ITAD Ruling No. 091-01

October 18, 2001 ITAD RULING NO. 091-01 RP-Japan, Art. 5 & 7 BIR Ruling No. ITAD-101-00 Sankou Seiki Co., Ltd. Inc. Lot 8 Blk 14 Phase 3 Cavite Economic Zone (CEZ) Rosario, Cavite Attention: Tsutomu Seki President and CEO Gentlemen : This refers to your letter dated May 29, 2001 requesting confirmation of your opinion that the income derived by International Manufacturing and Engineering Services Co., Ltd. (IMES) as a consultant of your Company, is exempt from withholding taxes pursuant to the RP-Japan Tax Treaty. It is represented that IMES is a corporation organized and existing under the laws of Japan with principal office address at 3 Kirihara-cho Fujisawa-shi, Kanagawaken, Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines per certification dated May 24, 2001 issued by the Securities and Exchange Commission; that Sankou Seiki Co., Ltd., Inc. (Sankou) is a corporation organized and existing under the laws of the Philippines with principal office address at Lot 8 Blk 14 Phase 3 Cavite Economic Zone (CEZ) Rosario, Cavite and is primarily engaged in the manufacture of computer peripherals; that on January 1, 2001, IMES and Sankou entered into a Management and Engineering Consulting Agreement whereby the former is appointed by the latter as its consultant; that IMES, being the consultant, shall provide consultancy services to Sankou in the areas of management, engineering and manufacturing which include but not limited to the following: 1) to recommend and advise Sankou in the development of its financial, operation and planning system and on the improvement of management systems and organizational structures; 2) to advise and assist Sankou in the development of the ingenious production control system and with the on going management; 3) to review and comment on the engineering plans for adoption; 4) to advise Sankou on the preparation of quality control system for the materials and equipment used in the manufacturing and operation of the business; and 5) to procure materials and equipment suitable for the operation of the business of Sankou which are not available in the Philippines; that in consideration for the said services, Sankou shall pay IMES a fee in the amount of JPY20,589,600; that the consultancy services are done at the consultant's office at 3 Kirihara-cho Fujisawa-shi, Kanagawa-ken, Japan and shall commence on January 1, 2000 for a period of one year and shall be automatically extended for another year unless either party discontinues the Agreement by written notice within 30 days prior to the end of the period. 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: "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 with in the Philippines for a period or periods aggregating more than six months in any taxable year except when the furnishing of such services is effected under an agreement between the Governments of Japan and Philippines regarding economic or technical cooperation, in which case, the corporation shall not be deemed to have a permanent establishment in the Philippines. Considering that the furnishing of services is performed by IMES in its office in Japan and none of its personnel will arrive or stay in the Philippines, IMES is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the consultancy income derived by IMES from services rendered is not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5(1) and (6) of the RP-Japan Tax Treaty. (BIR Ruling No. ITAD-101-00 dated August 7, 2000) This ruling is 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group