ITAD Ruling No. 069-00

April 7, 2000 ITAD RULING NO. 069-00 RP-Korea Art. 5; Art. 7 [DA-048-1-31-96] 0688-88; 022-88 Luzon Electronics Technology, Inc. SPEZ, Gateway Business Park, Javalera, Gen. Trias, Cavite City Attention: Junichi Kawaguchi Assistant Controller Gentlemen : This refers to your letter dated December 8, 1999 requesting for and in behalf of Kabool Electronics Co., Ltd. (KABOOL) an availment of relief from double taxation under the provisions of the RP-Korea Tax Treaty. LexLib Documents submitted show that KABOOL, a corporation duly organized and existing under and by virtue of the laws of Korea and not registered to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated December 16, 1999, with principal office at 626-38 Kamjung, Kimpo, Kyungki, Korea, entered into a contract for supply of engineering support services with Luzon Electronics Technology, Inc. (LETI), is a Philippine Economic Zone Authority (PEZA) registered domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at Special Export Processing Zone, Gateway Business Park, Javalera, General Trias, Cavite City, for the setting up of a commercial production of Head Stack Assemblies for Samsung (hereinafter referred to as HSA) and that KABOOL engineers have rendered services in the Philippines for 59 days as evidenced by the copies of their passport showing pages of dates of arrival and departure; that in consideration for the said services, LETI will pay KABOOL the total amount of US $60,000. In reply thereto, please be informed that paragraph (1), Article 7 of the RP-Korea Tax Treaty provides as follows: "Article 7 Business Profits "1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment. xxx xxx xxx" Moreover, paragraphs (1), (2) and (3) of Article 5 of the aforesaid treaty provide, viz: "Article 5 Permanent Establishment "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 place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) premises used as a sales outlet; and (h) a warehouse, in relation to a person providing storage facilities for others. "3. (a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months. (b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitute a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period; and xxx xxx xxx" Based on the foregoing, the taxability in the Philippines of business profits earned by a Korean resident shall depend on the existence of a permanent establishment (PE) therein. Such being the case, and inasmuch as, as represented, KABOOL would perform the engineering assistance to LETI for 59 days only, KABOOL cannot be considered to have set up a PE here within the meaning of Section 3(b) of Article 5 of the RP-Korea Tax Treaty. Hence, payments to be made to KABOOL are not subject to Philippine income tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group