ITAD BIR Ruling No. 206-15

June 5, 2015 ITAD BIR RULING NO. 206-15 Articles 5 and 7, Philippines-Japan tax treaty, as amended Chiyoda Philippines Corporation 1507 Sun Plaza Building, Barangay Wack-Wack Mandaluyong City Attention: Ms. Lourdes P. Reyes AGM-AFD/Corporate Treasurer Gentlemen : This refers to your tax treaty relief application filed on July 15, 2011 requesting confirmation that service fees to be paid by Chiyoda Philippines Corporation ("Chiyoda") to IT Engineering ("IT") are exempt from income tax in the Philippines pursuant to 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 ("Philippines-Japan tax treaty, as amended") . It is represented that IT is a foreign corporation organized and existing under the laws of Japan with principal office at Technowave 100 Bldg. 11F, 1-1-25, Shinurashima-cho, Kanagawa-ku, Yokohama, Japan based on its Tax Residence Certificate issued by the Chief of Kanagawa District Tax Office dated July 21, 2011; that 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 July 12, 2011; that on the other hand, Chiyoda is a corporation duly organized and existing under the laws of the Philippines with office address at 1507 Sun Plaza Building, Barangay Wack-Wack, Mandaluyong City, Philippines. It is further represented that on June 30, 2011 Chiyoda entered into a Consultancy Agreement ("Agreement") with IT where the latter agreed to perform consultancy services relative to server integration; that the services shall be performed for four (4) days; and that in consideration of the services rendered, Chiyoda shall pay IT a fee of 3,306,254.00, 30 days from receipt of billing invoice less government taxes. In reply, please be informed that service fees to be paid to IT, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." DcHSEa However, such fees may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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." Thus, you invoked Article 7 of the Philippines-Japan tax treaty which provides: "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 corporation shall be taxable only in Japan unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Japanese corporation carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as are attributable to that permanent establishment. Applying this to the instant case, the service fees received by Chiyoda for services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 (3) of the same treaty provides: "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." SCaITA Considering that the services rendered by IT through Mr. Kawakami Katsue were completed for a period of 4 days starting June 21, 2010 to June 24, 2010, IT is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Such being the case, the service fees paid by Chiyoda to IT are not 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. Finally, the portion of the service fees representing the supply of services in the Philippines, is subject to value-added tax ("VAT"). Section 108 (A) of the Tax Code, as amended, provides: "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, 1 raise the rate of value-added tax to twelve percent (12%) . . ." For purposes of VAT, Chiyoda shall be responsible for the withholding of VAT on the service fees before remitting them to IT. In remitting to the Bureau of Internal Revenue the VAT withheld, Chiyoda shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Chiyoda may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying such form. On the other hand, if it is a non-VAT-registered taxpayer, Chiyoda may include as part of the cost of the service fees furnished to it by IT the VAT consequently shifted or passed on to it. In addition, Chiyoda is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for IT and the fourth copy for Chiyoda as its file copy. 2 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 Footnotes 1. The VAT rate was increased to 12 percent beginning 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. 2. Pursuant to Revenue Regulations 16-2005 (Consolidated Value-Added Tax Regulations of 2005, as amended). n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.