ITAD Ruling No. 148-03

October 2, 2003 ITAD RULING NO. 148-03 Article 7 (1) & 5 (6) RP-Japan Tax Treaty BIR Ruling No. DA-ITAD 91-01 Joaquin Cunanan & Co. 29th Flr. Philamlife Tower 8767 Paseo de Roxas 1226 Makati City, Philippines Attention: George J. Lavadia Principal, Tax Service Gentlemen : This refers to your letter dated March 3, 2003, on behalf of your client, Tonets Corporation (Tonets), requesting confirmation that the income it receives from Modair Co., Ltd., Inc. (Modair) for technical support services rendered to the latter are not subject to Philippine income/withholding taxes pursuant to Article 7(1) of the RP-Japan tax treaty. It is represented that Modair is a corporation duly organized and existing under the Philippine laws with principal office at 6/F Emmanuel House, 115 Aguirre St., Legaspi Village, Makati City, Philippines; that Modair is engaged in the business of rendering complete engineering packages services in planning, design, construction and installation technical and engineering services; that Tonets is a foreign corporation duly organized and existing under the laws of Japan; that while the Tonets is registered and duly licensed to do business in the Philippines by the Securities and Exchange Commission (SEC), its branch office in the Philippines has long ceased operations since December 31, 1998; that this is following the completion of the fire protection, fire and sanitary systems works for the Ninoy Aquino International Airport Terminal 2 Development Project (which was the only purpose for the establishment of the branch office), as evidenced by the Affidavit of Cessation of Business Operations attached to the General Information Sheet submitted by Tonets to the SEC on July 29, 2002; that Tonets is now formally closing its non-operating Philippines branch; that on January 1, 2002, Tonets executed a Technical Support Services Agreement whereby Tonets shall provide to Modair technical consultancy services on the planning, design, construction, installation and implementation of air conditioning system, ventilation system, water supply/drain and sanitary system, fire protection system, clean room system engineering, energy saving engineering, dust removal/collecting equipment, electrical power plant, electrical substations and controls and industrial electrical supply system; that these services shall be rendered by Tonets entirely in Japan with no personnel being assigned in the Philippines. Further, even if Modair should require Tonets to render its service in the Philippines, in no case shall the services exceed six (6) months. In reply, based on the representation that the services to be rendered by Modair shall be performed entirely in Japan, then the fees to be paid by Tonets to Modair are considered income derived from sources outside the Philippines, which shall be governed by Section 28(B)(1), in relation to Section 42(A)(3), both of the 1997 Tax Code, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporation. "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation. "(1) In General Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) "xxx xxx xxx. "SEC. 42. Income from Sources Within the Philippines. "(A) Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: "xxx xxx xxx. "(3) Services Compensation for labor or personal services performed in the Philippines; "xxx xxx xxx" It is clear from the aforequoted provisions that a non-resident foreign corporation is taxable only on income derived from sources within the Philippines. The source of the income derived from services is the place where the services are rendered so that if the non-resident foreign corporation furnishes and performs services in the Philippines, the compensation therefor are taxable in the Philippines. In the instant case, based on your representation that the services to be rendered by Modair to Tonets shall be performed entirely in Japan, the consultancy fees to be remitted by Tonets are considered income derived from sources outside the Philippines and are, therefore, not subject to Philippine income tax and consequently to the withholding tax. (DA-ITAD 86-02 dated May 9, 2002) It is noteworthy that, since the income is derived entirely from sources abroad, then the RP-Japan tax treaty will find no application as the transaction does not result in a case of double taxation for which a tax treaty relief is sought. (DA-ITAD 152-02 dated August 29, 2002) . This ruling is issued on the basis of the 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 herein parties are concerned. HSDaTC Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service