ITAD BIR Ruling No. 033-17

November 6, 2017 ITAD BIR RULING NO. 033-17 Paragraph 5 of the Protocol to the Philippines-Japan tax treaty ______________________________ ______________________________ ______________________________ Attention: ____________________ ____________________ Gentlemen : This refers to your application for tax treaty relief dated June 19, 2013 requesting confirmation that profits from air transport in international traffic to be remitted by Corporation 1-Philippine Branch Office (" Corp1-PH Branch ") to Corporation 2 (" Corp2-Japan ") are exempt from branch profit remittance tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income (" Philippines-Japan tax treaty "). 1 SDAaTC It is represented that Corp2-Japan is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on its Certificate of Residence issued by the __________ Tax Office in Japan; that it is engaged in the business of providing scheduled and non-scheduled air transportation, buying, selling, leasing, and maintenance of aircraft and aircraft parts, and aircraft transportation ground support including passenger boarding procedures and loading of hand baggage; and that Corp2-Japan is licensed to transact business in the Philippines through a branch office based on the license granted to it by the Securities and Exchange Commission allowing Corp2-Japan to engage in the international transportation of passengers and cargo in the Philippines. It is also represented that Corp1-PH Branch intends to remit profits to Corp2-Japan for those derived from international transport of passengers and cargo in the Philippines for fiscal year 2012. It is further represented that the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, per certificate of no pending case issued by Corp1-PH Branch . In reply, please be informed that under Section 28 (A) (5) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), profits remitted by a branch of a foreign corporation doing business in the Philippines to its head office abroad are subject to a branch profit remittance tax of 15%, to wit: " 5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profit unless the same are effectively connected with the conduct of its trade or business in the Philippines." However, under Section 32 (B) (5) of the Tax Code, said income is exempt or partially exempt pursuant to a treaty obligation binding upon the Philippine government, viz. : " (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title. xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the government of the Philippines." With respect to a treaty, paragraph 5 of the Protocol to the Philippines-Japan tax treaty provides: acEHCD "5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing on the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being resident if Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of a company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10 percent of the amount of such earnings which remitted abroad. For the purposes of this paragraph, the term "earnings" means the amount remaining after deducting from the profits attributable to a permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed in such profits by the Republic of the Philippines." (Emphasis ours) Under the above-mentioned paragraph, the Philippines can impose an additional income tax at a rate not to exceed 10% on the profits of a Japanese corporation which are attributable to a permanent establishment of that corporation in the Philippines. However, this tax does not apply to profits in connection with the operation of ships or aircraft in international traffic. Relative thereto, under paragraphs 1 and 2, Article 5 of the Philippines-Japan tax treaty below, Corp1-PH Branch constitutes a permanent establishment of Corp2-Japan in the Philippines based on the definition and examples of a permanent establishment, to wit: " Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch ; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources" (Emphasis ours) In view of the foregoing, this Office is of the opinion that Corp1-PH Branch is a permanent establishment of Corp2-Japan in the Philippines; and considering that Corp1-PH Branch is used by Corp2-Japan in the operation of aircraft in international traffic in the Philippines, profits to be remitted by Corp1-PH Branch to Corp2-Japan attributable to such operation are exempt from branch profit remittance tax pursuant to paragraph 5 of the Protocol to the Philippines-Japan tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. As amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to the Taxes on Income effective January 1, 2009 .