Attachment of PEZA Certificate of Incentives to Income Tax Returns (ITR) upon Filing Thereof

May 2, 2002 ITAD RULING NO. 078-02 RP-Japan, Art. 5 & 7 BIR Ruling No. ITAD-101-00 Joaquin Cunanan & Company 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Partner Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated November 5, 2001, on behalf of Muramoto Audio-Visual Philippines, Inc. (MAPLE), requesting confirmation of your opinion that the service fees to be paid by MAPLE to Muramoto Industry Co., Ltd. (MIC) under the Business Support Agreement are not subject to Philippine income tax pursuant to the RP-Japan tax treaty and the ten percent (10%) value-added tax (VAT). It is represented that MIC is a corporation organized and existing under the laws of Japan with principal office address at No. 1-24-3 Chome, Takatsukadai, Nishi-ku, Kobe City, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated November 29, 2001 issued by the Securities and Exchange Commission; that MAPLE is a corporation organized and existing under the laws of the Philippines with principal office address at Mactan Export Processing Zone, Lapu-Lapu City, Cebu; that it is primarily engaged in the manufacture and assembly of car stereos, video tape recorders and riveted audio-visual equipment, components and spare parts of such products; that on November 7, 2001, MIC and MAPLE entered into a Business Support Services Agreement wherein the former will provide business support services so that the latter may expand its capacity to meet increased market demand and sales target; that this agreement shall be effective from the date of the agreement and shall continue in force for a period of five (5) years and shall be renewable for a period of three (3) years within sixty (60) days from the end of the effectivity of the agreement; that the business support services shall refer to activities relative to the marketing of electronic products and such other related activities which are undertaken to promote product sales which may include, among others, information dissemination, soliciting orders and contracts negotiations; that the agreement shall neither involve the grant of a license for the use of MICs proprietary rights nor will it involve the transfer of technology; that the above services will be performed entirely in Japan, however, if required under the circumstances, employees will be assigned to the Philippines to gather informations about MAPLE's products, production capacity, possible market and such other factors that may affect marketability of the latter's products; that such assignment shall, in no case, continue for more than six (6) months in any calendar year; and that in consideration for the said services, MAPLE shall pay MIC, service fees equivalent to the cost incurred by the latter plus commission fee of JP2,000,000 and an amount equivalent to 1% of the gross sales of New Products for the first year of sale. In reply, please be informed that Article 7 of the RP-Japan tax treaty provides as follows: EcDTIH "Article 7 "Business Profits "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 : "Article 5 " Permanent Establishment "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. 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 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 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. Such being the case, considering that the furnishing of services is performed by MIC in its office in Japan and none of its personnel will arrive or stay in the Philippines for more than six months, MIC is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the service income derived by MIC from services rendered to MAPLE 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-101-00 dated August 7, 2000) However, the fees paid by MAPLE to MIC for services performed in the Philippines shall be subject to the 10 percent value added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, being the payor in control of the payment, MAPLE shall be responsible for the withholding of VAT on such fees on behalf of MIC by filing a separate VAT return for and on behalf of MIC using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from MAPLE if it is a VAT-registered taxpayer. In case MAPLE is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, MAPLE is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of MIC, the first three copies thereof to be given to MIC and the fourth copy to be retained by MAPLE is its file copy. (Sections 4 and 6, Revenue Regulations 4-2002) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service