ITAD Ruling No. 139-03

September 18, 2003 ITAD RULING NO. 139-03 Article 14, Philippines-Japan tax treaty BIR Ruling No. ITAD 18-99 Asahi Glass Philippines, Inc. Plant and General Offices M.H. del Pilar Street, Barrio Pinagbuhatan Pasig City Attention: Ms. Cecilia S. Magalona Gentlemen : This refers to your letter dated July 28, 2003 requesting confirmation that the remuneration paid by Asahi Glass Philippines, Inc . to Mr. Kenyoshi Kawano is exempt from income tax pursuant to Article 14 of the Philippines-Japan tax treaty. It is represented that Asahi Glass Philippines, Inc. (Asahi) is a company organized and existing under the laws of the Philippines with principal office and factory at M.H. del Pilar Street, Barrio Pinagbuhatan, Pasig City, Philippines, which is primarily engaged in the manufacture and sale of glass products; that Mr. Kenyoshi Kawano is a national and resident of Japan with principal residence at 725-138 Hazaki-machi, Kashima-gun Ibaraki, Japan, and temporarily domiciled at The Richmonde Hotel at No. 21 San Miguel Avenue, Ortigas Center, Pasig City; that on August 3, 2003, Asahi and Mr. Kawano entered into a Technical Advisory Service Agreement where Mr. Kawano , whom Asahi appointed as supervisor from August 3 to October 20, 2003, shall furnish Asahi technical assistance on the manufacture of glass products; that, specifically, Mr. Kawano shall monitor and look over the operation and maintenance of Asahi's machinery and equipment and shall give Asahi recommendations on improving the use, operation and maintenance of such machinery and equipment; and that in consideration for the technical assistance furnished, Asahi shall pay Mr. Kawano a monthly salary of 400,000 Japanese yen, and shall provide Mr. Asahi the following fringe benefits: (a) accommodation and the necessary utilities, equipment, and facilities for it, (b) local transportation, (c) expenses for foreign travel, and (d) personal expense account. Based on the foregoing, please be informed that Article 14 (Independent Personal Services) of the Philippines-Japan tax treaty provides: "Article 14 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities or he is present in that other Contracting State for a period or periods exceeding in the aggregate 120 days in the calendar year concerned. If he has such a fixed base or remains in that other Contracting State for the aforesaid period or periods, the income may be taxed in that other Contracting State but only so much of it as is attributable to that fixed base or is derived in that other Contracting State during the aforesaid period or periods. 2. The term 'professional services' includes, especially, independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants." The term "professional services" generally includes all personal services performed by an individual for his own account, whether as a sole proprietor or as a partner, where the individual receives the income and bears the risk of loss arising from the services. 1 Pursuant to Article 14, remuneration derived by Mr. Kawano , being a resident of Japan, from furnishing technical assistance to Asahi may be taxed in the Philippines if (1) he has a fixed base in the Philippines regularly available to him for the purpose of performing his activities, or (2) he is present in the Philippines for a period or periods exceeding in the aggregate 120 days in the calendar year 2003. ADECcI As regards the first criterion, Mr. Kawano may be considered to have a fixed base for the purpose of performing his activities if he permanently set up in the Philippines an office or a workplace that will be regularly available to him to furnish technical assistance to persons resident in this country. 2 As regards the second criterion, the days counted for this purpose are all days of physical presence of Mr. Kawano in the Philippines which include: a partial day, the day of arrival, the day of departure, and all other days spent in the Philippines including Saturdays and Sundays, national holidays, holidays before, during, and after the activity, periods of training, strikes, lock-out and delays, days of sickness, and days attributable to death or sickness in the family. 3 In the instant case, the office or workplace temporarily utilized by Mr. Kawano at the premises of Asahi cannot be considered a fixed base for the purpose as above since such office or workplace is not permanently set up by Mr. Kawano in the Philippines for the purpose of furnishing technical assistance to persons resident in the country. Further, the days of physical presence of Mr. Kawano in the Philippines, from August 3 to October 20 in the calendar year 2003, consist only of 79 days and do not exceed the threshold period of 120 days. Thus, in the light of the fact that Mr. Kawano does not have a fixed base in the Philippines and his days of physical presence in the country do not exceed 120 days, remuneration derived by him from furnishing technical assistance to Asahi are exempt from Philippine income tax pursuant to Article 14 of the Philippines-Japan tax treaty (BIR Ruling No. ITAD 18-1999 dated August 16, 1999) . Remuneration exempt from tax in this case includes (1) Mr. Kawano's monthly salary of 400,000 Japanese yen, and (2) fringe benefits 4 (accommodation and the necessary utilities, equipment, and facilities for it; local transportation; expenses for foreign travel; and personal expense account) provided to him by Asahi . Finally, Mr. Kawano's monthly salaries, being payments for the supply of technical advice, assistance or services rendered in connection with technical management , are subject to 10 percent value-added tax (VAT) under Section 108(A)(6) of the National Internal Revenue Code. As regards the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations 4-2000, Section 3 of Revenue Regulations 8-02, and Section 7 of Revenue Regulations 14-2002 altogether state that Asahi , the resident withholding agent and payor in control of the salaries, shall be responsible for the withholding of the 10 percent VAT on such salaries before paying them to Mr. Kawano . In remitting the VAT withheld to the Bureau, Asahi shall use BIR Form 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Asahi may use as documentary substantiation for its claim of input VAT the duly filed BIR Form 1600 and the proof of payment accompanying it. If not a VAT-registered taxpayer, Asahi may include as part of the cost of the technical assistance furnished to it by Mr. Kawano , the VAT consequently shifted or passed on to it by Mr. Kawano and may treat such VAT either as expense or asset , whichever is applicable. In addition, upon Mr. Kawano's request, Asahi is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form 2306), the first, second and third copies to be kept by Asahi and the fourth copy by Mr. Kawano . 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. Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service Footnotes 1. Income Tax Treaties of the United States, Peter H. Blessing, Copyright 1996, Chapter 13, Page 21. 2. Pages 3134, Ibid. 3. Model Tax Convention on Income and on Capital, OECD Committee on Fiscal Affairs, Copyright June 1996, Pages 171172. 4. Ibid .