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
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 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

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 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
Bureau of Internal Revenue

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