SGV & Co.

June 18, 2021 ITAD BIR RULING NO. 033-21 Articles 5 & 7, Philippines-Japan tax treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. _________________ Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on October 22, 2014 requesting confirmation that service fees paid by PHILIPPINE SINTER CORPORATION ("Sinter") to JFE SHOJI TRADE CORPORATION ("JFE") are exempt from Philippine income tax pursuant to 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 Taxes on Income ("Philippines-Japan tax treaty") ,as amended. 1 FACTS JFE is a corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation, Certificate of All Items in Effect on the Corporate Register, and Residence Certificate issued by the Kita Tax Office, Osaka, Japan. JFE is engaged in purchasing, manufacturing, selling iron and steel products and their by-products; purchasing and selling raw materials and other materials for iron and steel manufacturing; and purchasing and selling nonferrous metals, among others. It was previously licensed by the Securities and Exchange Commission to establish a branch office in the Philippines, but such license was withdrawn by the Commission on October 3, 2012. On the other hand, Sinter is a domestic corporation engaged in manufacturing, processing, producing, developing, preparing for the market, buying, acquiring, selling and distributing at wholesale, and exporting iron sinter and other iron and steel products in pellet or in any other form. It is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise to manufacture sinter iron ore, burnt lime and hydrated lime and to operate 18.6 megawatt Cogeneration Plant (Waste Heat Recovery Power Generation). On March 29, 2014, Sinter and JFE entered into a Service Agreement whereby JFE agreed to provide services to Sinter by repairing the latter's unloader that suffered massive damage when a foreign vessel collided with it. The repair of the unloader is necessary in furtherance of, and incidental to, Sinter 's registered activities. JFE dispatched qualified personnel for the repair for two months from March 30 to May 31, 2014. In consideration, Sinter paid service fees to JFE amounting to JPY______________, through telegraphic transfer on October 30, 2014. Based on the certification issued by Sinter ,the following personnel of JFE were dispatched to the Philippines in 2014 to carry out the repair of the unloader, to wit: EcTCAD _________________________ Date of Arrival Date of Departure _________________________ May 9 May 27 _________________________ May 1 May 10 _________________________ May 1 May 11 _________________________ April 28 May 27 _________________________ March 30 April 5 _________________________ March 30 April 5 _________________________ April 28 May 27 _________________________ May 1 May 11 _________________________ May 1 May 11 _________________________ May 1 May 11 _________________________ May 1 May 11 _________________________ May 1 May 11 These personnel stayed in the Philippines for thirty-six (36) days (March 30:1 day; April 1-5, 28-30: 8 days; May 1-27: 27 days). Based on the sworn statement issued by Sinter ,the income subject of this ruling is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, profits derived in the Philippines by a nonresident foreign corporation are subject to income tax at the rate of 30% to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . profits and income, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." (Emphasis supplied) xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code, such profits are exempt to the extent required by any treaty obligation binding upon the Philippine government, to wit: " SEC. 32. Gross Income. xxx xxx xxx (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." Relative thereto, paragraph 1, Article 7 of the Philippines-Japan tax treaty provides: HSAcaE "Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, 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. xxx xxx xxx" Under Article 7, the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as such, its profits may be taxed in the other State but only so much of them as are attributable to that permanent establishment. Relative thereto, Article 5 of the tax treaty defines a permanent establishment, as follows: "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; AScHCD g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx xxx xxx 6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State. xxx xxx xxx" Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially a store or other sales outlet, a branch, an office, a factory, a workshop and a warehouse. It includes also a furnishing of services in a Contracting State by an enterprise of the other Contracting State (through employees or other personnel thereof),including consultancy services, or supervisory services in connection with a contract for a building, construction or installation project, which continue for a period or periods aggregating more than six months within any twelve-month period. Considering that JFE is not licensed to engaged in trade or business in the Philippines, does not have an office, a branch, or a fixed place of business in the Philippines, and did not furnish services for more than six months within any twelve-month period but for thirty-six (36) days only, JFE shall not be deemed to have a permanent establishment under paragraphs 1, 2 and 6, Article 5 of the Philippines-Japan tax treaty. This being so, the service fees by Sinter to JFE for repairing the latter's unloader shall be exempt from Philippine income tax under paragraph 1, Article 7 of the tax treaty. Similarly, under Section 108 (A) of the Tax Code, since the service were performed in the Philippines, the services therefor are subject to value-added tax ("VAT") ,to wit: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange services, including the use or lease of properties selling price or gross value in money the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary Finance, shall, effective January 1, 2006, 2 raise the rate of value-added tax to twelve percent (12%) ..." However, since Sinter is a PEZA-registered enterprise and as such, is exempt from national and local taxes under Republic Act (RA) No. 7916, 3 the sale of services is, therefore, exempt from VAT. In Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) , the Court ruled that no VAT shall be imposed directly and indirectly upon business establishments operating within the ecozone under RA No. 7916, to wit: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases .Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish . Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included .Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly .Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly ." This ruling is issued on the basis of the facts as represented. However, if it shall be disclosed upon investigation that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. caITAC Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. 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 Taxes on Income, effective January 1, 2009. 2. The VAT rate is increased to twelve percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 3. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for This Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes, as amended.