ITAD BIR Ruling No. 397-12

December 19, 2012 ITAD BIR RULING NO. 397-12 Articles 5, 7 and 24 Philippines-Japan tax treaty P. Imes Corporation Phase IV, Block 16 Cavite Economic Zone Rosario, Cavite Attention: Ms. Florafe M. Bantayan Executive Vice President and Financial Officer Gentlemen : This refers to your tax treaty relief application filed on August 31, 2010 requesting confirmation that service fees paid by P.IMES Corporation ("P.IMES") to International Manufacturing and Engineering Services Company Ltd. ("International Manufacturing") 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 ("Philippines-Japan tax treaty") . 1 Facts International Manufacturing is a foreign corporation and a resident of Japan based on the Certificate of Status of Taxable Person issued by the Fujisawa Tax Office in Japan on September 6, 2010. International Manufacturing is located at 3 Kirihara-cho, Fujisawa-shi, Kanagawa-ken, Japan. 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 September 29, 2010. On the other hand, P.IMES is a domestic corporation located at Phase IV, Block 16, Cavite Economic Zone, Rosario, Cavite, Philippines. On July 1, 2010 ,P.IMES and International Manufacturing entered into a Management and Engineering Consulting Agreement where P.IMES appointed International Manufacturing as consultant for the former's management, engineering and procurement matters concerning its business. International Manufacturing will provide consultancy services in the following projects: mold business, hard disk drive test equipment and medical device. In consideration, P.IMES will pay service fees to International Manufacturing amounting 113,380,000.00 and payable monthly in arrears as follows: Month Amount (in Yen) July 2010 12,015,000.00 August 2010 12,015,000.00 September 2010 12,015,000.00 October 2010 12,015,000.00 November 2010 12,015,000.00 December 2010 7,615,000.00 January 2011 7,615,000.00 February 2011 7,615,000.00 March 2011 7,615,000.00 April 2011 7,615,000.00 May 2011 7,615,000.00 June 2011 7,615,000.00 Total 113,380,000.00 ============ The service fees will be paid within one month or upon the receipt of an invoice from International Manufacturing. The Agreement took effect on July 1, 2010 and will remain in effect for an initial period of one year; thereafter, the Agreement will be extended for successive periods of one year. Based on the Certification issued by P.IMES on April 30, 2012, the following personnel of International Manufacturing provided services to P.IMES in the Philippines: caSDCA Name Dates Number of Days Total 2010 2 2011 3 1. Hiroki Kondo July 1-31, 2010 2. Tomoki Adachi July 12-17; October 21-23, November 14-15, 18-24, 2010; February 13-16; April 17-18, 24-27, 2011 3. Ryoji Shibuya August 1-14, 2010; June 20-30, 2011 4. Shinji Hattori August 23-September 18, 107 93 200 December 1-7, 15-19, 2010; January 20-February 5, March 8-18, May 9-17, 2011 5. Kiyoaki Kikuchi September 29-October 3, November 10-17, 2010; May 15-24, June 2-22, 2011 6. Kei Ohno April 13-28, 2011 Ruling Relative thereto, please be informed that the service fees paid by P.IMES to International Manufacturing may be taxed in the Philippines if they are attributable to a permanent establishment which International Manufacturing has in the Philippines, under paragraph 1, Article 7 of the Philippines-Japan tax treaty, to wit: "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." In relation thereto, paragraphs 1, 2 and 6, Article 5 of the treaty define 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. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; AaDSEC e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. 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." As defined, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a store or other sales outlet, a branch, an office, a factory, and a workshop. It includes also the furnishing of consultancy services, or supervisory services in connection with a contract for a building, construction or installation project, through employees or other personnel of an enterprise, where such activity continues (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. Accordingly, since International Manufacturing had furnished consultancy services in the Philippines for a period aggregating more than six months (183 days) within any twelve-month period, that is, 200 days within the twelve month period from July 2010 to June 2011, International Manufacturing is deemed to have a permanent establishment in the Philippines, under paragraph 6, Article 5 of the Philippines-Japan tax treaty. This being the case, the service fees paid by P.IMES to International Manufacturing for consultancy services rendered by the latter shall be subject to income tax in the Philippines, under paragraph 1, Article 7 of the treaty. ATDHSC Moreover, under paragraph 3, Article 7, and paragraph 2, Article 24, of the Philippines-Japan tax treaty, International Manufacturing, being a foreign enterprise with a permanent establishment, shall be allowed to deduct executive and general administrative expenses from profits it derives in the Philippines shall not be treated less favorably than domestic enterprises carrying on the same activities in the Philippines, to wit: "Article 7 xxx xxx xxx 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere." "Article 24 xxx xxx xxx 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents." Simply put, for purposes of income taxation, International Manufacturing shall be treated as a foreign corporation engaged in trade or business in the Philippines and taxed at the rate of 30 percent based on its taxable income , 4 under Section 28 (B) (1) of the National Internal Revenue Code of 1997, to wit: AaEDcS "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by the 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. July 1-31 (31 days);August 1-14, 23-31 (23);September 1-18, 29-30 (20);October 1-3, 21-23 (6);November 10-24 (15);December 1-7, 15-19 (12). 3. January 20-31 (12 days),February 1-5, 13-16 (9);March 8-18 (11);April 13-28 (16);May 9-24 (16),June 2-30 (29). 4. "SEC. 31. Taxable Income Defined. The term 'taxable income' means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws."