BIR Ruling [UN-100-94]

March 23, 1994 BIR RULING [UN-100-94] Asia-Pacific Chartering Phil., Inc. 2nd Floor, La Paz Centre Salcedo & Herrera Streets Legaspi Village, Makati Metro Manila Attention: Mr . Teofilo S . Eugenio President Gentlemen : This refers to your letter dated May 26, 1993 stating that under a prime contract between NAPOCOR and MARUBENI/KHI (Kawasaki Heavy Industries Ltd.) which is funded by the Import and Export Bank of Japan, Chemical Bank and Citibank, Tokyo Kyuei Co., Ltd. (TKC) holds a sub-contract to undertake the construction of "Water Intake System Work' of NAPOCOR's 300 MW Combined Cycle Power Plant at Limay, Bataan; that the survey team of TKC renders consultancy services to the NAPOCOR project; that you were, in turn, appointed by TKC as local husbanding agent in the Philippines for this project; but that the monthly remunerations of the members of the Japanese survey team are being paid in pesos directly remitted by TKC from Japan; that you do not handle any payroll remittance/payment in behalf of TKC; that for the calendar years 1992 and 1993, the duration of stay in the Philippines of the members of the Japanese survey team are as follows: cdtech Calendar Year Total Days From Arrival 1992 1993 to Departure 1. Site Manager 173 days 207 days 380 days 2. Chief Engineer 137 days 182 days 319 days 3. Supervisor 162 days nil 162 days 4. Administration 163 days 218 days 381 days 5. Civil Engineer 142 days 191 days 333 days 6. Diver 1 48 days 176 days 224 days 7. Diver 2 nil 121 days 121 days Based on the foregoing representations, you now request information on the following queries: "a. Do the Japanese Nationals have to file Philippine personal income tax in 1992 and in 1993 based on their stated length of stay in the Philippines (as mentioned in Item DD)? "b. If so, what BIR Form will they use?" In reply, please be informed that the personnel who comprise the Japanese survey team sent by TKC to provide technical consultancy services to NAPOCOR's "Water Intake System Work" appears to be the employees of, or works for said Japanese company. Since their consultancy services are not of an independent character, Article 15 of the RP-Japan Tax Treaty shall apply. Pursuant to Article of the RP-Japan Tax Treaty, the remunerations received directly from Japan are taxable in the Philippines only if the duration of their stay in the Philippines exceeds an aggregate of 183 days. Conversely, if their stay in the Philippines during the calendar year is less than 183 days, they shall not be subject to Philippine income tax and consequently, to withholding tax. This conclusion is clear from the provision of Article 15 of the RP-Japan Tax Treaty, the pertinent portion of which states: ARTICLE 15 (1) Subject to the provisions of Article 17, 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 he 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. In other words, if the length of stay in the Philippines of any of the Japanese consultants sent by TKC exceeds an aggregate of 183 days during any calendar year, then such person shall be considered as a non-resident alien doing business in the Philippines subject to tax in the same manner as resident citizens and aliens on taxable income received from all sources within the Philippines, pursuant to Section 22 (a)(1) of the Tax Code. Thus, in the instant case, the members of the Japanese Survey Team who will be subject to Philippine income tax for 1993 are: 1. Site Manager whose length of stay would be 207 days; 2. Consultant for Administrative whose length of stay is 218 days; and 3. Civil Engineer whose length of stay would be 191 days. The income tax form to be used for this purpose shall be BIR Form No. 1701-A. For all other members of the team, i.e. namely: Chief, Engineer, Diver 1, and Diver 2, whose length of stay in the Philippines for calendar years 1992 and 1993 does not exceed an aggregate of 183 days for each year, no income tax shall be imposed on their remunerations received from Japan while undertaking consultancy services in the Philippines; hence, they are not also required to file any income tax return. (BIR Ruling No. 558-88 dated November 24, 1988) Very truly yours, ALICIA P. CLEMENO Head Revenue Executive Assistant Officer-In-Charge (Legal Service)