ITAD BIR Ruling No. 311-14

November 4, 2014 ITAD BIR RULING NO. 311-14 Articles 5 and 7, Philippines-Japan Tax Treaty; Sections 28 (B) (1), 32 (B) (5), and 108 of the Tax Code, as amended SGV & Co. 6760 Ayala Avenue Makati City Attention: Carolina A. Racelis Gentlemen : This refers to your tax treaty relief application (TTRA) filed on August 9, 2012 on behalf of Sakamoto Yakuhin Kogyo Co., Ltd. ("Sakamoto JA") requesting for confirmation that the service fees to be paid by Sakamoto Orient Chemicals Corporation ("Sakamoto PH") to Sakamoto JA are exempt from income tax pursuant to 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Sakamoto JA is a nonresident foreign corporation organized and existing under the laws of Japan and a resident thereof based on the Residence Certificate issued by the tax authority of Japan on December 20, 2011 with office address at 2-6 Awaji-machi 1-chome, Chuo-ku, Osaka, Japan; that Sakamoto JA is not registered either as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission dated May 30, 2012; that on the other hand, Sakamoto PH is a domestic corporation with principal office address at 104 HV dela Costa Street, Makati City; and that Sakamoto PH is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 99-012 based on the Certificate issued by PEZA on March 11, 1999. It is further represented that on February 28, 2012, Sakamoto JA and Sakamoto PH entered into a Service Agreement ("Agreement") whereby Sakamoto JA shall dispatch qualified engineers to Sakamoto PH to supervise the operation of Sakamoto PH' s Refinery Plant in Bauan, Batangas, including, but not limited to, conduct system audit, test-runs of newly installed facilities, repair and/or maintenance of existing facilities that require an expert's analysis and remedy; that for and in consideration of the services rendered by the dispatched engineer/s, Sakamoto PH shall pay Sakamoto JA a service fee of JPY50,000.00 per day per dispatched engineer; that Sakamoto PH shall defray on its own account, the following expenses that may be incurred by the dispatched engineers while within the Philippines and while on assignment: (a) Cost for board and lodging, excluding meal expenses, (b) Insurance premiums if applicable but excluding cost of domestic communication, (c) Cost of local transportation; that the first payment by Sakamoto PH to Sakamoto JA under the Agreement was made on January 10, 2013 based on the Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ on even date; and that based on the Certification issued by the General Manager of Sakamoto PH dated July 16, 2012, the following personnel of Sakamoto JA have been engaged to perform contractor services under the Agreement for the following period: HESCcA that the total number of days spent in the Philippines based on the foregoing chart is 56 days; and that, the first payment was made on January 10, 2013 based on the Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ on January 30, 2013. It is finally represented that the fees subject of this request for ruling are not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal based on the sworn statement issued by the Corporate Secretary of Sakamoto PH on May 17, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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): n 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: 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. AaEcDS xxx xxx xxx" Thus, you invoke 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 aforecited provisions, 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 that is attributable to that permanent establishment. Applying this to the instant case, the payments received by Sakamoto JA from Sakamoto PH 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 of the same tax treaty defines 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. 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. . . ." (underscoring supplied) TAHIED Considering that the services is performed by Sakamoto JA, through its engineers dispatched to the Philippines, is for a period not more than 180 days, then Sakamoto JA 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 payments by Sakamoto PH to Sakamoto JA are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Japan tax treaty. Finally, the fees paid for the services of Sakamoto JA through its engineers which are to be rendered in the Philippines are generally subject to VAT pursuant to Section 108 of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended which 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 twelve percent (12%) xxx xxx xxx . . . 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, . . ." However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005), the Supreme Court ruled that: "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: 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. ITcCaS 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." Further, the Supreme Court in the case of Toshiba Information Equipment (Phils.), Inc. vs. Commissioner of Internal Revenue, G.R. No. 157594 dated March 9, 2010 ruled: "It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered enterprises, such as Toshiba, are VAT-exempt and no VAT can be passed on to them. The Court explained in the Toshiba case that PEZA-registered enterprise, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory. xxx xxx xxx The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT." Accordingly, since Sakamoto PH is an enterprise registered with PEZA under Republic Act No. 7916, 2 as amended, based on the relevant Certification from PEZA, it cannot be directly charged for VAT on its sales of goods or services nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchase of goods and services when such purchase is subject to VAT. Therefore, since Sakamoto JA is a nonresident supplier who is not registered in the Philippines for VAT purposes, the payment made to it by Sakamoto PH under the Agreement are, instead of being subjected to VAT at zero percent, exempt from VAT. (BIR Ruling No. ITAD 019-14 dated February 19, 2014) 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. DcITaC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau 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. Entitled An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.