ITAD BIR Ruling No. 203-12

May 23, 2012 ITAD BIR RULING NO. 203-12 Articles 5 & 7, Philippines-Japan tax treaty, as amended Quisumbing Torres 12th Floor, Net One Center, 26th Street corner 3rd Avenue, Crescent Park West Bonifacio Global City, Taguig City Attention: Jose Jaime V. Cruz Maria Ana Camila C. Jacinto Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 15, 2010, requesting confirmation that the service fees received by TDK-EPC CORPORATION ("TDK-EPC") from TDK ELECTRONICS PHILIPPINES CORPORATION ("TDK-EPC Phil") are exempt from Philippine income tax, pursuant to the provisions of the amended 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 ("Philippine-Japan tax treaty, as amended") , considering that the services are performed outside the Philippines. It is represented that TDK-EPC is a nonresident foreign corporation, organized and existing under the laws of Japan, with business address at 13-1 Nihonbashi, 1-chome, Cho-ku, Tokyo per Certificate of Status of Taxable Person dated March 15, 2010, signed by the District Director of Nihonbashi Tax Office and certified by Japan's Ministry of Foreign Affairs; that TDK-EPC is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated March 23, 2010; and that on the other hand, TDK-EPC Phil is a domestic corporation, registered with the Philippine Economic Zone Authority as an ecozone facilities enterprise under Certificate of Registration No. 04-35-F dated December 15, 2004; and that, TDK-EPC Phil's office address is at 119 East Science Avenue Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is also represented that on October 1, 2009, TDK-EPC and TDK-EPC Phil entered into a Management Services Agreement ("Agreement"), intended to aid TDK-EPC Phil in developing its business and maintaining sound management; that under the terms of the Agreement, TDK-EPC will provide TDK-EPC Phil with the following management services ("Services") from October 1, 2009 until September 30, 2010: a.) Quality assurance assistance including, but not limited to, providing support to establish and maintain a quality assurance system; b.) Accounting and finance assistance including, but not limited to, providing support with respect to budgeting, closing accounting, finance, cash management and tax; c.) General administration assistance including, but not limited to, providing support with respect to secretarial services, public and government relations, and advising on matters relating to corporate governance; d.) General corporate planning assistance; and HCISED e.) Such other assistance that may be reasonably requested by TDK-EPC Phil and agreed to be provided by TDK-EPC. that such Agreement, in the absence of notice of non-renewal, shall be automatically extended for a period of one year; that on March 15, 2010, an Addendum to the Management Services Agreement ("Addendum") was executed by TDK-EPC and TDK-EPC Phil, specifying that the Services shall, to the extent possible, be performed entirely in Japan and that if it is necessary for TDK-EPC to send its employees or other personnel to the Philippines for the performance of the Services, TDK-EPC will ensure that its personnel will stay in the Philippines only for short periods of time, which in no case shall exceed six (6) months in the aggregate; that as of May 31, 2010, TDK-EPC Phil certified that TDK-EPC has not sent any TDK-EPC personnel, nor has TDK-EPC any intention of sending its personnel to the Philippines; and that finally, the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal as certified by TDK-EPC Phil, on April 12, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, applies, in general to profits derived in the Philippines by a non-resident foreign corporation. It provides: "Section 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%). . . ." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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 this particular case, the treaty involved is the Philippines-Japan tax treaty, as amended which, in its Article 7, provides as follows: "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. . . ." Based on the foregoing, the profits of a Japanese enterprise shall be taxable only in Japan unless such corporation carries on business in the Philippines through a permanent establishment situated therein. Defining 'permanent establishment', Article 5 of the Philippines-Japan tax treaty, as amended, provides: TAECSD "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. 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" Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e., payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. . ." (Underscoring ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: "However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Underscoring ours) HScaCT This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, this Office hereby DENIES relief on all the service fees paid by TDK Phil to TDK-EPC before the subject TTRA was filed on April 15, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said fees shall be subject to income tax at 30 percent as provided for under Section 28 (B) (1) of the Tax Code of 1997 cited above. On the other hand, considering the representation that TDK-EPC does not have a fixed place of business in the Philippines, and that no personnel of TDK-EPC Phil has been sent in the Philippines and should they be sent, their stay shall not exceed a period or periods aggregating to more than 183 days, TDK-EPC is not deemed to have a permanent establishment in the Philippines to which such payment of service fees may be attributed. Accordingly, relief is hereby GRANTED to the service fees received by TDK-EPC from TDK-EPC Phil, under the March 15, 2010 Addendum, shall not be subject to Philippine income tax pursuant to Article 7 (1) in relation to Articles 5 (1) and (6) of the Philippines-Japan tax treaty, as amended. As regards the imposition of the value-added tax ("VAT") on the rendition of services of TDK-EPC, please be informed further that Section 108 of the Tax Code of 1997 provides 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 ten percent (10%) 2 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, . . ." Section 108 (A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Hence, the service fees to be paid by TDK Phil to TDK-EPC, for services rendered under the March 15, 2010 Addendum, to the extent that the subject services are not performed in the Philippines, shall not be subject to VAT. Moreover, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz.: "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: TAaIDH 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." Accordingly, since TDK-EPC Phil is an enterprise registered with the PEZA operating within an economic zone and, as such, is an exempt entity, it can neither be directly charged with VAT nor indirectly made to bear, as added cost, the equivalent VAT. Thus, the service fees to be paid by TDK-EPC Phil to TDK-EPC under the Agreement as consideration for the Services are exempt from VAT. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue