ITAD Ruling No. 184-02

October 17, 2002 ITAD RULING NO. 184-02 Art. 5 & 7 of RP-Japan tax treaty ITAD Ruling No. 91-01 P. IMES Cavite Economic Zone, Rosario, Cavite Attention: Florante T. Garcia Asst. Senior Manager-Finance Gentlemen : This refers to your application for relief from double taxation requesting exemption from payment of withholding taxes on the consultation income of IMES Co., Ltd. (IMES) to be paid by P. IMES Corporation (P. IMES Corp.), pursuant to the RP-Japan tax treaty. It is represented that P. IMES Corp is a PEZA-registered corporation organized and existing under the laws of the Philippines; that IMES is a corporation duly organized and existing under the laws of Japan; that IMES is not registered as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated February 19, 2002; that the nature of the business of P. IMES Corp., which is manufacturing of computer peripherals, needs constant consultation with regard to management, engineering and manufacturing expertise to be able to cope with the fast changing world of information technology; that P. IMES Corp. entered into a Management and Engineering Consulting Agreement with IMES; that under the said agreement, IMES shall provide P. IMES Corp. with consultancy services, which include the following: (1) to recommend and advise on the improvement of management systems and organization structures, (2) to recommend and advise and assists in the development of the planning system and its measurement for management, (3) to recommend and advise in the development of financial system, (4) to advise and assist in the development of the ingenious production control system, (5) to advise with the on-going management, (6) to make recommendations regarding the development, preparation and conduct of manufacturing planning and operation system, (7) to review and comment on the engineering plans for adoption, (8) to advise on the preparation of the quality control system for the materials and equipment used in the manufacturing and operation of the business, and (9) to procure materials and equipment suitable for the operation of the business which are not available in the Philippines, from time to time as requested by P. IMES Corp.; that in consideration of the said services, P. IMES Corp. shall pay the amount of 8,240,880 which shall be based on the staff level of IMES and the estimated time spent by the staff of the latter in providing the services; that the consultancy services are done at the consultant's office in Japan. In reply, please be informed that 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) and (6) of Article 5 of the said treaty provide, viz : STcHDC "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. "xxx xxx xxx" "6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consulting services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State. "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan carries on business in the Philippines through a permanent establishment situated therein, the profits or the same shall be subject to Philippine income tax, but only so much of them as is attributable to that permanent establishment. For this purpose, a corporation which a resident of Japan may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of consultancy or supervisory services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than six months in any taxable year except when the furnishing of such services is effected under an agreement between the Governments of Japan and Philippines regarding economic or technical cooperation, in which case, the corporation shall not be deemed to have a permanent establishment in the Philippines. Considering that the furnishing of services is performed by IMES in its office in Japan and none of its personnel will arrive or stay in the Philippines, IMES is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the consultancy income derived by IMES from services rendered is not subject to Philippine tax pursuant to Article 7(1) in relation to Article 5(1) and (6) of the RP-Japan tax treaty. (BIR Ruling No. ITAD-91-01 dated October 18, 2001) This ruling is 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 herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service