ITAD Ruling No. 057-03

April 21, 2003 ITAD RULING NO. 057-03 Article 5 & 7 RP-Japan Tax Treaty BIR Ruling No. ITAD 78-02 & 184-02 Aranas Mendiola & De Jesus Unit 106 G/F Le Metropole Building 326 De la Costa corner Tordesilla Sts. Salcedo Village, Makati City Attention: Atty. Perciles C. Consunji Tax Principal Gentlemen : This refers to your application for relief from double taxation dated November 11, 2002, on behalf of Sanritsu Great International Corporation (SGIC), requesting confirmation of your opinion that the service fees paid by SGIC to Sanritsu Limited (Sanritsu) under the Management and Marketing Support Service Agreements are not subject to Philippine income tax and the Value Added Tax (VAT) pursuant to the RP-Japan tax treaty. It is represented that Sanritsu is a corporation organized and existing under the laws of Japan with principal office address at 2034-10, Kazama-Shimogawara, Nagano-shi, Nagano-ken, 381-0023, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated January 10, 2003; that SGIC is a corporation organized and existing under the laws of the Philippines with principal office address at Lot 6, Block 14, Phase III, Cavite Economic Zone, Rosario, Cavite 4106; that on July 1, 2002, SGIC and Sanritsu entered into a Management and Marketing Support Service Agreement; that under the Management Agreement, Sanritsu shall provide consultancy services to SGIC, which include the following: 1) for the offsite services a) to review SGIC's monthly financial reports and other management reports to identify the points to be improved; b) to assist SGIC in developing its organization and creating its annual business plan; and c) to provide such other incidental advise as may be requested by SGIC to improve the latter's management in general; all the above services shall be performed outside the Philippines, primarily in Japan, and shall not involve any transfer of technology, know-how or other intellectual property rights other than that related to the management of the company; 2) for the onsite services upon the written request of SGIC and based on the terms mutually agreed upon by both parties, Sanritsu shall send to SGIC, subject to availability of personnel, qualified administration professionals to render assistance and services to SGIC in connection with the management of SGIC for a reasonable period to be agreed upon by the parties hereto but not exceeding in the aggregated period of 6 months per calendar year; that on the other hand, under the Marketing Support Service Agreement the following services to be rendered include: a) to promote or market the services of SGIC in Japan and to other foreign clients of Sanritsu with Philippine operations, including regular visits and representation with relevant corporate officers of such clients; b) to assist SGIC in developing marketing strategies and specific marketing activities outside the Philippines; and c) to undertake such other incidental marketing activities as may be requested by SGIC to promote the latter's business in other countries; that all of the marketing services shall be performed totally outside the Philippines, primarily in Japan, and shall not involve any transfer of technology, know-how or other intellectual property rights; that in consideration of the said Management Services, SGIC shall pay Sanritsu a monthly service fee of Two Thousand Dollars in US Currency (USD2,000) payable semi-annually, while for the Marketing Services, SGIC shall pay Sanritsu a monthly service fee of Twenty Thousand Dollars in US Currency (USD20,000) payable annually; In reply, please be informed that Article 7 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. "xxx xxx xxx" Moreover, paragraphs (1) and (6) of Article 5 of the said treaty provide, viz : HCTDIS "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. "xxx xxx xxx". Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan carries on business in the Philippines through a permanent establishment situated therein, the profits of the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. For this purpose, a corporation which is a resident of Japan 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 in any taxable year. However, when the furnishing of such services is effected under an agreement between the Governments of Japan and Philippines regarding economic or technical cooperation, the corporation shall not be deemed to have a permanent establishment in the Philippines. Considering that under the Marketing Agreement and the Management Agreement furnishing of services is performed by Sanritsu in Japan and none of its personnel will arrive or stay in the Philippines and should it be necessary for Sanritsu to send its employees to the Philippines, as in the case of the onsite services, the length of stay shall not exceed six months per calendar year, Sanritsu is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Such being the case, the service income derived by Sanritsu from services rendered to SGIC are considered income derived from sources outside the Philippines and are not subject to Philippine tax pursuant Sec. 42(C)(3) in relation to Sec. 28(B)(1) of the Tax Code of 1997. ( BIR Ruling No. ITAD 78-02 and 184-02 dated May 2, 2002 and October 17, 2002 ) However, the fees to be paid by SGIC for that portion of the services rendered by Sanritsu in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, SGIC, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to Sanritsu. In remitting the VAT withheld, SGIC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by SGIC upon filing its own VAT return, if it is a VAT-registered taxpayer. In case SGIC is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, SGIC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Sanritsu, the first three copies thereof to be given to Sanritsu and the fourth copy to be retained by SGIC as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2000, Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] This ruling is issued based on 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service