ITAD Ruling No. 158-00

October 23, 2000 ITAD RULING NO. 158-00 RP-Japan Protocol par. 5 138-99 Fernandez, Santos & Lopez 8th Floor, Philbank Building 6778 Ayala Avenue Makati City 1226 Attention: Mr . Eliseo A . Fernandez Gentlemen : This refers to your letter dated June 29, 1998 requesting for the application of the preferential tax rate of 10% on profits remitted by NEC Manila Project Office (NEC MPO) to NEC Corporation (NEC Corp.), pursuant to the provisions of the RP-Japan Tax Treaty. It is represented that NEC Corp. is a Japanese corporation with address at 7-1 Shiba 5-Chome, Minato-ku, Tokyo, Japan; that the Philippine Branch was registered and licensed by the Securities and Exchange Commission (SEC) dated April 7, 1995, as the NEC MPO; that NEC MPO shall act as management consultant in implementing the local works in accordance with the agreement for rehabilitation and expansion of the public switch telephone network (PSTN) for the province of Pangasinan and environs and expansion of the transmission backbone network; that the license was amended on July 26, 1996 to reflect the change in purpose to act as management consultant in implementing the local works contracted for the telecommunications industry in the Republic of the Philippines; that as of the end of its fiscal year ended March 31, 1998 the Philippine Branch has accumulated earnings of P71,588,683.00 to be remitted to its head office in Japan. TAIcaD In reply, please be informed that paragraph 5 of the Protocol which forms an integral part of the RP-Japan Tax Treaty provides as follows: "5. Nothing in the Convention shall be construed as preventing the Republic of the Philippines from imposing in the earnings (other than those derived from the operation of ships or aircraft in international traffic) of a company being a resident of Japan attributable to a permanent establishment which it has in the Republic of the Philippines, a tax in addition to the tax which would be chargeable on the income of the company being a resident of the Republic of the Philippines, provided that any additional tax so imposed shall not exceed 10% percent of the amount of the part of such earnings which is remitted abroad. For the purposes of this paragraph, the term "earnings" means the amount remaining after deducting from the profits attributable to permanent establishment in the Republic of the Philippines in a year and years preceding that year all taxes other than the additional tax referred to in this paragraph, imposed on such profits by the Republic of the Philippines." Under Article 5, paragraph (2) of the RP-Japan Tax Treaty, the term "permanent establishment" includes a branch. Accordingly, under the above-cited provision of the tax treaty, the profit to be remitted by NEC MPO to NEC Corp. in Japan is subject to a tax of 10% of the profit remitted abroad. The 15% rate prescribed by Section 28(A)(5) of the Tax Code of 1997 imposed on profits remitted by a branch to its head office abroad does not, therefore, apply in this particular instance. (BIR Ruling No. 138-89 dated July 11, 1989) 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 considered null and void. DHcTaE Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group