ITAD Ruling No. 027-00

October 8, 1999 ITAD RULING NO. 027-00 RP-Japan, Art. 7 (1), Art. 5 (8) 023-95 SGV & Co. 6760 Ayala Avenue Makati City Attention: Mr . C . P . Noel & Mr . E . P . Guevara Tax Division Gentlemen : This refers to your letter dated May 12, 1999 requesting confirmation of your opinion on the following issues: 1. Mitsubishi Heavy Industries, Ltd. (MHI-Japan) does not have a permanent establishment in the Philippines. 2. Business profits of MHI-Japan from its subcontract of the Maintenance Agreement of the EDSA Metro Rail Transit (MRT-3) are not subject to Philippine income tax under the RP-Japan Tax Treaty. llcd 3. The profits of Mitsubishi Heavy Industries Philippines, Inc. (MHI-Phil) and/or TES Philippines, Inc. (TES Phil) from the subcontract of the Maintenance Agreement are subject to ordinary corporate income tax under Section 27 (A) of the Tax Code. It is represented that under the Build-Lease-and-Transfer Contract on the MRT-3 entered into by and between Metro Rail Transit Corporation (MRTC) and the Department of Transportation and Communications (DOTC) dated August 8, 1997, MRTC is obliged, among others to service, repair and maintain the MRT-3; that for the said purpose, MRTC entered into a Maintenance Agreement on the MRT-3 with Sumitomo Corporation of Japan (Sumitomo), which subcontracted the same to MHI-Japan; that MHI-Japan is a corporation organized and existing under the laws of Japan with no permanent establishment in the Philippines as per certification issued by Securities and Exchange Commission (SEC) dated May 18, 1999; that MHI-Japan subcontracted the same obligation to MHI-Phil who in turn subcontracted the actual maintenance work to TES Phil for a period of 10 years; that MHI-Phil is a subsidiary of MHI-Japan, a corporation organized and existing under the laws of the Philippines while TES Phil is a domestic corporation likewise organized and existing under the laws of the Philippines. In your letter dated September 27, 1999, you mentioned that, in the alternative, depending on such technical requirements, which are still being studied, MHI-Japan is considering whether it will directly subcontract the maintenance of MRT-3 to TES Phil, instead of to MHI-Phil, that in the aforementioned transactions, the business profits of MHI-Japan will not be subject to Philippine income tax under the RP-Japan Tax Treaty; that even under this alternative arrangement, MHI-Japan will not be deemed to have a permanent establishment in the Philippines; that since there is an existing tax treaty between the Philippines and Japan, the taxation of the payments to be derived by MHI-Japan from the subcontract of the Maintenance Agreement on the MRT-3 shall be governed by the RP-Japan Tax Treaty. cdlex In reply, please be informed that Article 7, Paragraph 1 of the RP-Japan Tax Treaty, provides, as follows: "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." After a study of the facts represented in your letters, this Office hereby confirms your opinion that: In both alternative arrangements, since MHI-Japan has no fixed place of business nor legal presence in the Philippines, then it has no permanent establishment. While it has a subsidiary in the Philippines, MHI-Phil, the same does not constitute a permanent establishment pursuant to Article 5, Paragraph 8 of the RP-Japan Tax Treaty, to wit: "Article 5 (8) The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other." In BIR Ruling No. 023-95 dated February 14, 1995, the aforecited tax treaty provision was referred to when it was ruled that a mere subsidiary corporation in the Philippines controlled by a foreign corporation does not constitute a permanent establishment of the foreign corporation within the Philippines. Accordingly, MHI-Phil being a subsidiary, does not constitute a permanent establishment of MHI-Japan. In view thereof, this Office is of the opinion, and so holds, that since MHI-Japan has no permanent establishment in the Philippines, the business profits received by MHI-Japan are not subject to Philippine income tax. Finally, since MHI-Phil and TES Phil are both domestic corporations, then any profits they will derive from the subcontract of the Maintenance Agreement on MRT-3 are subject to ordinary corporate income tax under Section 27 (A) of the Tax Code. This ruling is issued on the basis of the foregoing facts as represented. If however, upon investigation, it will be disclosed that the facts are different from what have been represented, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group