Sycip Gorres Velayo and Co.

July 9, 2021 ITAD BIR RULING NO. 036-21 Articles 5, 7 and 15 Philippines-Japan tax treaty, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue Makati City Attention: ______________________ Principal, Tax Services Gentlemen : This refers to your tax treaty relief application, which was filed on December 4, 2014, requesting confirmation that service fees paid by San Roque Power Corporation ("San Roque") to Kansai Electric Power Company, Inc. ("Kansai Electric") are exempt from 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 Kansai Electric is a corporation organized and existing under the laws of Japan and a resident thereof based on its amended Articles of Incorporation and Certificate of Residence issued by the Kita Tax Office in Japan. It is engaged in electricity supply, heat supply, electrical telecommunication, information processing and information supply services, and gas supply. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, San Roque is a domestic corporation which operates the San Roque Multipurpose Power Facility ("facility"). The facility is a dam and a hydroelectric plant located at the Lower Agno River in San Roque, San Manuel, Pangasinan Province, Philippines. The facility has installed a capacity of four hundred thirty-five (435) megawatts and produces approximately 1,000 gigawatts of electricity every year. It likewise provides renewable peaking energy to the Luzon Power Grid and a year-round irrigation to 21,000 hectares of farmlands in the province, and acts as water reservoir during heavy rains. 2 San Roque is jointly owned by Sithe Philippine Holdings, Inc. and KPIC Netherlands BV, the latter being a wholly-owned subsidiary of Kansai Electric. On October 11, 1997, San Roque entered into a Power Purchase Agreement ("PPA") with the National Power Corporation ("NPC"), a government-owned and controlled corporation in the Philippines, for the design, financing, construction, supply, delivery, installation, erection of equipment, testing/commissioning, management, operation, maintenance and repair of a hydroelectric power station, which forms part of NPC's San Roque Multipurpose Project on a build-operate-transfer basis. After the completion of the construction of the power plant, San Roque will operate and maintain the power station for the purpose of generation and supply of electricity to NPC for a period of twenty-five (25) years (co-operation period). In consideration, NPC will pay capacity fees and operating fees to San Roque. Under the PPA, San Roque will transfer to NPC the power station, including all fixtures, fittings, spare parts, test equipment and special tools and vehicles, owned by San Roque, without payment of compensation after the co-operation period. cEaSHC On October 27, 1998, San Roque and Sithe Hong Kong Power Services Ltd. ("SHKPS") entered into an Operation and Maintenance Consulting Agreement ("O&M Agreement") whereby San Roque contracted the latter to assist it in the operation and maintenance of the power plant. On January 30, 2004, pursuant to the Assignment, Assumption and Release Agreement among San Roque, SHKPS and Kansai Power International Corporation ("KPIC"), SHKPS has assigned to KPIC, and the latter has assumed the rights and obligations of SHKPS under the O&M Agreement, which shall continue throughout the co-operation period, unless earlier terminated by either of the parties. SHKPS, SEI and KPIC are all nonresident foreign corporations. On April 1, 2011, the O&M Agreement was further amended following the merger between KPIC and Kansai Electric effective March 31, 2011. Pursuant to the amended O&M Agreement, Kansai Electric assumed all KPIC's rights and obligations. Moreover, Kansai Electric agreed to provide San Roque with appropriate services for implementing the overall management plan for the operation, maintenance and inspection of the power plant in consideration of service fees amounting to US$_______, subject to escalation after the end of the fiscal period April 1, 2011 to March 31, 2012. To fulfill its obligations under the O&M Agreement, Kansai Electric sent some of its employees to the Philippines. Based on their respective passports, said employees stayed in the Philippines as follows: Name of Employee Date of Arrival Date of Departure Days of Physical Presence in the Philippines AA September 20, 2011 September 24, 2011 5 November 28, 2011 December 3, 2011 6 April 24, 2012 April 27, 2012 4 May 27, 2012 June 8, 2012 13 March 8, 2013 March 11, 2013 4 May 28, 2013 June 7, 2013 11 June 23, 2013 June 29, 2013 7 February 2, 2018 February 5, 2018 4 BB May 28, 2012 June 1, 2012 5 November 25, 2013 November 30, 2013 6 CC May 28, 2013 June 7, 2013 11 DD August 10, 2011 August 11, 2011 2 May 31, 2012 June 3, 2012 4 November 28, 2011 December 1, 2011 4 March 11, 2012 March 13, 2012 3 June 27, 2012 June 30, 2012 4 May 30, 2013 June 2, 2013 4 June 27, 2013 June 29, 2013 3 January 21, 2014 January 23, 2014 3 June 26, 2014 June 28, 2014 3 March 18, 2017 March 21, 2017 4 December 3, 2014 December 5, 2014 3 June 19, 2015 June 23, 2015 5 September 20, 2015 September 22, 2015 3 September 22, 2016 September 18, 2016 5 EE November 14, 2016 November 18, 2016 5 May 28, 2017 June 3, 2017 7 May 27, 2018 June 2, 2018 7 November 19, 2017 November 18, 2016 6 FF November 14, 2016 November 18, 2016 7 May 28, 2017 June 3, 2017 7 November 19, 2017 November 24, 2017 6 May 27, 2018 June 2, 2018 7 GG November 21, 2016 November 25, 2016 5 HH April 16, 2017 April 22, 2017 7 II November 18, 2017 November 24, 2017 7 November 4, 2018 November 10, 2018 7 JJ June 3, 2018 July 22, 2018 50 August 19, 2018 August 29, 2018 11 November 4, 2018 November 10, 2018 7 March 11, 2018 April 15, 2018 36 November 19, 2017 November 24, 2017 6 KK May 28, 2017 June 3, 2017 7 November 14, 2016 November 18, 2016 5 November 19, 2017 November 24, 2017 6 LL November 14, 2016 November 18, 2016 5 MM May 4, 2017 May 9, 2017 6 September 5, 2016 September 8, 2016 4 NN November 30, 2015 December 4, 2015 5 OO November 18, 2009 November 21, 2009 4 February 28, 2010 March 2, 2010 3 May 30, 2010 June 5, 2010 7 November 26, 2015 December 4, 2015 9 January 4, 2016 January 10, 2016 7 February 21, 2016 February 25, 2016 5 June 13, 2016 June 16, 2016 4 PP February 17, 2012 February 28, 2012 12 June 12, 2016 June 17, 2016 6 January 22, 2017 January 27, 2017 6 February 12, 2017 August 30, 2017 200 September 8, 2017 October 9, 2017 32 October 21, 2017 December 10, 2017 51 December 14, 2017 February 16, 2018 65 February 19, 2018 August 29, 2018 192 September 8, 2018 September 8, 2018 1 September 19, 2018 December 27, 2018 100 January 3, 2019 March 7, 2019 64 QQ December 4, 2015 December 30, 2015 27 June 12, 2016 June 17, 2016 6 November 21, 2016 November 23, 2016 3 RR January 21, 2015 January 24, 2015 4 November 3, 2015 November 7, 2015 6 January 17, 2016 January 23, 2016 7 SS January 21, 2015 January 24, 2015 4 May 11, 2015 May 15, 2015 5 TT December 3, 2014 December 5, 2014 3 September 6, 2015 September 9, 2015 4 June 21, 2015 June 22, 2015 2 February 3, 2016 February 5, 2016 3 March 21, 2016 March 22, 2016 2 June 16, 2016 June 18, 2016 3 September 5, 2015 September 8, 2015 4 November 16, 2016 November 19, 2016 4 December 1, 2016 December 3, 2016 3 January 27, 2017 January 28, 2017 28 June 13, 2017 June 15, 2017 3 May 28, 2017 May 31, 2017 4 September 25, 2017 September 28, 2017 4 January 18, 2018 January 19, 2018 2 August 9, 2018 August 11, 2018 3 UU June 13, 2018 June 16, 2018 4 January 15, 2019 January 16, 2019 2 December 2, 2018 December 4, 2018 3 VV November 23, 2014 November 29, 2014 7 January 21, 2015 January 24, 2015 4 May 11, 2015 May 15, 2015 5 November 3, 2015 November 7, 2015 5 December 14, 2015 December 24, 2015 11 January 4, 2016 January 10, 2016 7 February 21, 2016 February 25, 2016 5 WW November 23, 2014 November 29, 2014 7 May 11, 2015 May 15, 2015 5 XX November 17, 2014 November 21, 2014 5 May 10, 2015 May 15, 2015 6 November 30, 2015 December 4, 2015 5 June 12, 2016 June 25, 2016 14 November 21, 2016 November 25, 2016 5 January 22, 2017 January 27, 2017 6 February 21, 2017 March 11, 2017 19 April 16, 2017 May 3, 2017 18 July 17, 2017 July 22, 2017 6 YY November 17, 2014 November 21, 2014 5 May 10, 2015 May 15, 2015 6 April 16, 2017 April 22, 2017 7 ZZ December 1, 2013 December 6, 2013 6 AAA November 25, 2013 November 30, 2013 6 May 11, 2014 May 24, 2014 14 July 27, 2014 September 13, 2014 49 September 20, 2014 December 21, 2014 93 January 7, 2015 August 7, 2015 213 August 21, 2015 August 31, 2015 11 September 4, 2015 October 3, 2015 30 October 30, 2015 November 10, 2015 12 November 13, 2015 December 21, 2015 39 January 8, 2016 January 13, 2016 6 January 17, 2016 March 1, 2016 45 April 1, 2016 June 4, 2016 35 June 10, 2016 August 8, 2016 60 August 19, 2016 August 31, 2016 13 September 24, 2016 October 20, 2016 27 BBB November 17, 2016 December 21, 2016 35 January 5, 2017 February 2, 2019 29 October 14, 2017 October 19, 2017 6 May 1, 2018 May 4, 2018 4 February 12, 2019 February 15, 2019 4 CCC December 17, 2012 December 22, 2012 6 December 1, 2013 December 6, 2013 6 April 14, 2014 April 17, 2014 4 DDD May 27, 2012 June 8, 2012 13 April 18, 2013 April 26, 2013 9 EEE December 5, 2010 December 11, 2010 7 May 15, 2011 May 24, 2011 10 June 6, 2011 June 18, 2011 13 November 28, 2011 December 3, 2011 6 May 27, 2012 June 8, 2012 13 July 26, 2012 October 25, 2012 92 October 30, 2012 November 11, 2012 13 November 20, 2012 December 29, 2012 40 January 7, 2013 July 20, 2013 195 July 28, 2013 October 5, 2013 70 October 11, 2013 January 22, 2014 104 March 12, 2014 March 13, 2014 2 March 15, 2014 August 6, 2014 145 June 7, 2015 June 13, 2015 7 July 2, 2016 July 9, 2016 8 January 25, 2017 January 29, 2017 5 July 30, 2017 August 11, 2017 13 December 23, 2017 December 31, 2017 9 FFF April 21, 2013 April 26, 2013 6 Based on a sworn statement issued by San Roque, 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 proceeding, or judicial appeal. CTIEac RULING In reply, please be informed that paragraph 1, Article 7 and paragraphs 1, 2 and 6, Article 5 of the Philippines-Japan tax treaty provide the taxation of profits derived by an enterprise of a Contracting State from sources in the other Contracting State, to wit: " 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." " 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. 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 twelve-month period. 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." Article 7 provides that the profits may be taxed in the other State if the enterprise carries on business in that State through a permanent establishment situated therein and the profits are attributable to the permanent establishment. On the other hand, Article 5 defines a permanent establishment as 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, and a workshop. It includes also the furnishing of consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel of an enterprise, which continue in a Contracting State for a period or periods aggregating more than six months within any twelve-month period. SaCIDT As to the interpretation of the phrase "period or periods aggregating more than six months," paragraph 2, Article 3 of the Philippines-Japan tax treaty states that any term not defined in the said treaty shall have the meaning which it has under the laws of that Contracting State concerning the taxes to which the treaty applies. Relative thereto. Article 13 of Republic Act ("RA") No. 386, otherwise known as the Civil Code of the Philippines, provides, among others, that when the laws speak of months, it shall be understood that one month is composed of thirty (30) days. Therefore, we consider six months to be equivalent to 180 days. In this case, Kansai Electric consistently furnished consultancy services in the Philippines through its employees for more than six months or 180 days in any twelve-month period beginning 2012 , to wit: 2011 Employees Arrival Departure Days of physical presence in the Philippines EEE May 15, 2011 May 24, 2011 10 EEE June 6, 2011 June 18, 2011 13 DD August 10, 2011 August 11, 2011 2 AA September 20, 2011 September 24, 2011 5 EEE November 28, 2011 December 3, 2011 6 AA Total 36 2012 Employees Arrival Departure Days of physical presence in the Philippines PP February 17, 2012 February 28, 2012 12 DD March 11, 2012 March 13, 2012 3 AA April 24, 2012 April 27, 2012 4 AA May 27, 2012 June 8, 2012 13 DDD EEE DD June 27, 2012 June 30, 2012 4 EEE July 26, 2012 October 25, 2012 92 EEE October 30, 2012 November 11, 2012 13 EEE November 20, 2012 December 29, 2012 40 Total 181 2013 Employees Arrival Departure Days of physical presence in the Philippines EEE January 7, 2013 July 20, 2013 195 EEE July 28, 2013 October 5, 2013 70 EEE October 11, 2013 December 31, 2013 82 Total 347 2014 Employees Arrival Departure Days of physical presence in the Philippines EEE January 1, 2014 January 22, 2014 22 DD January 21, 2014 January 23, 2014 1 EEE March 12, 2014 March 13, 2014 2 EEE March 15, 2014 August 6, 2014 145 BBB August 7, 2014 September 13, 2014 38 BBB September 20, 2014 December 21, 2014 93 Total 301 2015 Employees Arrival Departure Days of physical presence in the Philippines BBB January 7, 2015 August 7, 2015 213 BBB August 21, 2015 August 31, 2015 11 BBB September 4, 2015 October 3, 2015 30 BBB October 30, 2015 November 10, 2015 12 BBB November 13, 2015 December 21, 2015 39 QQ December 22, 2015 December 30, 2015 9 Total 314 2016 Employees Arrival Departure Days of physical presence in the Philippines BBB January 8, 2016 January 13, 2016 6 BBB January 17, 2016 March 1, 2016 45 TT March 21, 2016 March 22, 2016 2 BBB April 1, 2016 June 4, 2016 65 BBB June 1, 2016 August 8, 2016 60 BBB August 19, 2016 August 31, 2016 13 MM September 5, 2016 September 8, 2016 4 DD September 22, 2016 September 25, 2016 4 BBB September 26, 2016 October 20, 2016 25 EE November 14, 2016 November 18, 2016 5 DD KK LL TT November 16, 2016 November 19, 2016 1 BBB November 20, 2016 December 21, 2016 32 Total 262 2017 Employees Arrival Departure Days of physical presence in the Philippines BBB January 5, 2017 February 2, 2017 29 PP February 12, 2017 August 30, 2017 200 PP September 8, 2017 October 9, 2017 32 BBB October 14, 2017 October 19, 2017 6 II November 18, 2017 November 24, 2017 7 PP December 14, 2017 December 31, 2017 18 Total 292 2018 Employees Arrival Departure Days of physical presence in the Philippines PP January 1, 2018 February 16, 2018 47 PP February 19, 2018 August 29, 2018 192 PP September 8, 2018 September 8, 2018 1 PP September 19, 2015 December 27, 2018 100 Total 340 Kansai Electric is, therefore, deemed to have a permanent establishment in the Philippines since 2012. Accordingly, all service fees paid by San Roque to Kansai Electric beginning 2012 to present for the provision of consultancy services in the Philippines in relation to the operation and maintenance of the San Roque Multipurpose Power Facility are subject to income tax, pursuant to paragraph 1, Article 7 of the treaty. SCaITA Kansai Electric, being a nonresident foreign corporation, is subject to income tax at the rate of 30% under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Moreover, with regard to the remuneration of Kansai Electric's employees who performed services in the Philippines for more than 183 days, Article 15 of the Philippines-Japan tax treaty provides, to wit: " 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." Based on the foregoing provisions, the remuneration derived by a resident of Japan in respect of an employment is general taxable in Japan; however, if such employment was exercised in the Philippines for more than 183 days, the remuneration derived therefrom may be taxed in the Philippines. In this case, the following employees exercised their employment in the Philippines for more than 183 days in 2013, 2015, 2016, 2017 and 2018, to wit: Employee Arrival Departure Days of physical presence in the Philippines EEE January 7, 2013 July 20, 2013 195 July 28, 2013 October 5, 2013 70 October 11, 2013 December 31, 2013 72 Total 337 Employee Arrival Departure Days of physical presence in the Philippines BBB January 7, 2015 August 7, 2015 213 August 21, 2015 August 31, 2015 11 September 4, 2015 October 3, 2015 30 October 30, 2015 November 10, 2015 12 November 13, 2015 December 21, 2015 39 Total 305 BBB January 8, 2016 January 13, 2016 6 January 17, 2016 March 1, 2016 45 April 1, 2016 June 4, 2016 65 June 10, 2016 August 8, 2016 60 August 19, 2016 August 31, 2016 13 September 24, 2016 October 20, 2016 27 November 17, 2016 December 21, 2016 35 Total 251 Employee Arrival Departure Days of physical presence in the Philippines PP January 22, 2017 January 27, 2017 6 February 12, 2017 August 30, 2017 200 September 8, 2017 October 9, 2017 32 October 21, 2017 December 10, 2017 51 December 14, 2017 December 31, 2017 18 Total 307 PP January 1, 2018 February 16, 2018 47 February 19, 2018 August 29, 2018 192 September 8, 2018 September 8, 2018 1 September 19, 2018 December 27, 2018 100 Total 340 Accordingly, EEE, BBB and PP, being nonresident alien individuals not engaged in trade or business in the Philippines, are subject to income tax at the rate of 25% on their gross income under Section 25 (B) of the Tax Code, which reads as follows: " SEC. 25. Tax on Nonresident Alien Individual . xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24." Finally, since the services are performed by Kansai Electric in the Philippines, the service fees paid to it are also subject to value-added tax ("VAT") at the rate of 12% under Section 108 (A) of the Tax Code, viz. : " 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 of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . . " The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . " 3 AHDacC Pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, 4 San Roque shall withhold VAT on the service fees at the rate of 12% before remitting them to Kansai Electric. San Roque shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld), and remit the withheld VAT within ten days following the end of the month the withholding was made. The duly filed form and its accompanying proof of payment shall serve as documentary substantiation for San Roque's claim of input VAT on the fees. This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation 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. 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. https://sanroquepower.ph . 3. Republic Act No. 10963 amends Section 108 (A) as follows: " 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . " 4. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005).