November 4, 2014

ITAD BIR RULING NO. 311-14

Articles 5 and 7, Philippines-Japan

Tax Treaty; Sections 28 (B) (1), 32
(B) (5), and 108 of the Tax Code, as
amended

SGV & Co.

6760 Ayala Avenue
Makati City

Attention: Carolina A. Racelis

Gentlemen :

This refers to your tax treaty relief application (TTRA) filed on August 9,
2012 on behalf of Sakamoto Yakuhin Kogyo Co., Ltd. ("Sakamoto JA") requesting
for confirmation that the service fees to be paid by Sakamoto Orient Chemicals
Corporation ("Sakamoto PH") to Sakamoto JA are exempt from income tax
pursuant to the Convention between the Republic of the Philippines and Japan for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income as amended by a Protocol 1(1) ("Philippines-Japan tax
treaty").

It is represented that Sakamoto JA is a nonresident foreign corporation

organized and existing under the laws of Japan and a resident thereof based on the
Residence Certificate issued by the tax authority of Japan on December 20, 2011
with office address at 2-6 Awaji-machi 1-chome, Chuo-ku, Osaka, Japan; that
Sakamoto JA is not registered either as a corporation or partnership in the
Philippines based on the Certification issued by the Securities and Exchange
Commission dated May 30, 2012; that on the other hand, Sakamoto PH is a
domestic corporation with principal office address at 104 HV dela Costa Street,
Makati City; and that Sakamoto PH is registered with the Philippine Economic
Zone Authority (PEZA) under Certificate of Registration No. 99-012 based on the
Certificate issued by PEZA on March 11, 1999.

It is further represented that on February 28, 2012, Sakamoto JA and

Sakamoto PH entered into a Service Agreement ("Agreement") whereby Sakamoto
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 JA shall dispatch qualified engineers to Sakamoto PH to supervise the operation of
Sakamoto PH's Refinery Plant in Bauan, Batangas, including, but not limited to,
conduct system audit, test-runs of newly installed facilities, repair and/or
maintenance of existing facilities that require an expert's analysis and remedy; that
for and in consideration of the services rendered by the dispatched engineer/s,
Sakamoto PH shall pay Sakamoto JA a service fee of JPY50,000.00 per day per
dispatched engineer; that Sakamoto PH shall defray on its own account, the
following expenses that may be incurred by the dispatched engineers while within
the Philippines and while on assignment: (a) Cost for board and lodging, excluding
meal expenses, (b) Insurance premiums if applicable but excluding cost of
domestic communication, (c) Cost of local transportation; that the first payment by
Sakamoto PH to Sakamoto JA under the Agreement was made on January 10, 2013
based on the Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi
UFJ on even date; and that based on the Certification issued by the General
Manager of Sakamoto PH dated July 16, 2012, the following personnel of
Sakamoto JA have been engaged to perform contractor services under the
Agreement for the following period: HESCcA

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 that the total number of days spent in the Philippines based on the foregoing chart
is 56 days; and that, the first payment was made on January 10, 2013 based on the
Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ on January
30, 2013.

It is finally represented that the fees subject of this request for ruling are not
under investigation, on-going audit, administrative protest, claims for refund or
issuance of a tax credit certificate, collection proceedings, or judicial appeal based
on the sworn statement issued by the Corporate Secretary of Sakamoto PH on May
17, 2012.

In reply, please be informed that Section 28 (B) (1) of the National Internal
Revenue Code (Tax Code) of 1997, as amended, provides:

"Section 28. Rates of Income Tax on Foreign Corporations. —

(B) Tax on Nonresident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code, a

foreign corporation not engaged in trade or business in the Philippines shall

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 pay a tax equal to thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains, except capital
gains subject to tax under subparagraph 5(c) and (d): *(2) Provided, That
effective January 1, 2009, the rate of income tax shall be thirty percent
(30%).

xxx xxx xxx"

However, Section 32 (B) (5) of the Tax Code of 1997, as amended,

provides:

"Section 32. Gross Income. —

xxx xxx xxx

(B) Exclusions from Gross Income. — The following items shall

not be included in gross income and shall be exempt from taxation under
this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. — Income of any kind, to the

extent required by any treaty obligation binding upon the Government of the
Philippines. AaEcDS

xxx xxx xxx"

Thus, you invoke Article 7 of the Philippines-Japan tax treaty which

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."

Based on the aforecited provisions, 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

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 much of them that is attributable to that permanent establishment. Applying this to
the instant case, the payments received by Sakamoto JA from Sakamoto PH for
services rendered in the Philippines shall be taxable in the Philippines only if it has
a permanent establishment in the Philippines in connection with the activities
giving rise to such income.

In relation thereto, Article 5 of the same tax treaty defines a permanent

establishment, as follows:

"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. 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. . . ." (underscoring
supplied) TAHIED

Considering that the services is performed by Sakamoto JA, through its

engineers dispatched to the Philippines, is for a period not more than 180 days,
then Sakamoto JA is not deemed to have a permanent establishment in the
Philippines to which its business profits may be attributed to. Such being the case,
the payments by Sakamoto PH to Sakamoto JA are not subject to Philippine
income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Japan
tax treaty.

Finally, the fees paid for the services of Sakamoto JA through its engineers
which are to be rendered in the Philippines are generally subject to VAT pursuant
to Section 108 of the National Internal Revenue Code of 1997 (Tax Code of 1997),
as amended which provides:

"SEC. 108. Value-added Tax on Sale of Services and Use or Lease

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 of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to twelve percent (12%)

xxx xxx xxx

. . . The phrase 'sale or exchange of services' means the performance

of all kinds of services in the Philippines for others for a fee, remuneration
or consideration, . . ."

However, in Commissioner of Internal Revenue vs. Seagate Technology

(Philippines) (G.R. No. 153866 dated February 11, 2005), the Supreme Court
ruled that:

"Applying the special laws we have earlier discussed, respondent as

an entity is exempt from internal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from
the very nature of the VAT as a tax on consumption, for which the direct
liability is imposed on one person but the indirect burden is passed on to
another. Respondent, as an exempt entity, can neither be directly charged for
the VAT on its sales nor indirectly made to bear, as added cost to such sales,
the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.

Moreover, the exemption is both express and pervasive for the

following reasons:

First, RA 7916 states that 'no taxes, local and national, shall be
imposed on business establishments operating within the ecozone.' Since
this law does not exclude the VAT from the prohibition, it is deemed
included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general rule. ITcCaS

Moreover, even though the VAT is not imposed on the entity but on
the transaction, it may still be passed on and, therefore, indirectly imposed
on the same entity — a patent circumvention of the law. That no VAT shall
be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per
obliquum. When anything is prohibited directly, it is also prohibited
indirectly."

Further, the Supreme Court in the case of Toshiba Information Equipment

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 (Phils.), Inc. vs. Commissioner of Internal Revenue, G.R. No. 157594 dated March
9, 2010 ruled:

"It is now a settled rule that based on the Cross Border Doctrine,
PEZA-registered enterprises, such as Toshiba, are VAT-exempt and no VAT
can be passed on to them. The Court explained in the Toshiba case that —

PEZA-registered enterprise, which would necessarily be located

within ECOZONES, are VAT-exempt entities, not because of Section 24 of
Rep. Act No. 7916, as amended, which imposes the five percent (5%)
preferential tax rate on gross income of PEZA-registered enterprises, in lieu
of all taxes; but, rather, because of Section 8 of the same statute which
establishes the fiction that ECOZONES are foreign territory.

xxx xxx xxx

The Philippine VAT system adheres to the Cross Border Doctrine,

according to which, no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the taxing
authority. Hence, actual export of goods and services from the Philippines to
a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%)
VAT."

Accordingly, since Sakamoto PH is an enterprise registered with PEZA

under Republic Act No. 7916, 2(3) as amended, based on the relevant Certification
from PEZA, it cannot be directly charged for VAT on its sales of goods or services
nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its
purchase of goods and services when such purchase is subject to VAT. Therefore,
since Sakamoto JA is a nonresident supplier who is not registered in the
Philippines for VAT purposes, the payment made to it by Sakamoto PH under the
Agreement are, instead of being subjected to VAT at zero percent, exempt from
VAT. (BIR Ruling No. ITAD 019-14 dated February 19, 2014)

This ruling is issued on the basis of the facts as represented. However, if

upon investigation it shall be disclosed that the actual facts are different, then this
ruling shall be without force and effect insofar as the herein parties are concerned.
DcITaC

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner

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 Bureau of Internal Revenue
Footnotes
1. Protocol Amending the Convention between the Republic of the Philippines and
Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income effective January 1, 2009.
2. Entitled An Act Providing for the Legal Framework and Mechanism for the
Creation, Operation, Administration, and Coordination of Special Economic
Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone
Authority (PEZA), and for Other Purposes.

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 Endnotes

1 (Popup - Popup)
1. Protocol Amending the Convention between the Republic of the Philippines and
Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income effective January 1, 2009.

2 (Popup - Popup)
* Note from the Publisher: The phrase "and (d) above" no longer appears in RA
9337, the law amending this provision.
3 (Popup - Popup)
2. Entitled An Act Providing for the Legal Framework and Mechanism for the
Creation, Operation, Administration, and Coordination of Special Economic
Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone
Authority (PEZA), and for Other Purposes.

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