ITAD Ruling No. 101-00

August 7, 2000 ITAD RULING NO. 101-00 RP-Japan [DA-048-1-31-96]; Art. 5; Art. 7 068-88; 022-88 Joaquin Cunanan and Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Atty. George J. Lavadia Principal, Tax and Corporate Services Gentlemen : This refers to your letter dated January 12, 1998 submitting on behalf of GNF (Philippines) Inc. (GNF) an application for tax treaty relief pursuant to the provisions of the RP-Japan Tax Treaty. It is represented that GNF, a PEZA-registered corporation organized and existing under the laws of the Philippines, entered into a Services Agreement with Futaba Manufacturing., LTD. TOKYO (FMC), a corporation duly organized and existing under the laws of Japan and not registered to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated January 16, 1998; that under the said Services Agreement, FMC is to provide GNF with services consisting of supervision and maintenance work of the GNFs manufacturing plant in the Philippines during the start up process of two months commencing from January 5, 1998 up to March 4, 1998; and that in consideration for the said services, GNF will pay FMC the total amount of US$100,209.48 Based on the foregoing, it is your opinion that since the length of service of FMC in the Philippines was only for a period of two (2) months, then FMC will not be deemed to have a permanent establishment in the Philippines and accordingly, payments to be made by GNF to FMC are not subject to Philippine income tax. In reply thereto, please be informed that paragraph (1), 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), (2) and (3) of Article 5 of the said treaty provide, viz: Article 5 (1) For the purpose 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. cCAIaD (2) The term permanent establishment includes especially: (a) a store or other sales outlet; (b) a branch; (c) an office; (d) a factory (e) a workshop; (f) a warehouse; (g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources, (3) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. "xxx xxx xxx" Under the aforementioned provisions, it is clear that if an enterprise of Japan does not carry on business in the Philippines through a permanent establishment situated therein, the profits of an enterprise of Japan shall not be subject to Philippines income tax. In view of the foregoing, your opinion is hereby confirmed. Considering that as represented, FMC does not have a permanent establishment in the Philippines, the service fees to be paid and remitted by GNF to FMC are not subject to income tax in the Philippines ( BIR Ruling No. 068-88 dated March 3, 1988 ). 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 without force and effect insofar as the parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group