Transnational Diversified Corporation

December 9, 2019 ITAD BIR RULING NO. 039-19 Article 22 of the Philippines-Japan tax treaty Transnational Diversified Corporation The Penthouse, Net Quad Building 4th Avenue corner 30th Street E Square Crescent Park West Bonifacio Global City, Taguig Attention: AAA _______________ Gentlemen : This refers to your application for tax treaty relief dated June 17, 2013 requesting confirmation that guarantee fee to be paid by NYK Transnational Properties Corp. ("NTPC") and NYK-FIL Maritime E-Training, Inc. ("NETI") to Nippon Yusen Kabushiki Kaisha ("NYK") is tax-exempt under The Convention between the Government of the Republic of the Philippines and the Government of Japan with respect to Taxes on Income, as further amended by the 2009 Protocol (Philippines-Japan tax treaty) . HTcADC It is represented that NYK is a foreign corporation organized and existing under the laws of Japan and a resident thereof based on the Certificate of Residence issued by the District Director of Kojimachi Tax Office in Tokyo, Japan; that it is engaged in the business marine transportation, land transportation, air transportation and loans to, guarantees for and investments in other businesses, among others; and that NYK is not registered as a corporation or a partnership in the Philippines per certification of non-registration issued by the Securities and Exchange Commission; and that on the other hand, NTPC and NETI is a domestic corporation organized and existing under the laws of the Philippines. It is also represented that on January 9, 2013, a Guarantee Fee Agreement (Agreement) is entered into by and among: 1. NYK ; 2. NTPC ; 3. NETI ; 4. NYK-FIL Ship Management, Inc. (NYK-FIL);and 5. NYK-Transnational Land Corp. (NTL) ( NTPC, NETI ,NYK-FIL, NTI, are the Borrower Group ) It is further represented that on September 28, 2012, each member of the Borrower Group obtained a joint venture loan from Sumitomo Mitsui Trust Bank, Ltd.,which joint venture loan was guaranteed by NYK ;that pursuant to an indemnity Agreement with Security dated December 10, 2012, the Borrower Group ,among others, agreed to indemnify NYK in consideration of the Guarantee issued by the latter for the joint venture loan; that the Agreement was made to set out the terms by which the Borrower Group has agreed to pay a guarantee fee to NYK as further consideration for the Guarantee issued by the latter for the joint venture loan; that the Borrower Group agrees to pay NYK in arrears for each six months a guarantee fee amounting to 0.2% of the total outstanding indebtedness, liabilities or obligations of the Borrower Group under the joint venture loan; and that the obligations of the Borrower Group under the Agreement shall be joint and several basis. aScITE It is also represented per certificate of no pending case issued by Acting Corporate Secretary of NTPC and NETI on June 17, 2013, 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. In reply, please be informed that profits derived in the Philippines by a nonresident corporation, like NYK in the instant case, are generally subject to tax under Section 28 (B) (1) of the National Internal Revenue Code of the Philippines of 1997 (Tax Code of 1997), as amended. It provides, viz. : 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, said income derived by a nonresident foreign corporation may be exempt or partially exempt pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : 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." In the instant case which involves income derived within the Philippines by a resident of Japan, Article 22 of the Philippines-Japan tax treaty appropriately applies. It provides: Article 22 (Other Income) 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State. HEITAD 2. The provisions of the preceding paragraph shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. Based on the foregoing, with the exception of income from immovable property, the income of a resident of Japan wherever arising, which is not dealt with in the other articles of the Convention shall be taxable only in Japan unless the enterprise carries on business in the Philippines through a permanent establishment situated therein or performs in the Philippines independent personal services from a fixed base situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In relation thereto, paragraphs 1 and 2 of Article 5 of the treaty define 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: g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. 3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. 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. ATICcS xxx xxx xxx Accordingly, since NYK is not engaged in trade or business in the Philippines to which an office or a branch is necessary, and it has no building site or construction or installation project that lasts more than six months in the Philippines and it does not furnish consultancy services in connection with the building or construction or installation project through its employees or personnel, NYK ,in either case, does not have a permanent establishment in the Philippines. This being the case, the guarantee fee paid by NTPC under the Agreement shall be exempt from income tax. 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