L-19707, Aug. 17, 1967) In other words, the local purchases by the Japanese contractors are neither exempt nor zero-rated. To be exempt or zero-rated, the purchases of goods or services shall be made by one who enjoys exemption from both direct, and/or indirect taxes passed on them by the seller. Very truly yours, (SGD.) JOSE U. ONG Commissioner