ITAD Ruling No. 209-02

November 27, 2002 ITAD RULING NO. 209-02 RP-Japan, Art. 5 & 7 BIR Ruling No. DA-ITAD-91-01 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City, Philippines Attention: Mr. George D. Lavadia Principal, Tax Services Department Gentlemen : This refers to your letter dated October 3, 2001 requesting confirmation of your opinion that the income derived by Kasei Industry Co., Ltd. (Kasei) as a consultant of K&K Moldings, Inc. (K&K), is exempt from withholding taxes pursuant to the RP-Japan tax treaty. It is represented that Kasei is a corporation organized and existing under the laws of Japan with principal office address at 181-1 Kamigou, Ebina-shi Kanagawa Ken, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification dated October 18, 1999 issued by the Securities and Exchange Commission; that K&K is a corporation organized and existing under the laws of the Philippines with principal office address at Lima Technology Center, Special Economic Zone, Malvar Batangas, and is primarily engaged in the manufacture and assembly of plastic injection molding parts; that on April 15, 1998, Kasei and K&K entered into an Engineering Services Agreement whereby the former shall undertake to supervise the installation trail operation, performance test, and operation of the Equipment imported from it by K&K, and shall furnish qualified personnel to undertake the contracted services who shall stay in the Philippines for a period not exceeding 183 days; that in consideration of such services, Kasei shall be entitled to receive service fees from K&K in the total amount of US$495,000.00. 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 carried 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 the 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." "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 consultancy 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. . . . "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 of 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 is a resident of Japan may 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. Considering that, as represented, the services of Kasei would render services in the Philippines for a period not exceeding 183 days, Kasei is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the service income derived by Kasei 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. DA-ITAD-91-01 dated October 18, 2001) 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 without force and effect insofar the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service