DOF-DTI Joint Memorandum Circular No. 1-2016 Clarifying Certain Provisions of DOF-DTI Joint Administrative Order No. 1-2016, Entitled "Rules and Regulations to Implement Republic Act No. 10708, Otherwise Known as the "Tax Incentives Management and Transparency Act (TIMTA)"

August 20, 2002 ITAD RULING NO. 142-02 RP-Japan, Article 5 & 7 BIR Ruling No. ITAD 101-00 Shindengen Philippines Corporation Lot No. 20-22 SEPZ, Carmelray Industrial Park Canlubang, Calamba, Laguna Attention: Mr. Gregorio L. Viado Finance Manager Gentlemen : This refers to your application for relief from double taxation dated August 28, 2001, requesting confirmation of your opinion that the consultancy fees to be paid by Shindengen Philippines Corporation (SDP) to NTT Facilities Inc. (NTT-F) are not subject to Philippine income tax, pursuant to the provisions of the RP-Japan tax treaty. It is represented that NTT-F is a corporation organized and existing under the laws of Japan with business address at No. 4-1, 3-Chome, Shibaura, Minato-Ku, Tokyo; 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 June 27, 2001 issued by the Securities and Exchange Commission; that SDP is a corporation organized and existing under the laws of the Philippines with address at Lots No. 20-22, SPEZ, Carmelray Industrial Park, Canlubang, Laguna; that on December 26, 2000, SDP entered into an Agreement for Work Assignment with NTT-F to render consultation on design and supervision for the construction of a factory building; that the assigned work to NTT-F started on September 18, 2000 and was completed on April 30, 2001; and that in consideration for the said consultancy services, SDP shall pay NTT-F the amount of J17,800,000. In reply, please be informed that Article 7 of the RP-Japan tax treaty provides: "Article 7 "(1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless that 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 same 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. TCcDaE "(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 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." Based on the foregoing provisions, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. A Japanese corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services of that corporation in the Philippines through its employees or other personnel in relation to a particular project or any project connected therewith is for a period or periods aggregating more than 6 months within any taxable year. Considering that the employees of NTT-F performed their services in the Philippines for less than six months, then it cannot be considered to have a permanent establishment in the Philippines. Hence, the consultancy fees paid by SDP to NTT-F under their Agreement for Work Assignment are not subject to Philippine income tax. ( BIR Ruling No. ITAD 101-00 ) However, the fees paid by SDP for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, SDP being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of NTT-F by filing a separate VAT return for and on behalf of NTT-F 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 SDP if it is a VAT-registered taxpayer. In case SDP 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, SDP is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of NTT-F, the first three copies thereof to be given to NTT-F and the fourth copy to be retained by SDP as its file copy. [ Sections 4 & 6, Revenue Regulation No. 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 without force and effect insofar as the parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service