ITAD Ruling No. 131-02

August 5, 2002 ITAD RULING NO. 131-02 RP-Japan Article 5 & Article 7 BIR Ruling DA No. 577-99 Filplas Company, Inc. Rm. 411 Solmac Building #34 Banawe corner Dapitan Street Quezon City Attention: Mr. Enrique John-Tan President Gentlemen : This refers to your letter dated November 17, 2000 requesting a ruling on withholding tax of bank guarantee fee payable to foreign stockholder is not subject to Philippine income tax pursuant to the RP-Japan tax treaty. It is represented that Itochu Corp. (Itochu-Japan) is a non-resident foreign corporation, organized and existing under the laws of Japan with principal office at 5-1 Kita-Aoyama 2-Chome, Minato-Ku, Tokyo Japan; that it was authorized by the Securities and Exchange Commission on May 22, 1997 to establish a branch office in the Philippines; that this Philippine branch has no involvement with regard to the issuance of bank guaranty to Filplas Company (Filplas); that Filplas is a corporation organized and existing under the laws of the Philippines with business address at Rm. 411 Solmac Bldg., #34 Banawe corner Dapitan Street, Quezon City; that East Indies Mercantile Co., Inc. (EIMC) is a corporation organized and existing under the laws of the Philippines with business address at Rm. 521 BPI Bldg., Plaza Cervantes, Binondo, Manila; that on May 5, 1998, Itochu-Japan and EIMC entered into a Joint Venture Agreement for the establishment and operation of Filplas to do business within the Philippines; that where funds are necessary for the activities and operations of Filplas in excess of its subscribed and paid-in capital and the revenue from Filplas' activities and operations, Filplas shall make a loan from banks and other financing institution; that Itochu-Japan shall guarantee such loan; that on December 7, 1997 as per Memorandum of Agreement, Itochu-Japan and EIMC mutually agreed that the funds guaranteed by Itochu-Japan shall not be in excess, unless otherwise agreed to in writing by Itochu-Japan and EIMC, of the amounts in the following schedule: Year Maximum amount per year First year Up to the equivalent of US$5,000,000 Second year and onwards Up to the equivalent of US$7,000,000 (if sales amount of Filplas will increase) that the guarantee fee shall be payable to Itochu-Japan at the rate of the difference between the interest rate for Peso loan to Filplas banks suggested by EIMC and the bank suggested by Itochu-Japan for the total amount of such funds; that the loan guaranteed by Itochu-Japan from the Fuji Bank, Limited Manila Branch, Citibank Tokyo Branch and the Bank of the Philippine Islands Makati Branch amounted to USD1,000,000.00, USD1,000,000.00 and PHP120,000,000.00 as supported by a Certificate of Credit Facilities. 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 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 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" 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 which includes a branch. While Itochu-Japan has a branch in the Philippines, the bank guaranty fee to be paid by Filplas to Itochu-Japan are not attributable to the Philippine branch since the latter has no participation/involvement, whether directly or indirectly with regard to the issuance of bank guaranty to Filplas. ( Marubeni Corporation vs. Commissioner of Internal Revenue , 177 SCRA 500 September 14, 1989) Thus, the bank guarantee fee payments to Itochu-Japan by Filplas are considered business profits not subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5 of the RP-Japan tax treaty. (BIR Ruling DA No. 577-99) 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service