BIR Ruling No. 214-83

November 2, 1983 BIR RULING NO. 214-83 Gentlemen : This refers to your letter of October 20, 1983 requesting for reduction/refund of tax on royalties paid by Maranaw Hotel & Resort Corporation (MHRC) to Ana Enterprises Ltd. pursuant to RP-Japan Tax Treaty. cd On the basis of the documents submitted, it appears that 1. On December 16, 1974 a joint venture agreement was entered into by ANAE and MHRC together with Marsteel Corporation and its stockholders in their individual capacities, for the purpose, among others, to undertake the construction of 500-room hotel in the Philippines (Century Park Sheraton Hotel). 2. On January 25, 1975 MHRC and ANAE entered into a technical assistance and management agreement for the management of said hotel. The technical assistance phase of the contract, became effective immediately upon the opening of the hotel, thereafter the management operation aspects became effective for the period of 20 years. In consideration of the undertaking, ANAE receives at the initial phase 3% of the net construction cost and at the subsequent phase, 3% of the total revenue as basic management fee and 5% of the operating profits as incentive management fee. Gleaned from the aforecited contract, ANAE is engaged in business in the Philippines from December 16, 1974 to the present for providing services through its permanent establishment. (Article 7, in relation to Article 5 of the RP-Japan Tax Treaty). Thus, it is subject to tax under the National Internal Revenue Code. For the above reason, Article 12 (Royalties) of the RP-Japan Tax Treaty is not applicable pursuant to paragraph 5 thereof which reads as follows: "(5) The provisions of paragraph (1), (2) and (3) shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein , or performs in that other contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." Article 7 which is the applicable provision, states that if the enterprise carries on business through a permanent establishment situated in the other Contracting State, "the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment." In other words, ANAE is a resident foreign corporation for Philippine income tax purposes. In view thereof, all income of ANAE from sources within the Philippines including management fees, incentive fees, "royalties" and others are subject to the corporate income tax, as provided for under the provisions of Section 24 (b)(2)(i) of the National Internal Revenue Code. Furthermore, the profits remitted by ANAE to its office in Japan are subject to the branch profit remittance tax under Section 24 (b)(2)(ii) of the same Code. As regards the refund of alleged overpayments made by ANAE, the same will be investigated by this Office. Any overpayment ascertained after investigation will be refunded by this Office. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue