Salaries of Expatriate Personnel of JDC a Non-resident Corporation are Exempt from Income Tax Pursuant to the RP-Japan Tax Treaty

December 12, 1981 BIR RULING NO. 240-81 022 000-00 240-81 Messrs. Guerrero and Torres 638, PhilBanking Bldg. Ayala Avenue, Makati Metro Manila Attention: Atty . Rafael E . Evangelista Gentlemen : This refers to your letters dated April 14 and July 17, 1981 requesting confirmation of your opinion to the effect that the salaries of the expatriate personnel of Japan Drilling Co., Ltd. (JDC) are exempt from Philippine income tax pursuant to the RP-Japan Tax Treaty. It appears that St. Joe Petroleum Philippine Corporation (St. Joe) was awarded a service contract under Presidential Decree No. 87 to perform petroleum operations covering approximately 518,000 hectares in the Lamon Bay; that St. Joe contracted JDC, a corporation organized and existing under the laws of Japan, to drill its two (2) obligatory wells at Lamon Bay using the drilling rig, Hakuryu V; that JDC has assigned its expatriate personnel to its operations in the Philippines; and that the drilling operations began on March 18, 1981 and was expected to last until the end of April, 1981. cdti In reply thereto, I have the honor to inform you that Article 15 of the RP-Japan Tax Treaty provides, viz: "Article 15 "(1) Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. "(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first- mentioned Contracting State if: (a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and (b) the remuneration is paid by or on behalf of, an employer who is not a resident of that other Contracting State, and (c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State." xxx xxx xxx Moreover, Article 4(1) of the aforementioned tax treaty defines the term "resident of a Contracting State" for purposes of the Convention as any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head or main office, place of incorporation or any other criterion of a similar nature. But the term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein. Although under Presidential Decree No. 1354 expatriate personnel of service contractors or by subcontractors engaged in petroleum operations are subject to a final income tax of 15%, nevertheless, the provisions of the RP-Japan tax treaty being an international commitment of our country would apply insofar as the tax liability of the expatriate personnel of JDC is concerned. Considering that JDC, the employer of the expatriate personnel, is not considered a resident of the Philippines for purposes of the Convention it being subject to income tax in this country in respect only of income derived from sources therein; that the JDC expatriate personnel stayed in the Philippines for not more than 183 days in the calendar year; that the remuneration is paid by the head office of JDC; and that the remuneration is not borne by a permanent establishment or fixed base which JDC has in the Philippines, this Office is of the opinion as it hereby holds that the salaries of the expatriate personnel of JDC are exempt from income tax pursuant to Article 15(2) of the RP-Japan Tax Treaty and consequently not subject to the 15% final tax provided under Presidential Decree No. 1354. cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner