ITAD Ruling No. 100-04

September 13, 2004 ITAD RULING NO. 100-04 RP-Japan tax treaty, Article 5 & 7 000-00 TES Philippines Inc. EDSA MRT DEPOT North Avenue cor. EDSA Quezon City Attention: Mr. Tetsugo Kanemura President Gentlemen : This refers to your letters dated August 15, 2001 and February 22, 2002, requesting confirmation of your opinion that the consultancy fees paid by TES Philippines Inc. (TES) to Ryoju Transportation Equipment Engineering & Service Co., Ltd., Japan (RTEE) are not subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5 of the RP-Japan tax treaty. It is represented that RTEE is a corporation organized and existing under the laws of Japan with business address at No. 16-20 Hinode 2-Chome, Kawasaki-ku, Kawasaki City, Kanagawa 210-0824, Japan; that RTEE is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per Certificate of Non-Registration issued by the Securities and Exchange Commission dated November 5, 2001; that TES is a corporation organized and existing under the laws of the Philippines with address at EDSA MRT Depot, North Avenue corner EDSA, Quezon City; and that per Requests for Work dated December 1, 1999, March 1, 2000 and August 14, 2000, RTEE will perform services to TES as follows: (1) supervise engineering works for MRT maintenance, (2) repair work on MRT vehicles and, (3) installation work on MRT. In reply, please be informed that Article 7 of the RP-Japan tax treaty provides: "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. THESAD xxx xxx xxx" Moreover, paragraphs (1) and (6) of Article 5 of the same 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. "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 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." Based on the foregoing provisions, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. A Japanese corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel in relation to a particular project or any project connected therewith is for a period or periods aggregating more than 6 months within ANY taxable year. When a permanent establishment is constituted in this manner, the Japanese corporation is deemed to have a permanent establishment in the Philippines throughout the duration of its operation in the latter for the same or any connected project. The documents submitted disclose that the employees of RTEE performed their services in the Philippines for periods aggregating more than six months in the taxable year 2000, a] thus, RTEE is deemed to have a permanent establishment in the Philippines in connection with the subject maintenance support and services it provided to TES Philippines, Inc. RTEE is a foreign corporation not authorized or licensed to do business in the Philippines. A corporation is itself a taxpaying entity and for purposes of income tax, corporations are classified into (a) domestic corporation and (b) foreign corporation. (Section 27 and 28 of the 1997 Tax Code). Foreign corporations are further classified into (1) resident foreign corporations and (2) non-resident foreign corporations. A resident foreign corporation is a foreign corporation that is engaged in trade or business in the Philippines or having an office or place of business therein. Conversely, a non-resident foreign corporation is a corporation that is not engaged in trade or business in the Philippines and not having office or place of business therein. In order for a foreign corporation to be considered as engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation, as in the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes. Foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical or casual gains, profits and income and capital gains. The tax is 30% (now 32%) of such gross income pursuant to Section 28(B)(1) of the 1997 Tax Code. ( N.V. Reederij "Amsterdam" and Royal Interocean Lion vs. Commissioner of Internal Revenue , L-46029, June 23, 1988, 162 SCRA 487) In view thereof, the consultancy fees paid by TES to RTEE from 1999 to 2000 are subject to Philippine withholding income tax at the rate of 32% in accordance with Section 28(B)(1) of the 1997 Tax Code. Moreover, the fees to be paid by TES for that portion of the services rendered by RTEE in the Philippines are subject to the 10% value-added tax pursuant to Section 108 of the Tax Code. Accordingly, TES, 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 RTEE. In remitting the VAT withheld, TES 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 TES upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case TES 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, TES is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of RTEE, the first three copies thereof to be given to RTEE and the fourth copy to be retained by TES as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR8-2002; Section 7 of RR 14-2002] 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. aDcETC Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue Footnotes a]. Certification of the duration of the services performed showed 189 days.