ITAD BIR Ruling No. 244-15

August 28, 2015 ITAD BIR RULING NO. 244-15 Articles 5 and 7, Philippines-Japan tax treaty, as amended Philippine International Manufacturing and Engineering Services Corporation Cavite Economic Zone Rosario, Cavite Attention: Ms. Florafe M. Bantayan Executive Vice President and Chief Financial Officer Gentlemen : This refers to your letter dated March 7, 2012 requesting reconsideration of BIR Ruling No. ITAD 271-11 dated November 14, 2011 in relation to service fees paid by P.IMES Corporation ("P.IMES") to International Manufacturing and Engineering Services Company Ltd. ("International Manufacturing") under a Management and Engineering Consulting Agreement effective July 1, 2009. We ruled that International Manufacturing has a permanent establishment in the Philippines during the twelve-month period from July 1, 2009 to June 30, 2010 where it furnished services in the Philippines for an aggregate total of 202 days , which is more than the allowed six months within any twelve-month period under paragraph 6, Article 5 of 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 by protocol, 1 to wit: "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 . . ." (underscoring supplied) Therefore, we ruled that service fees paid by P.IMES to International Manufacturing are subject to Philippine income tax under paragraph 1, Article 7 of the amended Philippines-Japan tax treaty, which provides: TAIaHE "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." Since the Philippines-Japan tax treaty uses the phrase "period or periods aggregating more than six months within any twelve-month," we interpret a period of six months to mean 180 days by treating one month to have 30 days . In short, any enterprise of Japan furnishing services in the Philippines will have a permanent establishment ("PE") if it carried out this activity for an aggregate of 180 days within any twelve-month period. Moreover, in counting the days of a PE, we harmonize the counting with the method employed in taxing income from independent and dependent personal services as described in the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) , to wit: "5. Although various formulas have been used by member countries to calculate the 183 day period, there is only one way which is consistent with the wording of this paragraph: the 'days of physical presence' method. The application of this method is straightforward as the individual is either present in a country or he is not. The presence could also relatively easily be documented by the taxpayer when evidence is required by the tax authorities. Under this method the following days are included in the calculation: part of a day, day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness (unless they prevent the individual from leaving and he would have otherwise qualified for the exemption) and death or sickness in the family. However, days spent in the State of activity in transit in the course of a trip between two points outside the State of activity should be excluded from the computation. It follows from these principles that any entire day spent outside the State of activity, whether for holidays, business trips, or any other reason, should not be taken into account. A day during any part of which, however brief, the taxpayer is present in a State counts as a day of presence in that State for purposes of computing the 183 day period." (Page 252) Based on the above, in counting a PE, the days of physical presence of the personnel involved are taken into account. These include a part of a day, day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness, and death or sickness in the family. We tabulate below the days of physical presence of the individuals sent by International Manufacturing within a twelve month period from July 1, 2009 to June 30, 2010 based on the information contained in your affidavits dated March 7, 2012 and February 7, 2011, to wit: 2009 2010 Personnel Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun Keiichi Tsukamoto 1-4 5-8 - - 18-21 - - - - - 26-29 - Kie Ohno 1-5 - - - - - - - 14-30 12-23 16-20 - Shukan Nogi 1-4 3-8 8-16 7-24 - - 7-16 10-15 - 5-17 12-25 16-30 17-20 Tomoki Adachi 28-31 1, 12- 13-14 - - - - 1-7 28-31 1-3 - 14-19 22 17-19 Ryoji Shibuya - - - - 2-30 1-12 - - - - - - Ryosuke Kaji - - - 18-30 1-7 - - - - - - Takayasu Susuki - - - - - - - - - - 16-20 - Total 9 18 12 18 29 12 10 17 18 22 18 17 Grand Total 200 days ======== Note that we only made one count for the following months where there are two or more personnel present in the country: Month Overlapping Days Non-Overlapping Days Total July 2009 1, 2, 3, 4 (4) 5, 28, 29, 30, 31 (5) 9 August 2009 5, 6, 7, 8 (4) 1, 3, 4, 12, 13, 14, 15, 18 16, 17, 18, 19, 20, 21, 22 (14) September 2009 13, 14 (2) 8, 9, 10, 11, 12, 15, 12 16, 17, 18, 19 (10) November 2009 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 18, 19, 20, 21, 22, 23, 29 12, 13, 14, 15, 16, 17 (16) 24, 25, 26, 27, 28, 29, 30 (13) December 2009 8, 9, 10, 11, 12 (5) 1, 2, 3, 4, 5, 6, 7 (7) 12 March 2010 14, 15, 16, 17, 18, 19, 28, 29, 30 (3) 18 20, 21, 22, 23, 24, 25, 26, 27, 31 (15) April 2010 12, 13, 14, 15, 16, 17 (6) 1, 2, 3, 5, 6, 7, 8, 9, 22 10, 11, 18, 19, 20, 21, 22, 23 (16) May 2010 16, 17, 18, 19, 20 (5) 12, 13, 14, 15, 21, 22, 18 23, 24, 25 26, 27, 28, 29 (13) June 2010 16, 17, 18, 19 (4) 14, 15, 20, 21, 22, 23, 17 24, 25, 26, 27, 28, 29, 30 (13) Accordingly, since International Manufacturing rendered services in the Philippines for 200 days , or more than an aggregate of six months within any twelve-month period, it has a PE in the Philippines under paragraph 6, Article 5, of the Philippines-Japan tax treaty, as amended. Therefore, we reiterate that service fees paid to International Manufacturing by P.IMES under the Agreement are subject to income tax under paragraph 1, Article 7 of the treaty, and that International Manufacturing be treated as a resident foreign corporation under Section 28 (A) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code") . Finally, under Section 108 (A) of the Tax Code, the services rendered by International Manufacturing in the Philippines are subject to value-added tax ("VAT"), to wit: cDHAES "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, 2 raise the rate of value-added tax to twelve percent (12%). . . Relative thereto, P.IMES shall withhold VAT on the service fees at the rate of twelve percent before remitting them to International Manufacturing . P.IMES shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for P.IMES's claim of input VAT on the fees; otherwise, if it is not a VAT-registered taxpayer, P.IMES may treat the VAT as an asset or expense, as applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding is made. 3 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. 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 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. 3. Pursuant to Section 4.112-2 of 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) , which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made."