ITAD Ruling No. 056-05

June 16, 2005 ITAD RULING NO. 056-05 Articles 5, 7 & 12, Philippines-Japan Tax Treaty BIR Ruling No. DA-ITAD 47-05 Sycip Gorres Velayo & Co . 6760 Ayala Avenue, 1226 Makati City Attention: Mr. L.P. Ferrer Partner Gentlemen : This refers to your application for tax treaty relief dated February 28, 2005, on behalf of your client, SANYO PLASTIC PHILIPPINES, INC. (SPPI), requesting confirmation of your opinion that the service fees received by Sanyo Plastic Industrial Co., Ltd. (SPIL) from SPPI for services performed entirely outside the Philippines are exempt from Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Japan tax treaty and consequently, from the ten percent (10%) value-added tax (VAT). It is represented that SPIL is a nonresident foreign corporation duly organized and existing under the laws of Japan with principal address at 2-9-9 Chidori, Ohta-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated November 25, 2004 issued by the Securities and Exchange Commission; that SPPI, on the other hand, is a domestic corporation organized and existing under the laws of the Philippines with principal address at 110 East Main Avenue, Special Export Processing Zone (SPEZ), Laguna Technopark, Bian, Laguna; that it is a Philippine Economic Zone Authority (PEZA)-registered enterprise engaged in the business of manufacturing products such as but not limited to control panels, remote controllers, and plastic injection molds for export; that SPIL is a duly registered stockholder of SPPI, owning ninety percent (90%) of the outstanding capital stock of SPPI; that on May 3, 2001, SPPI and SPIL entered into a Management and Marketing Agreement (Agreement) whereby SPIL will perform management and marketing support services to SPPI in Japan; that in consideration thereof, SPPI shall pay to SPIL monthly service fees in the amount of Six Hundred Thousand (600,000.00) payable in Japanese yen; that from time to time, SPIL may offer additional services to SPPI, the exact scope of which and payment therefore, to be agreed upon by SPIL and SPPI; that the Agreement shall take effect from the effective date, that is, January 1, 1997, and shall continue until terminated by agreement, or by either party giving at least thirty (30) days' written notice to the other party. In reply, please be informed that the service fees paid by SPPI to SPIL, a resident of Japan, are subject to preferential tax treatment under the relevant provisions of Articles 7 in relation to Article 5 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. xxx xxx xxx" In relation thereto, Article 5 of the same tax treaty provides: "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. DcCEHI 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 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. xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the corporation shall not be subject to Philippine income tax. For this purpose, a Japanese corporation may be deemed to have a permanent establishment in the Philippines, if among others, the furnishing of consultancy or supervisory services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than six months within any taxable year. Considering that as represented, the employees of SPIL shall perform the subject services covered under the Agreement in Japan, SPIL cannot be deemed to have a permanent establishment in the Philippines. Accordingly, the subject fees to be paid by SPPI to SPIL are exempt from Philippine income tax, value-added tax, and consequently, withholding tax for as long as services by SPIL in the Philippines under the subject Agreement and any future agreement for future additional services for SPPI will not be furnished in the Philippines for a period or periods aggregating more than six (6) months within any taxable year. ( BIR Ruling No. ITAD 47-05 dated May 31, 2005 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service