List of Capital Equipment for Ecozone Tourist Facilities to Be Eligible for Tax and Duty-Free Importation Incentive

January 10, 2003 ITAD RULING NO. 002-03 RP-Japan tax treaty, Art. 7 & 5 BIR Ruling No. DA-ITAD-27-00 Sycip Gorres & Velayo, Co . 6760 Ayala Avenue 1226 Makati City Attention: E . C . Alcantara Tax Division Gentlemen : This refers to your application for relief from double taxation dated June 18, 2002 and October 9, 2002, on behalf of your client, Mitsui Kinzoku Engineering Kabushiki Kaisha (MESCO) Inc., requesting confirmation of your opinion that the service income which MESCO shall derive from its contracts with Philippine Associated Smelting and Refining Corporation (PASAR) is not subject to the Philippine income tax and consequently to withholding tax, pursuant to the RP-Japan tax treaty. It is represented that MESCO is a corporation duly organized and existing under the laws of Japan with principal office address at 2-10-5 Ryogoku, Sumida-ku, Tokyo, 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 issued by the Securities and Exchange Commission dated August 7, 2002; that PASAR is a corporation duly organized and existing under Philippine laws with business address at 6th and 7th Floors, The Linden Suites, 37 San Miguel Avenue, Ortigas Center, 1600 Pasig City; that JGC Philippines, Inc. (JGC) is a corporation duly organized and existing under the laws of the Philippines with principal address at 2109 Prime St., Madrigal Business Park, Ayala Alabang, Muntinlupa City; that it is engaged in the business of construction and is duly licensed by the Philippine Contractors Accreditation Board; that on July 8, 2002, MESCO and PASAR executed a contract for the Fabrication and Installation for Replacement of the Flash Smelting Furnace with Electrodes (FSFE) Uptake (UT-C41) whereby MESCO undertakes the fabrication and installation, testing and commissioning the supply of labor, supervision and safety paraphernalia for the replacement of the FSFE Uptake, UT-C41 during the 2002 Plant Turnaround; that on July 10, 2002, the same parties executed another contract for the Fabrication and Installation of Fugitive Gas Collection System at the FSFE, Converter Furnaces (CF), Sandbed House and Dore Plant whereby MESCO undertakes the fabrication and installation for the fugitive gas collection system at the FSFE CF, Sandbed House and Dore Plant, at the PASAR plantsite in Isabel, Leyte, Philippines; and that MESCO will not perform any services in the Philippines as it will subcontract the execution and performance of the entire contracts to JGC in accordance with the subcontracting agreements dated July 10, 2002. 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 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. EcTaSC 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. "(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 MESCO subcontracted to JGC the fabrication and installation for the replacement of FSFE Uptake (UT-C41) and for the fugitive gas collection system at the FSFE, CF, Sandbed House and Dore plant, such that the actual services are performed in the Philippines by JGC and not by MESCO nor by any of its personnel, MESCO is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, this Office is of the opinion and so holds that the payments by PASAR to MESCO are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the RP-Japan tax treaty. CDcaSA 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 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