ITAD BIR Ruling No. 271-11

November 14, 2011 ITAD BIR RULING NO. 271-11 Articles 7 & 5, Philippines-Japan Tax Treaty P. IMES Corporation Cavite Economic Zone, Rosario, Cavite Attention: Ms. Florafe M. Bantayan Chief Financial Officer Gentlemen : This refers to your letter dated July 20, 2009 requesting confirmation that the income of International Manufacturing & Engineering Services Co. Ltd. ("IMES") from P.IMES Corporation ("P.IMES") is exempted from the payment of withholding taxes pursuant to Article 7 (1) in relation to Article 5 (1) and (6) 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 ("Philippines-Japan tax treaty, as amended") . It is represented that IMES is a foreign corporation organized and existing under the laws of Japan with principal office address at 3 Kirihara-cho Fujisawa-shi Kanagawa-ken, Japan; that IMES is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 10, 2009; and that P.IMES, on the other hand, is a domestic corporation with office address located at Cavite Export Processing Zone, Rosario, Cavite. It is further represented that on July 1, 2009 and July 1, 2010, IMES and P.IMES entered into a Management and Engineering Consulting Agreement ("MEC Agreement") that shall commence on July 1, 2009 and shall continue for a period of one (1) year, unless IMES or P.IMES gives written notice to the other party at least ninety (90) days prior to the end of such period; that the salient features of the MEC Agreement are as follows: 1. Appointment of Consultant P.IMES appoints IMES as its consultant for management, engineering and procurement matters concerning the business of the company. 2. Scope of Work cAHITS During the continuance of the MEC Agreement, IMES shall provide P.IMES with consultancy services in the following projects; mold business, hard disk drive test equipments and Medical device, which include the following areas: A. Management 1. To recommend and advise P.IMES on the improvement of management systems and organization structures. 2. To advise and assist P.IMES in development of the planning system and its measurement for management. 3. To recommend and advise P.IMES in development of financial system. 4. To advise and assist P.IMES in development of the ingenious production control system. 5. To advise P.IMES with the on-going management. B. Engineering and Manufacturing 1. To make recommendations to P.IMES regarding the development, preparation and conduct of manufacturing planning and operation system. 2. To review and comment on the engineering plans for adoption. 3. To advise P.IMES on the preparation of the quality control system for the materials and equipment used in the manufacturing and operation of the business of P.IMES. 4. To procure materials and equipment suitable for the operation of the business of P.IMES which are not available in Philippines, from time to time as requested by P.IMES. C. Other HEDSCc 1. To provide any advice and assistance, which shall, from time to time, be designated by P.IMES. and that for the purpose of rendering services under the MEC Agreement , IMES agrees to make available to P.IMES the services of qualified engineers who shall provide advice and assistance at the office of the consultant in Japan when required. It is also represented that the services performed in the Philippines by IMES personnel for the year 2009 totaled an aggregate period of 202 days per Certification issued by P.IMES dated February 7, 2011; that for the period July 1, 2010 to June 30, 2011, the services rendered by IMES in the Philippines did not last more than six months; and that in consideration for the services rendered by IMES, P.IMES shall pay service fee of 66,600.00 for the period covering of July 2009 to June 2010 and 13,380,000.00 for the year 2010-2011, which shall be based on the staff level of the consultant and the estimated time spent by the staff on providing the services. TacESD It is finally represented, based on the Sworn Statement issued by the Corporate Secretary of P.IMES on October 10, 2010, that the transaction subject of the request for 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 of the taxpayer/s involved. 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 nonresident 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%). xxx xxx xxx" 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: cEaDTA 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. xxx xxx xxx" In relation thereto, Article 7 of the Philippines-Japan tax treaty, as amended, 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 an enterprise which is a resident of the Japan shall be taxable only in Japan unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Japanese enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by IMES for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines to which said fees may be attributable. In this regard, Article 5 of the same tax treaty provides: ESTCDA "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 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." Based on the foregoing, a resident corporation of Japan may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continues, in the same or connected project, continue within the Philippines for a period or periods aggregating more than six months within any twelve-month period. In view of the foregoing, since IMES personnel provided services in the Philippines for a period of 202 days for the year 2009, as evidenced by a Certification by P. IMES dated February 7, 2011, which is more than the minimum required period of six (6) months within a twelve-month period, then IMES is deemed to have a permanent establishment in the Philippines to which its business is attributable and therefore shall be taxed as a resident foreign corporation under Section 28 (A) (1) of the Tax Code of 1997, as amended. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue