2006 ITAD Rulings - Delegated Authority

December 20, 2006

DA ITAD BIR RULING NO. 171-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-122-04 Ideal World Corporation Tres Cruses Rd. Bgy. de Ocampo Trece Martires City Cavite Attention: Mr. Mario M. Guy Chief Finance Officer Gentlemen : This refers to your application for tax treaty relief dated September 30, 2005, requesting confirmation that the dividend payments of Ideal World Corporation (IWC) to Happy World Incorporated (HWI) are subject to the 10% preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that HWI is a nonresident foreign corporation organized and existing under the laws of Japan with Business Registration No. 0110-01-018814 and with office address at Jingumae Happy Bldg., 6-19-14 Jingumae Shibuya-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification dated September 14, 2005 issued by the Securities and Exchange Commission; that IWC is a domestic corporation organized and existing under the laws of the Philippines, with office address at Tres Cruses Rd., Bgy. de Ocampo, Trece Martires City, Cavite, Philippines. It is further represented that as of March 16, 2005 to September 16, 2005, HWI owned Twenty One Thousand Eight Hundred (21,800) shares amounting to Two Million One Hundred Eighty Thousand Pesos (PhP2,180,000.00), representing 36.3% of the total shares in IWC; that on July 30, 2005, the Board of Directors of IWC resolved and approved the declaration of cash dividends of Five Pesos (PhP5.00) per share amounting to Three Hundred Thousand Pesos (PhP300,000.00) from the corporation's unrestricted retained earnings, payable to stockholders of record as of June 30, 2005, distributable on September 16, 2005. SAaTHc

Dividends paid by a company which is a resident of a Contracting State to a resident of

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the other Contracting State may be taxed in that other Contracting State. (2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; (b)

25 per cent of the gross amount of the dividends in all other cases. xxx

xxx

(4) The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares of the issuing company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that as of March 16, 2005 and up to September 16, 2005. HWI held 36.3% of the outstanding capital stock of IWC, as shown in the Certification issued by the Corporate Secretary of IWC dated June 2, 2006, the dividends paid to HWI by IWC are subject to the 10% preferential tax rate, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-122-04 dated November 3, 2004) This ruling is issued based on 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. DTCAES

Very truly yours, Commissioner of Internal Revenue By:

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December 29, 2006

DA ITAD BIR RULING NO. 170-06 Article 13, Philippines-Netherlands Tax Treaty; BIR Ruling No. DA-ITAD 214-96; BIR Ruling No. DA 326-05; BIR Ruling No. 039-02 Castillo Laman Tan Pantaleon & San Jose Law Offices The Valero Tower, 122 Valero St. Salcedo Village, 1227 Makati City Attention: Atty. Maria Victoria D. Sarmiento Gentlemen : This refers to your application for relief from double taxation on behalf of your client, Eli Lilly Philippines, Inc. (ELP), requesting confirmation of your opinion that: a.

ELP's plan to decrease its authorized capital stock is a non-taxable event. ELP is not subject to any tax for receiving from Eli Lilly Nederland B.V. (ELN B.V.) the surrender shares as a result of the partial liquidation, and for canceling/retiring the reduced ELP shares, since it is merely performing the ministerial function of implementing the reduction in capital stock, thus, ELP is not taking title nor does it receive any value for the surrendered shares; and

Assuming without admitting that the surrender by ELN B.V. of its shares of stock would fall under what constitutes a sale of movable property, the said transaction will be solely taxable in Netherlands, in accordance with the Philippines-Netherlands tax treaty.

It is represented that ELN B.V. nonresident foreign corporation duly organized and existing under the laws of Netherlands with office address at Krijtwal 17-23, 3431, HA Nieuwegein, Netherlands; that it is not licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated October 24, 2005; that ELP is a corporation organized and existing under the laws of the Philippines with office address at 32/F Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas Center, Pasig City. It is further represented that as of August 16, 2005, ELN B.V. owns a 103,353,050 shares of stock of ELP with a par value of P10.00 as evidenced by Secretary's Certificate notarized February 1, 2006; that Copyright 2017

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on August 16, 2005, the Board of Directors of ELP unanimously approved the following resolution:

DHESca

decrease the Authorized Capital Stock (ACS) of ELP by P500,000,000.00;

to amend Article VII of the amended articles of incorporation of ELP to effectuate the decrease of ACS; and

to reduce the subscribed and paid-up capital stock of ELP from One Billion Thirty Three Million Five Hundred Thirty Thousand Five Hundred Pesos (P1,033,530,500.00) divided into One hundred Three Million Three Hundred Fifty Three Thousand Fifty Shares (103,353,050) shares with a par value of Ten Pesos (P10.00) per shares to Five Hundred Thirty Three Million Five Hundred Thirty Thousand Five Hundred Pesos (P533,330,500.00) divided into Fifty Three Million Three Hundred Fifty Three Thousand Fifty (53,353,050) shares with a par value of P10.00 per share, with the amount of Five Hundred Million Pesos (P500,000,000,00) to be returned in cash to ELN B.V. as a partial return of its capital investment; and

to authorize the Directors and proper officers of the ELP to expedite, file and submit such documents and to do all acts or things as may be necessary to fully implement the decrease of the ACS;

that said decrease in capital stock was duly approved by the SEC on November 11, 2005; that in consideration of the surrender of the said shares by ELN B.V. and the cancellation of shares corresponding to the decrease of the ELP's subscribed and paid up capital in the amount of Five hundred Million (P500,000,000.00) par value worth of shares, ELP will return to ELN B.V. the amount of P500,000,000.00, as partial return of its capital investment; that the decrease in the ACS corresponds to 50,000,000 shares of par value of P10.00 per share will be considered as retired. In reply, please be informed that ELP is not subject to any tax on the surrender of ELN B.V.'s shares in ELP due to the latter's reduction of its subscribed capital stock, since they are merely performing a ministerial function required under the law to carry out the reduction of the capital stock and therefore are not taking title to and do not represent value, since they are merely the documentary evidence of the reduced capital stock and will cease to exist after their cancellation. (BIR Ruling No. DA-214-96 dated June 26, 1996) However, any gain or losses that may be sustained by ELN B.V. upon the surrender of its shares, for the amount of value to be received in exchange, in the instant case, the net gain or income will be subjected to Philippine income taxes. (BIR Ruling Nos. 119-84, 322-87, 136-88, 171-92, and UN248-94). Therefore, gain is to be treated in the same manner as a gain from the sale or exchange of shares, consistent with the decision of the Supreme Court in Wise & Co., Inc., and as such is subject to the ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate], 27(A) or (E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on the status of the shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident or non-resident). (BIR Ruling No. 39-02 dated November 11, 2002) Since the shareholder is a resident of the Netherlands, Article 13 of the Philippines-Netherlands will apply. It provides: "Article 13 Copyright 2017

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GAINS FROM THE ALIENATION OF PROPERTY 1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article 6, may be taxed in the State in which such property is situated. DHEcCT

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State, or of movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing professional services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. 3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of the States from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State. 4. Gains from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3, shall be taxable only in the State where the alienator is a resident. 5. The provisions of paragraph 4 shall not affect the right of each of the States to levy according to its domestic law a tax on gains from the alienation of any property derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State at any time during the six years immediately preceding the alienation of the property."

It is clear from the aforequoted provisions of the Philippines-Netherlands tax treaty that capital gains from the alienation of any property, other than mentioned in paragraphs 1, 2 and 3 of Article 13 of the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the surrender of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of the Philippines-Netherlands tax treaty, any gain that may be derived by ELN B.V. from the surrender of its shares of stock to ELP, which is a resident of the Netherlands, shall not be subject to Philippine income tax under Section 28(A)(7)(c) of the Tax Code of 1997, but shall be subject to tax only in the Netherlands. In the instant case, the surrender of the certificates of stock by the stockholders of ELP is a necessary consequence of the decrease in the capital stock of the said corporation. Thus, in order to reflect the corrected number of shares therein, it is required that the stockholders of record should transfer and surrender their old certificates of stock to the corporation, without any monetary consideration, but only for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective transfer of beneficial ownership over the said shares. Such being the case, the replacement of stock certificates is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code, as amended. Accordingly, the issuance of new shares of stocks, to replace the previously issued and outstanding shares of stocks of ELP pursuant to a decrease in its capital stock is exempt from the payment of documentary stamp tax. (BIR Ruling DA-326-05 dated July 22, 2005) 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. HEDSIc

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(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 22, 2006

DA ITAD BIR RULING NO. 169-06 Article 11 of the Philippines-Singapore tax treaty; BIR Ruling No. 142-95 Asahi Glass Philippines, Inc. Barrio Pinagbuhatan Pasig City Attention: Ms. Sarah C. Soriano Senior Manager Finance and Accounting Gentlemen : This refers to your application for relief from double taxation, on behalf of AG Investment (Singapore) Pte., Ltd. (AG Investment), on the Loan Agreement (Agreement) between Asahi Glass Philippines Inc. (Asahi) and AG Investment, pursuant to the Philippines-Singapore tax treaty. It is represented that AG Investment is a nonresident foreign corporation duly organized and existing under the laws of Singapore with office address at 460 Alexandra Road, #30-02 PSA Building, Singapore; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 4, 2005; that Asahi is a corporation organized and existing under the laws of the Philippines with office address at M. H. Del Pilar Street, Barrio Pinagbuhatan, Pasig City and duly registered with the Board of Investments with Certificate of Registration No. EP 88-675 dated October 6, 1988. It is further represented that on November 24, 2005, Asahi and AG Investments entered into a Loan Agreement commencing from the date of the said Agreement and ending on November 30, 2010 wherein AG Investment shall make available to Asahi a long term loan of aggregate principal amount not exceeding at any time of Thirty Million US Dollars (US$30,000,000.00) which shall bear interest at a rate equal to the prevailing procurement cost of AG Investment plus reasonable margin to be determined by Copyright 2017

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AG Investment (currently 0.50%) for each calendar month, provided however, that such interest shall not exceed 3-month BBA LIBOR (British Banking Association London Inter Bank Offered Rates) plus 2% at any interest period. aDSHIC

In reply, please be informed that Article 11 of the Philippines-Singapore tax treaty provides viz: "Article 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The component authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article." xxx

xxx

xxx"

Based on the aforequoted provision, interest income arising in the Philippines and paid to a resident of Singapore is taxable in the Philippines at a preferential tax rate not exceeding 15% of the gross amount thereof if the recipient of such interest is the beneficial owner thereof. In view thereof, this Office is of the opinion and so holds that the interest payments made by Asahi to AG Investments, the beneficial owner of the interest under the Loan Agreement, are subject to the preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 11 of the Philippines-Singapore tax treaty. (BIR Ruling No. 142-95 dated September 13, 1995) Moreover, the above Loan Agreement is subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243 1(1), at the rate of One peso (P1.00) for each Two Hundred Pesos (P200) or fractional part of the aggregate principal amount of the Loan Agreement. 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 herein parties are concerned. ITDSAE

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By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

Footnotes 1.

Republic Act No. 9243 — An Act Rationalizing The Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as amended and for Other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)

December 21, 2006

DA ITAD BIR RULING NO. 168-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-58-01 Embassy of Australia 23rd Floor, Yuchengco Tower RCBC Plaza Ayala Avenue, Makati City Gentlemen : This has reference to your Note No. 459/06 and File No. MN94/00110 dated November 6, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use of the Embassy of Australia, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number: Copyright 2017

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Toyota Camry 2.4V A/T 2006 Thermalyte 2AZ-E013987 MR053BK40-07003804 Philippine Taxation Encyclopedia (2017.1)

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads: "ARTICLE 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) services;

indirect taxes of a kind which are normally incorporated in the price of goods or

ITCcAD

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of Australia and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Camry 2.4V A/T for the official use of the Embassy of Australia is exempt from value-added tax. (BIR Ruling No. DA-ITAD-58-01 dated July 12, 2001) 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 18, 2006

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DA ITAD BIR RULING NO. 167-06 Article 20, Philippines-Germany tax treaty; BIR Ruling No. DA-ITAD-85-05; 30-06 European International School No. 75 Swaziland Street Better Living Subdivision Parañaque City Attention: Mr. Ludwig Etzel Administrator Deutsche Schule Manila Gentlemen : This refers to your letter dated September 11, 2005, applying for tax treaty relief on the salaries and/or other emoluments received by Mr. Walter Jrg Dietze, a teacher engaged to teach in Deutsche Schule Manila (DSM) for a period of not exceeding two (2) years, pursuant to Article 20 of the Philippines-Germany tax treaty. It is represented that DSM is the German component of the European International School with principal address at No. 75 Swaziland St., Better Living Subdivision, Parañaque City; that Mr. Walter Jorg Dietze is, at present or immediately before, a resident of the Federal Republic of Germany as evidenced by the Certification letter issued by Mr. Markus Tschan, Third Secretary, Press and Cultural Affairs of the Embassy of the Federal Republic of Germany in Manila; that DSM entered into a Contract of Employment for Limited Period of Time with Mr. Dietze from August 1, 2006 to July 31, 2008. In reply, please be informed that Article 20 of the Philippines-Germany tax treaty provides as follows: "ARTICLE 20 TEACHERS AND RESEARCHERS 1. Remuneration which a professor or teacher, who is or immediately before was a resident of a Contracting State and who visits the other Contracting State for a period not exceeding two years for the purpose of carrying out advanced study or research or for teaching at a university, college, school or other educational institution, receives for such work shall not be taxed in that Contracting State. 2. This Article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons." HCITcA

Based on the aforequoted provision, it is clear that the remuneration paid to a teacher who, is or immediately before his visit to the Philippines, a resident of Germany and who stays in the Philippines for the purpose of teaching for a period not exceeding two years shall not be subject to Philippine income tax. In view, thereof, this Office is of the opinion and so holds that the subject remuneration of Mr. Walter Jorg Copyright 2017

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Dietze for teaching in DSM for a period not exceeding two (2) years shall not be subject to Philippine income tax. (BIR Ruling No. DA-ITAD 30-06 dated March 16, 2006) cda2007tax

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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

DA ITAD BIR RULING NO. 166-06 Article 11, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-68-03 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: George J. Lavadia Principal, Tax Services Gentlemen : This refers to your letter dated April 18, 2006, on behalf of your client Totoku Philippines, Inc. (TPI) requesting confirmation of your opinion that the interest payments made by TPI to Totoku Electric Company Ltd. (TEC), are subject to the preferential tax rate of 15%, pursuant to Article 11(2)(b) of the Copyright 2017

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Philippines-Japan tax treaty. It is represented that TEC is a corporation with office address at 3-21 Okubo 1-Chome, Shinjuku-ku, Tokyo, Japan and is a resident of Japan for the purpose of Japan taxation and registered as a taxable person in Japan under tax reference number 382019, per Certification dated November 16, 2005, issued by the Chief of Shinyuku District Taxation Office in Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated February 2, 2005; that TPI is a corporation duly organized and existing under the laws of the Philippines with office address at Lot Bl-3 Rd., Carmelray Industrial Park II Brgy. Tulo Calamba City; that it was registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise on April 28, 1999; that on August 28, 2001 TPI and TEC entered into a Loan Agreement wherein TPI borrowed from TEC an amount of Nine Hundred Thousand US Dollars (US$900,000) with an interest rate of 4.74% per annum; and that the Agreement has a term of three years. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: CHDAEc

a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b)

15 per cent of the gross amount of the interest in all other cases. xxx

xxx

5. The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx

xxx

xxx"

Based on the above-quoted provision of the Philippines-Japan tax treaty, the preferential tax rate to be withheld by TPI on its interest payments to TEC under their Loan Agreement shall be fifteen percent (15%) of the gross amount of the interest since it is not paid in respect of Government securities or bonds or debentures. (BIR Ruling No. DA-ITAD-68-03 dated May 5, 2003) Moreover, the Loan Agreement between TPI and TEC dated August 28, 2001 is subject to documentary stamp tax imposed under Section 180 of the National Internal Revenue Code (NIRC) of 1997 at a rate of Thirty Centavos (P0.30) on each of Two Hundred Pesos (P200), or fractional part thereof, of the face value of such contract. 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 Copyright 2017

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the herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 18, 2006

DA ITAD BIR RULING NO. 165-06 Section 108 (B) (3) & 106 (A) (2) (c) of the National Internal Revenue Code of 1997; Articles 5 & 7, Paragraph 1 (a) of the GADC between GOP and GOA ITAD Ruling No. 10-05 Philippines-Australia Land Administration and Management Project 3F JMT Bldg. Ortigas Center, Pasig City Gentlemen : This refers to the Australian Embassy's Note No. 425-06 File No. MN94/00112 dated October 19, 2006, endorsed to this Office by the Department of Foreign Affairs (DFA) and the Department of Finance (DOF), requesting for tax-free local purchase of motor vehicles, for the official use of the Philippines-Australia Land Administration and Management Project (PALAMP), specifically described as follows: Organization: Make: Copyright 2017

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Philippines-Australia Land Administration and Management Project Three (3) units 2006 Toyota HiAce 2.5 GL Philippine Taxation Encyclopedia (2017.1)

Engine Nos.:

Chassis Nos.:

Grandia Diesel 2KD-1508766 2KD-1513336 2KD-1515462 JTFRS13P9-00003521 JTFRS13P3-00003644 JTFRS13P0-00003908

In reply, please be informed that Section 106 (A)(2)(c) 1(2) and Section 108(B)(3) of the National Internal Revenue Code of 1997 (NIRC), as amended, provide, viz: "Section 106. Value-added Tax on Sale of Goods or Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor; . . . . . .. (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx

xxx

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. DEScaT

xxx

xxx"

"Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — xxx

xxx

xxx"

(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx

xxx

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; xxx

xxx

xxx"

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1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (Emphasis supplied) (a)

the name and duration of the activity;

(b)

a description of the activity and statement of its objectives;

(c)

the nominated implementing agencies in both countries;

(d)

potential benefits of the activity; xxx

xxx

xxx"

(a) for direct supplies of domestic goods and services, subject them to zero rate or for purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for inspection fees, storage charges and all other levies, fees and charges; xxx

xxx

xxx"

3. The disposal of vehicles provided for activities executed under this Agreement shall be the subject of discussions between the two Governments and shall take into account the transport requirements of other activities assisted by the GOA under the program of development cooperation."

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Philippines-Australia Land Administration And Management Project (PALAMP) was concluded pursuant to and subject to the provisions of the GADC on August 20, 2004. Such being the case, this Office is of the opinion and so holds that since the Subsidiary Arrangement relating to PALAMP is in accordance with the GADC between the GRP and GOA, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of PALAMP are subject to zero percent rate for purposes of VAT in respect of supplies, and professional and technical material and services provided by the GOA, while direct importations of goods are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003) In view of the foregoing, the local purchase of PALAMP of three (3) units 2006 Toyota HiAce 2.5 GL, Grandia Diesel, herein described and for its official use are subject to VAT at zero percent rate pursuant to sections 108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC. As regards the seller of goods and services to PALAMP, the sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions. [Sec 4.100.3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the PALAMP. To enable local sellers to refund the amount of the tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to PALAMP is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000) ICAcHE

Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to PALAMP is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, with the Large Taxpayer's Audit and Investigation Division II (LTAID II), if VAT-registered seller is a large taxpayer, or with the Audit Information, Tax Exemption and Incentives Division (AITEID) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without prior approved application for effective zero-rating, the transaction which may otherwise be treated as zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Secs. 4.102-2, 4.103-1 and 4.107-1(d), Revenue Regulations No. 7-95) This ruling is issued on the basis of 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 party is concerned.

Very truly yours,

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Legal Service Bureau of Internal Revenue Footnotes 1.

The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

December 18, 2006

DA ITAD BIR RULING NO. 164-06 Arts. 5 & 7, Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD 79-06 JPN, Inc. Lot 9, Block 13, Phase 1 Cavite Economic Zone, Rosario, Cavite Attention: Mr. Yoshitaka Fukumoto President Gentlemen : This refers to your tax treaty relief application dated February 21, 2006, received by this Office on August 9, 2006, for the service fees paid by JPN, Inc. (JPN-Philippines) to Ishii Hyoki Co. Ltd. (Ishii-Japan). It is represented that Ishii-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at No. 5 Asahioka, Kannabe-cho, Fukayasugun, Hiroshima 720-22 Japan; that Ishii-Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on April 19, 2006; that JPN-Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address located at Lot 9 Block 13, CEPZ, Rosario, Cavite; that JPN-Philippines is a PEZA-registered enterprise engaged in the manufacture, assemble or fabricate nameplates, seal printing membrane panel and other products related to marking and signs.

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It is further represented that on February 1, 2004, Ishii-Japan and JPN-Philippines entered into a Contract whereby Ishii-Japan commits the following services to JPN-Philippines: 1.

General consultation and management (e.g. assist in strategic planning and forecasting)

CHEIcS

•

Advice and assistance on JPN-Philippines' current operations

•

Development of global business strategies and provision of strategic global leadership

•

Advice on maintaining and administering proper accounting procedures, ledgers, payroll processing and other bookkeeping records

•

Advice necessary to ensure that the manufacture, marketing and/or sale of the products are at the standard of quality

Administrative support services

Training and personnel development (e.g. give advice on standards recruitment of executive staff)

Financial and budgetary planning (e.g. budget review, financial projection and analysis) and

Marketing services (e.g. give advice on marketing strategies, business development, and marketing analysis) •

Advertising, marketing, sales support to increase the sales business for JPN-Philippines including but not limited to: market research requirements and questionnaire structure/content; packaging design

•

Advice on expansion in the sales share in the Japan market.

That the foregoing services will be performed by Ishii-Japan outside the Philippines; that in cases where it would be necessary for Ishii-Japan to send its personnel in the Philippines, the stay of these individuals in the Philippines shall not exceed 183 days in any given year; that said services shall in no case involve the transfer of Ishii-Japan of any know-how; that as a consideration for the said services, JPN-Philippines will pay Ishii-Japan a fixed monthly fee, in addition to bearing out-of-pocket expenses which are separately reimbursable to Ishii-Japan at their actual cost; that the Contract shall be valid and binding for a period of one (1) year from the effective date, 1 February 2004, and, unless terminated by either party at least thirty (30) days prior to the date of expiration, shall be automatically renewed for successive period of one (1) year; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed of Article 7 of the Philippines-Japan tax treaty quoted as follows: "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 Copyright 2017

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attributable to that permanent establishment. xxx

AHSaTI

xxx

xxx"

Based on the above, 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 that is attributable to that permanent establishment. Applying this to the instant case, the service fees received by Ishii-Japan for services rendered in the Philippines under the Contract 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

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 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."

Paragraph 6 of Article 5 provides that an enterprise of Japan shall be deemed to have a permanent establishment in the Philippines if it furnishes in the Philippines 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. Thus, Ishii-Japan is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than six months within any taxable year in the course of their rendition of services to JPN-Japan. Such being the case, the income derived by Ishii-Japan from services rendered to JPN-Japan shall not be subject to Philippine income tax and, as such, shall likewise be exempt from withholding tax. (BIR Ruling No. DA-ITAD 79-06 dated July 19, 2006) As regards the imposition of the VAT on the rendition of services of Ishii-Japan, please be informed further that Section 108 of the Tax Code of 1997 1(3) provides as follows: DEAaIS

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(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2(4) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, in general, the VAT is imposed on services rendered by Ishii-Japan in the Philippines. On every payment of service fees, JPN-Philippines is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3(5) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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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. xxx

xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment of services fees by JPN-Japan, being a PEZA-registered enterprise, to Ishii-Japan under the subject Contract should be, as it is hereby confirmed to be, exempt from VAT. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

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December 18, 2006

DA ITAD BIR RULING NO. 163-06 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) of the National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD 105-05 Nihon Houzai Laguna Corp. Rm. 202 M, 124 East Science Avenue Laguna Technopark, Biñan, Laguna Attention: Mr. Teruo Nishimura Vice President Gentlemen : This refers to your tax treaty relief application dated February 21, 2006, received by this Office on August 12, 2006, for the service fees paid by Nihon Houzai Laguna Corp. (Nihon-Philippines) to Nihon Hosai Co. Ltd. (Nihon-Japan). It is represented that Nihon-Japan is a nonresident foreign corporation organized and existing under the laws of Japan with principal office address at No. 2-4-2 Hatanodai Shinagawa Tokyo, Japan; that Nihon Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on June 14, 2006; that Nihon-Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address located at GRM Bldg. Rm. 202 M, 124 East Science Avenue, Laguna Technopark Biñan, Laguna; that Nihon-Philippines is a PEZA-registered enterprise as shown in its Certificate of Registration No. 04-09-F dated June 14, 2004. acCDSH

It is further represented that on January 3, 2005, Nihon-Japan and Nihon-Philippines entered into a Contract whereby Nihon-Japan commits the following services to Nihon-Philippines: 1.

Facilitation of the purchases being made by Nihon-Philippines from various suppliers outside the territorial jurisdiction of the Philippines;

Recommendation of the appropriate measures to be undertaken by Nihon-Philippines to improve/sustain the level and quantity of its production; and •

Provision of other services such as competitive sourcing of new products, project management, technical development, testing and evaluation of quality assurance and transportation and commercialization of new/existing products.

That Nihon-Japan shall not be under any obligation to send its employees or representative to the Philippines; that as a consideration for the said services, Nihon-Philippines will pay Nihon-Japan the Copyright 2017

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amount of Twenty Thousand US Dollars ($20,000.00) per month; that the Contract shall be valid and binding for a period of one (1) year from the effective date, 3 January 2005, and, unless terminated in writing by either party at least thirty (30) days prior to the date of expiration, shall be automatically renewed for successive period of one (1) year; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 23(F) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997) provides: "Section 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx

xxx

"(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on derived from sources within the Philippines. xxx

xxx

xxx"

According to Section 23(F), a foreign corporation like Nihon-Japan is taxable only on income derived from sources within the Philippines. With respect to income from the provision of services, such income is considered as derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code of 1997, quoted below: "Section 42. Income from Sources Within the Philippines. — A. Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx (3)

xxx

Services. — Compensation for labor or personal services performed in the Philippines;

TIDcEH

xxx

xxx"

Such being the case and since the subject services will be rendered outside the Philippines, the service fees to be paid therefor by Nihon-Philippines to Nihon-Japan, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) Similarly, the service fees are not subject to the twelve percent (12%) VAT imposed under Section 108(A) of the Tax Code of 1997, as amended: "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 1(6) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), Copyright 2017

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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 . . . xxx

xxx

xxx"

Section 108(A) above clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the said services will not be performed in the Philippines, the service fees to be paid by Nihon-Philippines to Nihon-Japan are therefore exempt from VAT. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to increase the Value-Added Tax Rate from Ten Percent to Twelve Percent)

December 18, 2006

DA ITAD BIR RULING NO. 162-06 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code of 1997; BIR Ruling No.

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DA-ITAD 105-05 Latitude Broadband, Inc. U2101 21st Floor, Citibank Tower Paseo de Roxas, Makati City Attention: Mr. Federico S. Payot Vice President for Finance & Operations Gentlemen : This refers to your letter dated August 7, 2006, requesting exemption from Philippine income tax the payments of Latitude Broadband, Inc. (Latitude-Philippines) to IQPC Worldwide PTE Ltd (IQPC-Singapore) pursuant to the provisions of the Philippines-Singapore tax treaty. It is represented that IQPC-Singapore with address at 61 Robinson Road, # 14-01 Robinson Centre, Singapore and is a resident of Singapore for income tax purposes as confirmed by the Certificate of Residence issued by Sabina H B Cheong (Mrs), Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore; that IQPC-Singapore is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on November 30, 2006; that IQPC-Singapore is engaged in organizing international events; that Latitude-Philippines is a domestic company with principal office located at 21-A Citibank Tower, 8741 Paseo de Roxas, Makati City. THSaEC

It is further represented that on May 10, 2006, IQPC-Singapore and Latitude-Philippines entered into a Sponsorship Agreement whereby the latter will participate as a sponsor in Wireless Broadband Week, an international event organized by IQPC-Singapore, from October 3 to October 4, 2006 in Singapore; that the sponsorship cost of Latitude-Philippines for the said event is US$16,600; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 23(F) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997) provides: "Section 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx

xxx

"(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." xxx

xxx

xxx"

According to Section 23(F), a foreign corporation like IQPC-Singapore is taxable only on income derived from sources within the Philippines. With respect to income from the provision of services, such Copyright 2017

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income is considered as derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code of 1997, quoted below: "Section 42. Income from Sources Within the Philippines. — A. Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx

xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines; xxx

xxx

xxx"

Such being the case and since the subject international event will be held in Singapore, the sponsorship fee to be paid therefor by Latitude-Philippines to IQPC-Singapore, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) Similarly, the subject sponsorship fee is not subject to the twelve percent (12%) VAT imposed under Section 108(A) of the Tax Code of 1997, as amended: "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 1 of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), HaEcAC

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 . . . xxx

xxx

xxx"

Section 108(A) above clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the said international event will not be performed in the Philippines, the sponsorship fee to be paid by Latitude-Philippines to IQPC-Singapore is therefore exempt from VAT. 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.

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By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

DA ITAD BIR RULING NO. 161-06 Sec 106 & 108 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling UN-085-94 Embassy of Brazil 17 Talisay Street, North Forbes Park Makati City Attention: Mr. Paulo Tarrisse da Fontoura Minister/Deputy Chief of Mission Gentlemen : This has reference to your Form MV-2A dated October 9, 2006, referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of a motor vehicle, for the personal use of Mr. Paulo Tarrisse da Fontoura, Minister/Deputy Chief of Mission of the Embassy of Brazil, specifically described as follows: Type of Use: Make: Model Year: Chassis Number: Engine Number:

Personal Mitsubishi Adventure 2001 PAEVB2WLR1B00195 4G63AB6650

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads:

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"A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: IEHScT

"(a) indirect taxes of a kind which are normally incorporated in the price of the goods and services; "xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of locally-assembled motor vehicles. In other words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles shall, in general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm exemption to the Embassy of Brazil and its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in your country. Hence, the local purchase of once (1) unit of 2001 Mitsubishi Adventure, for the personal use of Mr. Paulo Tarrise da Fontoura, Minister/Deputy Chief of Mission of the Embassy of Brazil is exempt from value-added tax and ad valorem tax. (BIR Ruling UN-085-94 dated March 7, 1994) This ruling is issued on the basis of the facts 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

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DA-ITAD-28-06 European International School No. 75 Swaziland Street Better Living Subdivision Parañaque City Attention: Mr. Ludwig Etzel Administrator Deutsche Schule Manila Gentlemen : This refers to your letter dated September 11, 2005, applying for tax treaty relief on the salaries and/or other emoluments received by Mr. Christoph Norbert Balssnig, a teacher engaged to teach in Deutsche Schule Manila (DSM), for a period of not exceeding two (2) years, pursuant to Article 21 of the Philippines-Austria tax treaty. It is represented that DSM is the German component of the European International School with principal address at No. 75 Swaziland St., Better Living Subdivision, Parañaque City; that Mr. Christoph Norbert Balssnig was, immediately before his employment in the Philippines, a resident of the Republic of Austria with address at Hochschaberstrae, Lienz, Tirol, Austria; that Mr. Balssnig has formally given notice of his departure from his residence in Lienz and is now residing in Metro Manila as evidenced by the Acknowledgement Letter issued by the local authorities in Lienz dated August 11, 2006; that DSM entered into a Contract of Local Employment with Mr. Balssnig engaging the latter to teach at DSM for the School Year 2006-2008 from August 1, 2006 to July 31, 2008. In reply, please be informed that Article 21 of the Philippines-Austria tax treaty provides as follows: "ARTICLE 21 PROFESSORS AND TEACHERS 1. Remuneration which a professor or teacher, who is a resident of one of the Contracting States and who visits the other Contracting State for a period not exceeding two years for the purpose of teaching or carrying out advanced study or research at a university, college, school or other educational institution, receives for those activities shall be taxable only in the first-mentioned State. 2. This Article shall not apply to remuneration which a professor or a teacher receives for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons. aITECA

3. For the purposes of paragraph 1 of this Article, the term "remuneration" shall include remittances from sources outside the other State sent to enable the professor or teacher to carry out the purposes referred to in paragraph 1."

Based on the aforequoted provision, it is clear that the remuneration paid to a teacher who is a resident of Austria and who stays in the Philippines for the purpose of teaching for a period not exceeding Copyright 2017

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two years shall not be subject to Philippine income tax. In view thereof, and considering that Mr. Balssnig was a resident of Austria immediately before his employment in the Philippines, this Office is of the opinion and so holds that the subject remuneration of Mr. Christoph Norbert Balssnig for teaching in DSM for a period not exceeding two (2) years, shall not be subject to Philippine income tax pursuant to Section 21 of the Philippines-Austria tax treaty. (BIR Ruling No. DA-ITAD 28-06 dated March 16, 2006) 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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

DA ITAD BIR RULING NO. 159-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. ITAD-133-06 Embassy of Australia 23rd Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave. cor. Sen. Gil Puyat Ave., Makati City Attention: Mr. Shane Thomas Cleary Second Secretary Copyright 2017

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Gentlemen : This has reference to your Note No. 450/06 and File No. MN94/00109 dated October 31, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of ad valorem and value-added taxes (VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. Shane Thomas Cleary, Second Secretary of the Embassy of Australia specifically described as follows: Make: Model Year: Color: Frame Number: Engine Number:

Ford Escape XLT 3.0L V6 4X4 A/T 2006 Magnetic Silver PE2ET68151WE00543 AJ012745

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads: "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of goods or services; "xxx

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm the exemptions to the Embassy of Australia or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government allows similar exemptions to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles thereat. Hence, the local purchase of one (1) unit of 2006 Ford Escape XLT 3.0L V6 4X4 A/T for the personal use of Mr. Shane Thomas Cleary, Second Secretary of the Embassy of Australia is exempt from VAT and ad valorem tax. (BIR Ruling No. ITAD-133-06 dated October 30, 2006) 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.

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(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

DA ITAD BIR RULING NO. 158-06 Sec 106 & 109 (K), National Internal Revenue Code of 1997, as amended; Articles 5 & 7, General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines; BIR Ruling No. ITAD-066-06 Philippines-Australian Basic Education Assistance For Mindanao (BEAM) II Project c/o DepEd Region XI Torres St., Davao City Gentlemen : This has reference to the Australian Embassy's Note No. 425/06 and File No. MN94/112 dated October 27, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of ad valorem and value-added taxes (VAT) on the purchase of one (1) unit 2006 Toyota Grandia Hi Ace and four (4) units 2006 Toyota Fortuner for official use by the Philippines-Australia Basic Education Assistance for Mindanao (BEAM) II Project specifically described as follows: Make

Model Year

Color

Chassis Number

Engine Number

Toyota Hi Ace GL Grandia

2006

Nobel Pearl

JTFRS13P300002526

2KD-1472054

Toyota Fortuner

2006

Super White

MROYZ59G600035999

1KD-9671341

Toyota Fortuner

2006

Super White

MROYZ59G700038915

1KD-9670244

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Toyota Fortuner

2006

Super White

MROYZ59G500039237

1KD-9674471

Toyota Fortuner

2006

Super White

MROYZ59G900038835

1KD-9669774

In reply, please be informed that Section 106(A)(2)(c) of the National Internal Revenue Code of 1997, as amended (NIRC) provides, viz: "Section 106. Value-added Tax on Sale of Goods or Properties.

EcHTDI

(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve-percent (12%), . . . xxx (2)

xxx

xxx"

The following sales by VAT-registered persons shall be subject to zero percent (0%)

rate: xxx

xxx

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate."

In this connection, Article 5, paragraphs 1 and 2 of the General Agreement on Development Cooperation (GADC) between the Government of Australia (GOA) and the Government of the Republic of the Philippines (GRP), signed on October 28, 1994 and entered into force on March 12, 1998, provides, viz: "Article 5 Subsidiary arrangements 1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (Emphasis supplied)

(a)

the name and duration of the activity;

(b)

a description of the activity and statement of its objectives;

(c)

the nominated implementing agencies in both countries;

(d)

potential benefits of the activity;

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xxx

xxx"

Relative thereto, Article 7, paragraph 1 (a) of the GADC between GRP and GOA, pertinently provides, viz: "Article 7 Project supplies and professional and technical material and services 1. In respect of project supplies and professional and technical material and services whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall: (a) for direct supplies of domestic goods and services, subject them to zero rate for purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for inspection fees, storage charges and all other levies, fees and charges;" CDHacE

xxx

3. The disposal of vehicle provided for activities executed under the Agreement shall be the subject of discussions between the two Governments and shall take into account the transport requirements of other activities assisted by the Government of Australia under the Program of development cooperation."

Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply to Subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7(1)(a) and (3) of the GADC state that GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). It is worthy to rule that the abovementioned BEAM was created by virtue of the concluded Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia on June 27, 2001 pursuant to Article 5 of the GADC. Such being the case, this Office is of the opinion and so holds that since BEAM was created by virtue of a subsidiary arrangement pursuant to the GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of BEAM are subject to VAT at zero percent rate in respect of supplies, motor vehicles and professional and technical material and services provided by the Government of Australia while direct importations of goods are exempt from VAT. (BIR Ruling No. ITAD-066-06 dated June 7, 2006) In view of the foregoing, the local purchase by BEAM II of one (1) unit of 2006 Toyota Grandia Hi Ace and four (4) units Toyota Fortuner for official use, is subject to VAT at zero percent rate, pursuant to Section 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC. As regards the seller of goods and services to BEAM, the sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions. (Sec 4.106.5(c), Revenue Regulations No. 16-2005) In this jurisdiction, the grant of VAT exemption alone Copyright 2017

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would mean that the sellers shall bear the burden of the tax if they tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to BEAM is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit of refund. (VAT Ruling No. 008-00 dated February 7, 2000) Treated as effectively zero-rated transaction, the VAT-registered seller of goods or services to BEAM is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, to the Large Taxpayers Audit and Investigation Division (LTAID II) if VAT-registered seller is a large taxpayer, or to the Audit Information, Tax Exemption and Incentives Division (AITIED) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Consequently, failure of the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Sections 4.106-6 of Revenue Regulations No. 16-2005) TIHDAa

This ruling is issued on the basis of facts 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 party is concerned.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 15, 2006

DA ITAD BIR RULING NO. 157-06 Art. 11, Philippine-Germany Tax Treaty; Art. 11, Philippine-Netherlands Tax Treaty; Sec. 23 (F) in connection with Sec. 42 (A) (3) of the Tax Code of 1997; BIR Ruling No. Copyright 2017

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DA-ITAD 105-05; BIR Ruling No. DA-ITAD 55-05 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: C. P. Noel Vice Chairman and Deputy Managing Partner Gentlemen : This refers to your request for clarification of the following: 1)

That the Intercreditor Agency Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to be paid by STEAG State Power, Inc. (SPI) to Bayerische Hypo-und Vereinsbank AG (HVB) for services performed by the latter outside of the Philippines are considered income derived from sources outside the Philippines and therefore not subject to Philippine income tax and any withholding tax.

That the interest income derived by HVB-Germany and ING-Netherlands in the Philippines from the loan agreement referred to in BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006 is subject to tax at a rate of 10% of the gross amount of the interest under the provisions of Article 11(2)(a)(ii) of the Philippines-Germany and Philippines-Germany and Philippines-Netherlands tax treaties, respectively. THCSAE

The factual representations recited in BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006 are hereby adopted. In addition thereto, it is also represented that SPI will pay service fees, namely Intercreditor Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a nonresident German commercial bank, for performing services as the appointed agent of the JBIC and NEXI Loan Facility and for arranging the said credit facilities; and that the services of HBV as the appointed agent of JBIC and NEXI Loan Facilities are being performed entirely outside the Philippines as well as its services as the lead arranger of the said facilities. In reply, please be informed of the following: 1)

On the Intercreditor Agency, JBIC Facility Agency and the Lead Arranger Front End Fees that will be paid by SPI to HVB

Section 23(F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "Section 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx (F) Copyright 2017

xxx

A foreign corporation, whether engaged or not in trade or business in the

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Philippines, is taxable only on income derived from sources within the Philippines. xxx

xxx

According to Section 23(F), a foreign corporation like HVB is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code of 1997, as amended, below: "Section 42. Income from Sources Within the Philippines. — A. Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx

xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines; xxx

xxx

xxx"

Such being the case and since the subject services were carried out entirely outside the Philippines, the intercreditor agency, JBIC facility agency and the Lead Arranger front end fees paid by SPI to HVB, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) IcSHTA

On Interest income derived by HVB-Germany and ING-Netherlands in the Philippines arising from the loan agreement

Article 11 of the Philippines-Germany tax treaty provides: "Article 11 INTEREST 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a)

10 per cent if such interest is paid: (i)

in connection with the sale on credit of any industrial, commercial or scientific equipment, or

(ii)

on any loan of whatever kind granted by a bank, or

(iii)

in respect of public issues of bonds, debentures or similar obligations.

15 per cent of the gross amount of such interest in all other cases xxx

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xxx

Philippine Taxation Encyclopedia (2017.1)

xxx 37

The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income from money lent by the taxation law of the State from which the income is derived. xxx

xxx

xxx."

Article 11 of the Philippines-Netherlands tax treaty also provides: "Article 11 INTEREST 1.

Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State.

However, such interest may be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a)

10 per cent of the gross amount if such interest is paid: (i)

in connection with the sale on credit of any industrial, commercial or scientific equipment, or TcICEA

(ii)

on any loan of whatever kind granted by a bank, or any other financial institution,

(iii)

in respect of public issues of bonds, debentures or similar obligations,

15 per cent of the gross amount of the interest in all other cases xxx

xxx

The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Act. xxx

xxx

xxx."

In view of all the foregoing, the interest income derived by HVB and ING, in the Philippines falls under interest income "on any loan of whatever kind granted by a bank or any other financial institutions", and is subject to the preferential tax rate of 10 percent of the gross amount of the interest under paragraph (2)(a)(ii) for both the Philippines-Germany and Philippines-Netherlands tax treaties, respectively. (BIR Ruling No. DA-ITAD 55-05 dated June 16, 2005) This ruling supplements BIR Ruling No. DA-ITAD 104-06 dated August 31, 2006 and applies the appropriate final withholding tax rate with respect to the interest income derived by HVB and ING in the Philippines in the light of the additional factual representation. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall Copyright 2017

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be disclosed that the actual 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 13, 2006

DA ITAD BIR RULING NO. 156-06 Articles 5 (Permanent Establishment), 8 (Business Profits) Philippines-United States of America tax treaty; Revenue Memorandum Circular No. 44-05; BIR Ruling No. DA-ITAD 91-06 Regalado Bautista & Menzon Law Offices Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City Attention: Atty. Edith Abana-Bautista Gentlemen : This refers to your letter dated March 16, 2006 requesting a ruling on the tax implication on the purchase of a software (C++ Test Professional Edition-Windows Node Lock License) by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Parasoft Corporation (Parasoft) It is represented that Parasoft is a nonresident foreign corporation, organized and existing under the Copyright 2017

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laws of the United States of America, with principal office at 101 E. Huntington Dr., 2nd Floor Monrovia, CA 91016 USA as shown in the Certificate of Status Domestic Corporation issued by Mr. Bill Jones, Secretary of State of California; that Parasoft is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated November 23, 2005 issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software development involving imaging, communications and related technologies. aEIADT

It is further represented that Canon-Philippines purchased a software (C++ Test Professional Edition-Windows Node Lock License) from Parasoft under an End User Software License Agreement (Agreement) where Parasoft grants to Canon-Philippines a non-exclusive, non-transferable license to use the software but not to sell, transfer, or sublicense the software; that Canon-Philippines is authorized to install, use, display, and operate the software product for its own internal use, on the specific set of computer hardware and operating system on which the software is designed to run; that Canon-Philippines is authorized to make one (1) copy of the original recorded media provided by Parasoft for archival purposes or as part of Canon-Philippines normal system backup procedures; that each archival copy shall display the same program name, serial number, version number, copyright and trademark, notices as the original licensed copy provided by Parasoft; that Parasoft shall retain title and ownership of the software and all portions thereof and all applicable rights in patents, copyrights and trade secrets in the software; that Parasoft will also provide Canon-Philippines the necessary maintenance services under Exhibit B (Software Maintenance Services and Updates) of the Agreement for a period of one year automatically renewable on a year to year basis unless terminated in writing; that the Software Maintenance Services includes the response to and resolution of encountered Errors in the Software by telephone, electronic mail, fax or delivery of Error Corrections, Enhancements, Updates and Releases; that the maintenance shall be within reasonable limits, as determined by Parasoft, and does not include requests for basic product training or technical consulting; that the provision of services shall be performed outside the Philippines as confirmed by the Certification issued by Canon-Philippines; and that as consideration for the purchase of software and for the maintenance services, Canon-Philippines will pay Parasoft $3,495.00 US Dollars and $700.00, respectively, inclusive of freight and other miscellaneous charges payable within 60 days from date of invoice. In reply please be informed as follows. Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(7)) covers software payments made as of November 18, 2003 and until September 7, 2005 and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software: The term 'royalties' as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term 'use' as contained herein shall include the reselling or distribution of software.

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Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(8)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: aATHES

"Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a. Transfer of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i. The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; ii. The right to prepare derivative computer programs based upon the copyrighted software; iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

v. any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright. The determination of whether a transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale or exchange because not all substantial rights have been transferred will be classified as a license generating royalty income. When only copyright rights are transferred, payments made in consideration therefor are royalties. On the other hand, when copyright ownership is transferred, payments made in consideration therefor are business income. b. Transfer of copyrighted articles. A copyrighted article incorporating a software includes a copy of the software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any other medium. xxx

xxx

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personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and distributor. Payments as consideration for after-sales service in a mixed contract are not royalties alone, but will include income from services. The appropriate course to take with such a contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated payments according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. Thus, the part of the payments representing the use of the software will be treated as royalties and taxable as such and the other part of the payments representing the provision of services will be treated as income from services and taxable as such. (Emphasis supplied) cHaADC

If, however, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then the treatment applicable to the principal part should generally be applied to the whole amount of the consideration. (De minimis)"

The substantial difference between the two Circulars is their characterization of payment from the purchase of a copyrighted article incorporating a software, like the license fee for the Licensed Software where the licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and not readily the right to market or exploit the Licensed Software. Under the first Circular, the license fee is treated as royalties and taxable as such, while under the second Circular, the license fee is treated as business income (or business profits) and taxable as such, as described above. If should be noted that under the same Agreement, Parasoft will also provide Canon-Philippines the necessary maintenance services. Thus, in accordance with the aforequoted Section 5c of the RMC No. 44-2005, the subject Agreement should be characterized by breaking down the same into the portion which represents the use of the software and the portion which pertains to the provision of services. As to the portion of the Agreement referring to the use of the software, it being clear that Parasoft merely grants to Canon-Philippines a non-exclusive, non-transferable license to use the software but not to sell, transfer, or sublicense the software, the payments of Canon-Philippines, being an end-user, to Parasoft shall be considered as business profits. Thus, payments (license fee) by Canon-Philippines to Parasoft that would be made 60 days from January 17, 2006, being business income (or business profits), will be subject to income tax in the Philippines only if they are attributable to a permanent establishment which Parasoft has in the Philippines, under paragraph 1, Article 8 in relation to Article 5 of the Philippines-United States tax treaty, to wit: "Article 8 BUSINESS PROFITS 1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." "Article 5 PERMANENT ESTABLISHMENT

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1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. 2.

The term 'fixed place of business' includes but is not limited to: a)

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse;

A mine, quarry, or other place of extraction of natural resources;

DHESca

i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx

xxx

xxx"

Based on the foregoing, in order for Parasoft to be considered to have a permanent establishment to which said business profits may be attributed, it must satisfy the following conditions 3(9): —

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

—

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

—

the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.'' (Paragraph 2)

Since Parasoft, based on the documents submitted, does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may carry on its business, Parasoft does not have a permanent establishment to which its business profits may be attributed to. This is further bolstered by the fact that it is neither registered as a corporation nor as a partnership Copyright 2017

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in the Philippines. This being so, the business profits earned by Parasoft from its sale of the subject software to Canon-Philippines shall not be subject to Philippine income tax. On the other hand, as to the portion of the Agreement referring to the provision of services, the payments of Canon-Philippines shall be considered as income from sources without the Philippines under Section 42(C)(3) of the National Internal Revenue Code (Tax Code) of 1997. (BIR Ruling No. DA-ITAD 91-06 dated August 14, 2006) However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the Tax Code of 1997, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% VAT from its payments before it telegraphically transfers it to the account of the Parasoft. THDIaC

With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Canon-Philippines shall be responsible for the withholding of the 12 percent VAT on the license fee before remitting it to Parasoft. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Canon-Philippines may include as part of the cost of the services provided to it by Parasoft the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Parasoft and the fourth Copy for Canon-Philippines as its file copy. 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:

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1. 2. 3.

December 13, 2006

DA ITAD BIR RULING NO. 155-06 Sec 109 - National Internal Revenue Code 1997; Article III, Section 10 - Vienna Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations; BIR Ruling No. DA-ITAD-01-04 United Nations Children Fund (UNICEF) 31F Yuchengco Tower, RCBC Plaza 6819 Ayala Avenue Makati City Gentlemen : This refers to your letter dated October 13, 2000, indorsed to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) of ten (10) locally-purchased motor vehicles, for the official use of the United Nations Children's Fund (UNICEF), specifically described as follows: Make

Model Year

Color

Chassis Number

Engine Number

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G201538335

1KD-7167266

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G001538527

1KD-7173658

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G101538326

1KD-7167461

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G501538491

1KD-7170769

Toyota 4X4 Hi

2006

Lithium

MR0FZ29G8-

1KD-7167153

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Lux 3.0

01538341

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G501538460

1KD-7169867

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G801538369

1KD-7168640

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G901538364

1KD-7168885

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G401538546

1KD-7177081

Toyota 4X4 Hi Lux 3.0

2006

Lithium

MR0FZ29G701538296

1KD-7166731

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides as follows: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"

In relation thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations dated November 21, 1947 provides: "Article III xxx

xxx

Section 10 While the specialized agencies will not, as a general rule, claim exemption from excise duties and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless when the specialized agencies are making important purchases for official use of property on which such duties and taxes have been charged or chargeable, States parties to this Convention will, whenever possible, make appropriate administrative arrangements for the remission or return of the amount of duty or tax. "xxx

xxx

xxx"

Based on the above provisions, important purchases for official use of property in the Philippines of the specialized agencies of the United Nations (UN) are accorded exemption from indirect taxes such as VAT imposed under Section 107 of the NIRC. Such being the case, and since the UNICEF is a specialized agency of the UN, this Office is of the opinion and so holds that aforementioned purchase of ten (10) units 2006 Toyota 4X4 Hi Lux 3.0 Diesel, for the official use of the UNICEF, is exempt from VAT. Copyright 2017

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It is hereby understood that this exemption applies only to vehicles purchased under the name of United Nations Children's Fund for its official use. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 13, 2006

DA ITAD BIR RULING NO. 154-06 Sec 106 & 108 of the National Internal Revenue Code of 1997; Article 34, Vienna Convention; VAT Ruling No. 006-97 Embassy of Canada 8/F Tower 2, RCBC Plaza 6819 Ayala Avenue, Makati City Gentlemen : This has reference to your Note No. 0308/06 dated October 23, 2006, referred to this Office by the Department of Finance (DOF) and the Office of Protocol, Department of Foreign Affairs (DFA), requesting for a tax-free purchase on a local motor vehicle for the official use of the Embassy of Canada, specifically described as follows: Make: Model Year: Color: Copyright 2017

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Toyota GL Grandia 2.5 Diesel M/T 2006 Dark Gray Mica Philippine Taxation Encyclopedia (2017.1)

Engine Number: Frame Number:

2KD-1520781 JTFRS13P9-00003826

"xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall in general, be subject to the VAT prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemptions to the Embassy of Canada in its local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy on its purchases of goods and services in your country. Hence, the herein local purchase of one (1) Toyota GL Grandia 2.5 Diesel M/T for the official use of the Embassy of Canada is exempt from VAT. (BIR Ruling No. ITAD 23-99 dated August 30, 1999)

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 12, 2006

DA ITAD BIR RULING NO. 153-06

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Article 4, Philippines-Spain tax treaty Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22/F Philamlife Tower 8767 Paseo de Roxas Makati City 1226 Attention: Raymund S. Gallardo Partner, Tax and Corporate Services Melea B. Solis-Cruz Manager, Tax and Corporate Services Gentlemen : This refers to your letters dated 17 October 2005 and 28 December 2005, on behalf of your client, Solid Cement Corporation (SCC), requesting for the correct tax treatment of income earned in the Philippines of its expatriate employee by the name of Mr. Jaime Ruiz De Haro, and his spouse, Mrs. Esther Sulis Massana. It is represented that Mr. De Haro, a Spanish national, has been employed by SCC, a member of the CEMEX Philippine Group of Companies, since May 5, 2003 up to the present with no definite intention of returning to his home country; that he is the President and Chief Executive Officer of SCC; that by virtue of his position in SCC, the spouses have been staying in the Philippines since the said date; that as an alien individual working in the Philippines for an indefinite period of time, Mr. De Haro filed his 2003 and 2004 income tax returns with the Philippine Bureau of Internal Revenue; that Mr. De Haro's wages are being paid under a split-pay arrangement, i.e., a portion of his income is being paid in Spain and the remaining portion is being paid in the Philippines; that as can be noted in his 2004 (but not in his 2003) Philippine income tax return, Mr. De Haro remitted additional income tax upon filing thereof because the offshore portion (being paid in Spain) was not subjected to withholding taxes, since SCC has no control over its payment; that in computing his income tax liability, he has been treated as a resident alien for income tax purposes pursuant to Section 5 of Revenue Regulations No. 2; that Mrs. Massana has not been deriving income from Philippine sources; that she is a plain housewife; and that Mr. De Haro and Mrs. Massana are holders of Alien Certificates of Registration and Certificates of Residence (Temporary) which are issued by the Philippine Bureau of Immigration. In reply, please be informed that under Section 22(F) of the National Internal Revenue Code (Tax Code) of 1997, the term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. HDTSIE

In relation thereto, Section 4 of Revenue Regulations No. 2 (Income Tax Regulations) provides as follows, viz: "An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a Copyright 2017

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transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned."

Based on the foregoing, it can be deduced that an alien (or one who is not a citizen of the Philippines) may be considered a resident of the Philippines for income tax purposes if: (1) he or she is not a mere transient or sojourner, (2) he or she has no definite intention as to his stay, or (3) his or her purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his or her home temporarily in the Philippines. Thus, Mr. De Haro and Mrs. Massana are considered residents of the Philippines for purposes of our income tax laws. Section 23(D) of the Tax Code provides that, "(a)n alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines". Furthermore, Section 24(A)(1)(c) of the same Code provides that "(a)n income tax is hereby imposed: . . . (o)n the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines". Accordingly, compensation received by Mr. De Haro for labor or personal services performed in the Philippines is treated as his gross income from sources within the Philippines under Section 42(A) of the Tax Code which provides that: "SEC. 42.

Income from Sources Within the Philippines. —

(A) Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx (3)

xxx

Services. — Compensation for labor or personal services performed in the Philippines; xxx

xxx

xxx"

Based on the foregoing, Mr. De Haro is correct in including his wages or salaries coming from Spain (under the split-pay arrangement) in computing his income tax liability in the Philippines, because in earning such wages or salaries, he renders personal service in the Philippines as President and Chief Executive Officer of SCC and thus, payments received in consideration thereof is gross income from sources within the Philippines. cDCEIA

In sum, this Office is of the opinion as it hereby holds that Mr. De Haro and Mrs. Massana (once gainfully employed), are resident aliens under the Tax Code of 1997 and are liable to tax in the Philippines "in respect only of income from sources therein". This ruling is issued based on 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 Copyright 2017

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parties are concerned.

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG Commissioner Bureau of Internal Revenue

December 11, 2006

DA ITAD BIR RULING NO. 152-06 Sec 106 & 108 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-001-99 Embassy of the Federal Republic of Nigeria 2211 Paraiso Street Dasmariñas Village Makati City Attention: Mr. Fonma T. Usoro Administrative Attaché Gentlemen : This has reference to your Note No. NE/16/10/2006 dated October 25, 2006, referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of taxes on the local purchase of a motor vehicle, for the personal use of Mr. Fonma T. Usoro, Administrative Attaché of the Embassy of the Federal Republic of Nigeria, specifically described as follows: Type of Use: Make: Model Year: Chassis Number: Engine Number:

Personal Mitsubishi Pajero Gas 2.5 (MT) 1995 DONV320SJ00383 4G54B6388

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reads: "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of the goods and services; "xxx

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption to the Embassy of the Federal Republic of Nigeria and its personnel on their local purchases of goods and/or services, specifically on the purchase of locally-assembled motor vehicles, it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in your country. cda2007tax

Hence, the local purchase of one (1) unit of 1995 Mitsubishi Pajero Gas 2.5 (MT), for the personal use of Mr. Fonma T. Usoro, Administrative Attaché of the Embassy of the Federal Republic of Nigeria is exempt from VAT. (BIR Ruling No. DA-ITAD-001-99 dated June 24, 1999) 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 8, 2006

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DA ITAD BIR RULING NO. 151-06 Section 23 (F) in relation to Section 42 (A) (3) and Section 108 (A) National Internal Revenue Code; BIR Ruling No. DA-ITAD 105-05 Fernandez Aguja Law Firm CPA-Lawyers Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated October 31, 2006 on behalf of your client, Taiyo Yuden (Philippines), Inc. (PTY) (Taiyo-Philippines), requesting confirmation of your opinion that the commission payments it makes to Wako Denki Co., Ltd. (Wako-Japan) under the Sales Promotion Agreement for the latter's sales promotion activities rendered entirely outside the territorial jurisdiction of the Philippines are subject to the 0% preferential withholding tax rate under Article 7 in relation to Article 5 of the Philippines-Japan Tax Treaty and that said commission payments are not subject to the Value-Added Tax under Section 109(K) of the 1997 Tax Code, as amended. It is represented that Wako-Japan is a nonresident foreign corporation organized and existing under the laws of Japan, with principal office at 5-1-2 Sotokanda Chiyodaku, Tokyo, Japan; that it is engaged in the business of manufacture and distribution of IC, LSI, and electronic components, wireless communication equipment, boat equipment; that Wako-Japan is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Securities and Exchange Commission's Certificate of Non-Registration of Corporation/Partnership dated October 3, 2006; that Taiyo-Philippines is a domestic corporation with principal office at Mactan Economic Zone I, Lapulapu City. It is a duly registered Philippine Economic Zone Authority (PEZA) export enterprise under Certificate of Registration No. 89-04. It is further represented that on August 1, 2005, Taiyo-Philippines and Wako-Japan executed a Sales Promotion Agreement and a Supplemental Agreement dated October 26, 2006 under which Wako-Japan agreed to render Sales Promotion services, which shall include the following among others:

To conduct research and studies on the current and future market conditions include the demand, price and supply of Products;

To conduct research and studies on the Target Customer's needs and/or demands for the Products and other related matters;

To provide the guidance and advise to Taiyo-Philippines how to sell the Products at its best;

To support the business relation between Taiyo-Philippines and/or Taiyo Yuden Co., Ltd.

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(JTY) and Target Customer; and e)

To do and perform other sales promotions specifically requested by Taiyo-Philippines and/or JTY. ITDHSE

That Wako-Japan shall perform the foregoing Sales Promotion activities and services completely outside the territorial jurisdiction of the Philippines; that the said services shall be rendered only in Japan or in any other foreign country outside Philippine jurisdiction; that the rendition of the sales promotions services shall in no way involve a grant of license for the use of Wako-Japan's proprietary rights nor will it involve any transfer of technological know how and other intellectual property rights; that in consideration for the above services, Taiyo-Philippines shall pay Commissions in the amount of 3% of the amount of gross sales to PENTAX Cebu; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance or a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 23(F) of the Tax Code of 1997, as amended, provides: "Section 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx

xxx

(F) A foreign corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. xxx

xxx

xxx"

According to Section 23(F), a foreign corporation like Wako-JAPAN is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42(A)(3) of the Tax Code of 1997, as amended, below: "Section 42. Income from Sources Within the Philippines. — A. Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx

xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines; xxx

xxx

xxx"

Such being the case and since the subject services will be carried out entirely in Japan and other countries, the commission payments to be paid by Taiyo-Philippines to Wako-Japan, being income not derived from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) Lastly, since it is represented that the said services will be rendered in Japan and other countries, the commission payments by Taiyo-Philippines to Wako-Japan will not be subject to VAT imposed under Copyright 2017

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Section 108(A) of the Tax Code of 1997, as amended, which provides: "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: cDAISC

(i)

Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii)

National government deficit as a percentage of GDP of the previous term exceeds one and one-half percent (1 1/2%).

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, . . ."

Section 108(A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will not be performed in the Philippines, the commission payments in consideration for the said services to be paid by Taiyo-Philippines to Wako-Japan are therefore exempt from VAT. 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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 8, 2006

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DA ITAD BIR RULING NO. 150-06 Secs. 106 & 108 of the National Internal Revenue Code of 1997; Article 34 of the Vienna Convention; BIR Ruling No. ITAD-34-99 Embassy of the United States of America Roxas, Boulevard Manila Attention: Mr. Marvin Burgos Special Agent (Inspector, USAID) Gentlemen : This has reference to your Note Verbale No. 1395 dated October 4, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a tax-free purchase of one (1) locally assembled motor vehicle described hereunder, for the personal use of Mr. Marvin Burgos, Inspector, USAID of the Embassy of the United States of America: Make: Model Year: Color: Frame No.: Engine No.:

Toyota Fortuner 4X2 G Gas A/T 2006 Lithium MR0ZX69G4-00008626 2TR-6271720

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall, in general, be subject to the value-added tax prescribed under Sections 106 and 108, both of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemptions to the Embassy of the United States of America and/or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs that your Government allows similar exemption to Philippine Embassy and/or its personnel on their purchases of goods and services in Copyright 2017

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your Country.

CTIDcA

Hence, the herein local purchase of one (1) unit of Toyota Fortuner 4X2 G Gas A/T for the personal use of Mr. Marvin Burgos, Special Agent (Inspector, USAID) of the Embassy of the United States of America is exempt from VAT (BIR Ruling No. DA-ITAD-34-99 dated October 18, 1999)

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

December 8, 2006

DA ITAD BIR RULING NO. 149-06 Articles 5, 7 & 15 Philippines-Korea tax treaty; BIR Ruling No. DA-ITAD-69-00 Kepco Ilijan Corporation 18 Floor, Citibank Tower 8714 Paseo de Roxas Makati City Attention: Atty. Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your letter dated May 25, 2006, requesting tax treaty relief on behalf of Korea Electric Power Corporation ("KEPCO" for brevity), pursuant to the Philippines-Korea tax treaty. It is represented that KEPCO is a nonresident foreign corporation, with principal address at 167 Samseong-Dons, Gangnam-Gu, Seoul, 135-791, Korea, and is a resident of Korea for the purpose of the Philippines-Korea tax treaty, with Tax Identification No. 120-82-020052 as confirmed by the Certification of Residence issued by the Commissioner of the National Tax Administration of Korea dated May 2006; that KEPCO is not registered either as a corporation or as a partnership in the Philippines per certification Copyright 2017

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issued by Securities and Exchange Commission dated May 29, 2006; that Kepco Ilijan Corporation ("KEPCO" for brevity), on the other hand, is a corporation duly organized and existing under the laws of the Philippines. SDHCac

It is further represented that KEPCO has an existing Energy Conversion Agreement (ECA) with the National Power Corporation (NPC) for the operation and maintenance of the 1200 MW Ilijan Combined Cycle Power plant located in Batangas City; that on November 9, 2000, KEPCO and KEILCO entered into a Managerial and Technical Services Agreement (MTSA), pursuant to which KEPCO shall provide the following managerial and technical advisory services to KEPCO as follows: Scope of Work Major Scope of Work The Contractor 1(10) shall provide the following major services, including all incidental services related thereto, to the Owner 2(11) during the term of this Agreement 3(12). 1.

consulting and advisory services to the Owner;

advisory services in respect of technical and engineering matters as may be required by the Owner in the development, implementation and administration of the Project 4(13), and for the design, construction, testing, commissioning, operation and maintenance of the Power Station 5(14);

training of the Owner's staff and a personnel in accordance with Schedule "B" at the Contractor's facilities in Korea and coordinating such training with the training to be provided to the Owner's staff and personnel by the Construction Constructors 6(15) pursuant to the Construction Contracts; and

supply or procurement of equipment, instruments, tools spare parts and other materials and supplies for the Power Station as the Owner may request.

Technical Support Without limiting the Contractor's responsibilities in Section 2.2.1, the Contractor shall provide the following specific technical support services, and all incidental services related thereto, to the Owner during the term of this Agreement:

assistance to the Owner in the formulation of various procedures and guidelines for the safe operation and maintenance of the Power Station, including but not limited to the procedures relating to the operation of all equipment, corrective and preventive maintenance and emergency actions, in accordance with Good Operating Procedures;

review and evaluation of the designs of the Power Station in order to check conformity with the specifications set forth in the Construction Contracts and the ECA, and providing recommendations on improvements or other necessary changes to such designs;

review and evaluation of the training, operation and maintenance manuals in order to check conformity with the requirements of the ECA and the O&M Protocol, and providing recommendations on the improvements or other necessary changes to such manuals;

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review and evaluation of the equipment warranties provided by the Construction Contractors and other equipment suppliers of the Owner, if any, and providing recommendations on improvements or other necessary changes to such warranties; IaHAcT

review of the various Projects Documents entered into or to be entered into by the Owner as they may impact on or related to the financing, design, construction, testing, commissioning, operation and maintenance of the Power Station and the development, implementation and administration of the Project, and providing recommendations on necessary amendments to such Project Documents;

provision of a computerized maintenance and logistics management system, including specific routines or programs for materials and spare parts inventory and for the administration, control, supervision, operation and maintenance of the Power Station;

advice on the structuring of an efficient organizational and personnel set-up in respect of the construction, operation and maintenance of the Power Station, including the identification of the qualification requirements of the Owner's operation and maintenance personnel;

provision of technical and engineering advice (a) in the administration of the Project Document, (b) during the testing of the various equipment at the place of manufacture, and (c) during the commissioning and testing of the Power Station;

inspection of, reporting on and evaluation and monitoring of (a) all proposed designs or amended designs of the Power Station, (b) the Construction Contractors' progress reports and invoices, (c) all payments to the Construction Contractors and other suppliers, (d) all expenditures, and (e) all contractual claims;

10.

preparation and submission of periodic and adhoc reports, based on information provided by the Owner, within such periods as the Owner and the Contractor may subsequently agree on, on matters relating to the construction, operation and maintenance of the Power Station and the development, implementation and administration of the Project;

11.

review and evaluation of all engineering matters pertaining to the construction, operation and maintenance of the Power Station, including any major overhaul thereof; and

12.

provision of other technical assistance and advisory services as the Owner

may request and deem necessary or as the Contractor may deem appropriate, Administrative Support (a)

The Contractor shall advise the Owner as may be necessary to ensure that the Power Station will be constructed, managed, operated and maintained in accordance with (i) the standard set out in the ECA, (ii) Good Operating Procedures, (iii) the operation and maintenance manuals provided by the Construction Constructors or any other equipment vendor and such other requirements as may be applicable to the warranties of the Construction Contractors or any other equipment vendor, (iv) the Annual Operating Budget and Annual Operation Plan, (v) applicable Law, Consents and all other requirements of Governmental Authorities, (vi) the requirements of the Project's insurers, (vii) applicable dispatch instructions given by NPC in accordance with the ECA, (viii) such operating rules, procedures and standards of

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NPC, as may be applicable to the Project from time to time, (ix) the O&M Protocol and (x) such security requirements or measures as may be agreed to by the Owner and the Contractor; CIDcHA

(b)

Without limiting the Contractor's responsibilities in Section 2.2.1, Section 2.2.2, and paragraph (a) of this Section the Contractor shall provide the following specific administrative support services, and all incidental services related thereto, during the term of the Agreement: 1.

advice on the Owner's performance of corporate business activities;

advice on the administration and management of the various Project Documents;

advice on matters relating to the Owner's application for, and renewal and maintenance of, the various Consents required for the Owner's business operations and as may be required by the Project;

advice on matters relating to the planning, supervision and implementation of the various financial requirements of the Owner and the management of the Owner's financial resources, such as the maintenance of financial records and books of accounting;

advice on matters relating to the negotiation, execution and performance of the Financing Agreements and the administration and performance of the Owner of its obligations under the Financing Agreements;

advice on matters relating to the formulation and review of various internal procedures, guidelines and regulations of the Owner, including such regulations governing the Construction Contractors and other suppliers, their subcontractors and their employees, agents, representatives and personnel as may be deemed necessary to ensure the safe, timely and successful construction, commissioning, testing, start-up and operation and maintenance of the Power Station;

advice on matter relating to the recruitment and mobilization of the personnel (including staff) of the Owner;

advice on matters relating to the preparation, review and implementation of the Annual Operating Budget, Annual Operating Plan and the Long-Term Major Maintenance Plan;

Assistance in the formulation of the Owner's internal auditing procedures from time to time;

10.

advice on matters relating to the preparation and monitoring of the schedules for the construction, operation and maintenance of the Power Station;

11.

advice on matters relating to any dispute arising out of any of the Project Documents; and

12.

provision of other administrative assistance, support and resources as the Owner may

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reasonably request or as the Contractor may deem appropriate.

HICEca

Under the said contract it is also stipulated on Article 8.2 Licenses: 8.2

Licenses 8.2.1 Provisions of Licenses

The Contractor shall grant or cause to be granted to Owner such licenses of all patents and other proprietary rights held by any person as may be reasonably required for the provision of the services and fulfillment of the Contractor's obligations under this Agreement. Such licenses shall be in such form as shall be reasonably approved by the Owner, and shall be irrevocable, non-exclusive and royalty free to the Owner and its successors and assigns. Furthermore, per Certification dated October 10, 2006 issued by Ricardo A. Galano III, Corporate Counsel of Kepco Ilijan Corporation, it is represented that services under the Management and Technical Service Agreement for the year 2005 rendered both outside the Philippines and those performed in the Philippines did not exceed an aggregate of 183 days within any twelve-month period; and as a service agreement, the MTSA only involves the rendition of the following: a) consulting and advisory services; b) technical support services; and c) administrative support services; that during the term of the agreement no technological processes, intellectual property rights, patients, technical information and other "know-how" were transferred by KEPCO to the Corporation so as to constitute any royalties within the contemplation of the applicable laws. That in consideration for the aforementioned services, KEILCO shall pay to KEPCO annual fees, to be prorated and paid on a monthly basis as provided in Article 6 of the Agreement; that the services shall be done in Korea subject to a few exceptions wherein it is necessary to perform certain service in the Philippines for purposes of verifying and confirming all the works done in Korea; that on May 3, 2006, KEPCO issued a certification stating that the aggregate number of days of stay in the Philippines by KEPCO's personnel are forty eight (48) days for the year 2005. In reply, please be informed that Article 7(1) and, in relation thereto, Article 5 of the Philippines-Korea tax treaty which respectively provide, as follows: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment. "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.

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The term 'permanent establishment' includes especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

premises used as a sales outlet; and

a warehouse, in relation to a person providing storage facilities for others.

TAaEIc

3. a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months; b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitutes a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period; and c) a place of exploration of natural resources constitutes a permanent only if it exists for more than six months xxx

xxx

xxx"

Based on the aforequoted provisions, the profits of KEPCO are taxable only in Korea unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits may be attributable. For this purpose, KEPCO may be deemed to have a permanent establishment in the Philippines, if among others, it furnishes services in the Philippines through its personnel for a period or periods exceeding in the aggregate 183 days within any twelve-month period. The documents submitted to this Office show that the personnel of KEPCO rendered services under the MTSA, for an aggregate period not exceeding 183 days within a twelve-month period. Thus, KEPCO is not deemed to have a permanent establishment by virtue of the rendition of said services in the Philippines to which its profits could be attributable. In view thereof, this Office is of the opinion and so holds that the profits derived by KEPCO from the rendition of services under the MTSA shall not be subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5(3)[b] of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-202-02 dated November 25, 2002; BIR Ruling No. ITAD-069-00 dated April 07, 2000) As regards the remuneration to be paid to KEPCO's personnel who will render services in the Philippines, Article 15 of the same treaty provides, viz: "Article 15 Copyright 2017

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DEPENDENT PERSONAL SERVICES 1. Subject to the provisions of Article 16 (Directors' Fees), 18 (Pensions and Annuities), 19 (Government Service), 20 (Students and Apprentices), and 21 (Professors and Teachers), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in that other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: EAIcCS

the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and

the remuneration is paid by, or on behalf of an employer who is not a resident of the other State, and

the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. xxx

xxx

xxx"

Based on the above provision, the remuneration derived by KEPCO's personnel in connection with their visit to the Philippines shall be subject to Philippine income tax if their presence in the Philippines exceeds in the aggregate 183 days in a calendar year, and if their remuneration is paid by an enterprise which is a resident of the Philippines, and finally, if the remuneration is borne by a fixed base which KEPCO has in the Philippines. Inasmuch as the presence of KEPCO's personnel in the Philippines did not exceed in the aggregate, a period of more than 183 days for the year 2005, their remuneration for said taxable years shall not be subject to Philippine income tax, pursuant to Article 15 of the Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-083-05 dated August 22, 2005) In the event that a transfer of information or know-how arises from the MTSA, the pertinent paragraphs of Article 12 of the above mentioned tax treaty shall apply to payments therefor. It provides: "Article 12 Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State if such resident is the beneficial owner of the royalties. 2. However, such royalties may be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charge shall not exceed 15 per cent of the gross amount of the royalties. 3. Notwithstanding the provisions of paragraph 2 thereof, the amount of tax by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments under the investment incentives laws of the Philippines to a resident of Copyright 2017

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Korea, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, any patent, trademark design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting. CcTHaD

xxx

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Thus, pursuant to the foregoing provisions, payments to be made by KEPCO under the MTSA for any transfer of information or know-how are royalties which may be subject to a 10% preferential tax rate if the paying company is registered with the Board of Investments and engaged in preferred areas of investment and 15% in all other cases as long as the recipient of the royalty payments is the beneficial owner of the royalties and a resident of the Contracting State. Finally, royalty payments which might be made under the MTSA for the services to be rendered by KEPCO in the Philippines are subject to the value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. 7(16) With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that KEILCO shall be responsible for the withholding of the VAT on the service fees before remitting them to KEPCO. In remitting to the Bureau of Internal Revenue the VAT withheld on the service fees, KEILCO shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, KEILCO may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, KEILCO may include as part of the cost of the services furnished to it by KEPCO the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or as an asset, whichever is applicable. In addition, KEILCO is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to KEPCO upon its request, and the fourth copy to be retained by KEILCO as its file copy. (BIR ITAD Ruling No. DA-ITAD-147-05 dated November 29, 2005) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then thus ruling shall be without force and effect insofar as the herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

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Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3. 4. 5.

6. 7.

Contractor refers to Korea Electric Power Corporation (KEILCO). Kepco Ilijan Corporation (KEPCO). Managerial and Technical Services Agreement between KEPCO and KEILCO. "Project". "Power Station" means the 1200 MV natural gas fired combined cycle power plant with diesel fuel fire capability to be located in Ilijan, Batangas on a build, operate and transfer basis, and all other facilities constructed or to be constructed in respect thereof by the Owner to enable the Owner to fulfill its obligations under the ECA, and including the Switchyard Facilities, Access Road, Diesel Fuel Pipeline and Jetty. "Construction Contractors" means Raytheon Ebasco Overseas Ltd, and United Engineers International, Inc. and Mitsubishi Corporation. Republic Act No. 9337 (An Act Amending Section 27, 28, (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108(A), which now reads: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 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. . ." The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

December 7, 2006

DA ITAD BIR RULING NO. 148-06

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Article 13, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 042-06 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. R.C. Vinzon Tax Services Gentlemen : This refers to your application for relief from double taxation dated March 31, 2005, on behalf of your client, NEC Tokin Electronics (Philippines), Inc. (NEC Tokin), requesting confirmation that the fee paid to NEC Tokin Corporation (NTC) for the purchase of production and inventory control system is not subject to the Philippine income tax under Articles 5(6), 7(1) and 12(4) of the Philippines-Japan tax treaty. It is represented that NTC is a corporation duly organized and existing under the laws of Japan with office address at 6-7-1 Kooriyama, Futoshiro Ku, Sandai City, Miyagi Prefecture, Japan; that NTC is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission dated April 5, 2005; that NEC Tokin is a corporation duly organized and existing under and by virtue of the laws of the Philippines with registered office and principal place of business at 1 Ring Road, Light Industry & Science Park (LISP) II, Barangay La Mesa, Calamba, Laguna; that on February 23, 2003, NEC Tokin purchased a production and inventory control system (system) under a Software Purchase Agreement (Agreement); that pursuant to such Agreement, NTC installed production and inventory control system that is customized for NEC Tokin's production and inventory process design for internal use only and will monitor and track the production of electro-mechanical devices, and record the current inventory of the said devices at any given time; that the system was purchased in a one-time transaction for which a lump-sum amount was paid and thereafter, NEC Tokin gained full ownership of the production inventory and control system; and that the employees of NTC will install the system in the Philippines and will stay for a few days only. It is your position that the payments made for the production and inventory control system purchased by NEC Tokin are not technically considered as software payments subject to royalties but are payments that represent business profits paid to NTC, which does not have a permanent establishment in the Philippines. cda2007tax

In reply, please be informed as follows. Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMCs) that govern the taxation of software payments. The first Circular, RMC 77-2003 (Classification of Payments for Software for Income Tax Purposes), which covers software payments made from November 18, 2003 to September 7, 2005, generally treats software payments as royalties. It provides: "Definition of Royalties Includes Payments for the Use of Software: The term "royalties" as generally used means payment of any kind received as a Copyright 2017

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consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term "use" as contained herein shall include the reselling or distribution of software. HDTSIE

On the other hand, the second Circular, RMC 44-2005 (Taxation of Payments for Software), which covers software payments made from September 8, 2005 and thereafter, substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. Software payments are treated as royalties only if the transaction does not constitute a sale or exchange and not all substantial rights in the software have been transferred, but are merely for the transfer of copyright rights in the software. (BIR Ruling No. DA-ITAD-42-06 dated April 11, 2006) Accordingly, the fees paid for the purchase of production and inventory control system under the subject Agreement, from the effective date of the Agreement on February 24, 2003 up to September 7, 2005, which fees are treated as royalties under RMC 77-2003, are subject to the reduced tax rate under paragraph 2, Article 12 of the Philippines-Japan tax treaty, to wit: "Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b)

25 per cent of the gross amount of the royalties in all other cases. xxx

xxx

4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." xxx Copyright 2017

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xxx" 67

Based on the aforequoted provision, payments for the purchase of production and inventory control system under the SPA by NEC Tokin to NTC are subject to the reduced income tax of twenty five percent (25%) of the gross amount thereof. On the other hand, the fees paid for the purchase of production and inventory control system under the SPA payable to NTC by NEC Tokin from the effective date of RMC 44-2005 on September 8, 2005 and thereafter, which fees are treated as business profits under this RMC, are subject to income tax only if the same are attributable to a permanent establishment which NTC has in the Philippines, in accordance with paragraph 1, Article 7 of the Philippines-Japan tax treaty, to wit: "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. xxx

xxx

xxx"

Moreover, Article 5 of the said treaty provides, viz: "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. 2.

The term "permanent establishment" includes especially: a)

a store or other sales outlet;

a branch;

an office;

a factory;

a workshop;

a warehouse;

g) resources.

a mine, an oil or gas well, a quarry or other place of extraction of natural

3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. xxx

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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 all 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. HCEaDI

xxx

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Based on the foregoing, in order for any business profits derived by NTC from its transaction with NEC Tokin to be taxed in the Philippines, NTC must have a permanent establishment in the Philippines to which said profits must be attributed. Furthermore, a Japanese corporation may be deemed to have a permanent establishment in the Philippines, if among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continues within the Philippines for a period or periods aggregating more than six months within any taxable year. Since NTC, based on the documents submitted, does not appear to have in the Philippines a place of business at its disposal which is fixed or established at a distinct place, which has a certain degree of permanence, and through which it carries out its business considering that the employees of NTC shall perform the subject services in the Philippines for one hundred twenty (120) days only for the taxable year as evidenced by the certification issued by NEC Tokin, NTC is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed. Accordingly, this office is of the opinion and so holds that the fees paid for the purchase of production and inventory control system by NEC Tokin to NTC from September 8, 2005 and thereafter, under the subject agreement, are not subject to income tax. (BIR Ruling No. DA-ITAD 030-05 dated April 12, 2005) However, the fees paid for the purchase of production and inventory control system by NEC Tokin to NTC before February 1, 2006 are subject to VAT pursuant to Section 106(A) of the Tax Code of 1997 1(17) at the rate of 10% and beginning February 1, 2006 and thereafter are subject to VAT at the rate of 12%. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that NEC Tokin shall be responsible for the withholding of the VAT on the license fees before remitting them to NTC. In remitting to the Bureau of Internal Revenue the VAT withheld on such fees, NEC Tokin shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, NEC Tokin may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, NEC Tokin may include as part of the cost of the copy of the software purchase agreement sold to it by NTC the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or an asset, whichever is applicable. In addition, NEC Tokin is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to NTC upon its request, and the fourth copy to be retained by NEC Tokin as its file copy. HESIcT

This ruling is issued based on 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.

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 106(A) to read as: "SEC. 106. Value-added Tax on Sale of Goods or Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). xxx xxx xxx" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

December 6, 2006

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Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-138-04 Embassy of the Republic of Singapore 35th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Gentlemen : This has reference to your Note No. MNL105/2006 dated November 7, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use of the Embassy of the Republic of Singapore, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Toyota Fortuner 4X2 G Gas A/T 2006 Deep Nautica 2TR-8012443 MROZX69G6-00010085

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of the Republic of Singapore and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Fortuner 4X2 G Gas A/T for the official use of the Embassy of the Republic of Singapore is exempt from value-added tax. (BIR Ruling No. DA-ITAD-138-04 dated November 25, 2004) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall Copyright 2017

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

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

November 23, 2006

DA ITAD BIR RULING NO. 146-06 Article 5 & 7 of the Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-69-04 Luzon Electronics Technology, Inc. Special Export Processing Zone Gateway Business Park Javalera, Gen. Trias, Cavite Attention: Ms. Luz G. Cuyco Manager for Finance Department Gentlemen : This refers to your letter dated January 9, 2006, applying for relief from double taxation on income payments made by Luzon Electronics Technology, Inc. (LETI) to Marubun Corporation (Marubun) in consideration for engineering and technical support rendered by the latter pursuant to the Philippines-Japan tax treaty. It is represented that Marubun is a corporation duly organized and existing under the laws of Japan, with office address at Marubun Daiya Bldg. 8-1, Nihonbashi Odenmacho, Chuo-Ku, Tokyo 103, Japan as evidenced by a copy of its Company Registration certified by the Registration Officer of the Tokyo legal Affairs Bureau on September 27, 2005; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 18, 2005; that LETI is a PEZA registered enterprise with Certificate of Copyright 2017

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Registration No. 95-121 duly organized and existing under the laws of the Philippines with principal office at SEZ, Gateway Business Park, Javalera, General Trias, Cavite City. It is further represented that on June 21, 2005, LETI and Marubun entered into an Agreement for the purpose of providing services of a Technical Supervisor to support Engineering requirements for Akim (Index type mounter equipment of LETI) consisting of the following: (a) test run and adjustment work, (b) scheduled maintenance, (c) claim and complaints; that the cost of one Supervisor dispatched to LETI shall be at 70,000 yen/day, however, for a move day, LETI pays 35,000 yen/day; that the Agreement shall be valid one year after signing of the Agreement and such term shall be automatically extended for successive terms of one (1) year at the same condition unless either party gives notice of termination not less than three (3) months prior to the current term; and that the subject transaction is not under any investigation, audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer involved. HCacTI

In reply, please be informed that Article 7 of the Philippines-Japan tax treaty provides as follows: "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. xxx

xxx

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 is 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"

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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. Considering that the services specified in the Agreement are generally performed by Marubun in its office in Japan and that if such services are performed in the Philippines, the length of stay of personnel of Marubun shall not exceed six (6) months, and that for the succeeding periods covering the renewed terms of the Agreement, Marubun employees who would be coming to the Philippines to render the services under the Agreement will not stay in the Philippines for a period or periods aggregating more than six (6) months within any taxable year per certification issued by LETI dated July 26, 2006, Marubun is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the income derived by Marubun from services rendered to LETI is not subject to Philippine income tax, pursuant to Article 7(1) in relation to Article 5 of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-69-04 dated July 13, 2004) SEACTH

As the regards the imposition of the VAT on the rendition of services of Marubun, please be informed further that Section 108 of the Tax Code of 1997 1(18) provides as follows, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2(19) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, in general, the VAT should be imposed when Marubun provides the above services in the Philippines "for short durations and in no case shall exceed an aggregate of 3 months in any given calendar year". LETI shall then be required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3(20) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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Internal Revenue (BIR), 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. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an ecozone. xxx

xxx

Moreover, the exemption is both express and pervasive for the following reasons: . . ., 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. 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. xxx

xxx

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Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109 (K) of the Tax Code of 1997, as amended which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment of services fees by LETI, being a PEZA-registered enterprise to Marubun, under the above Agreement should be as it is hereby confirmed to be exempt from VAT. 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.

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By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

November 21, 2006

DA ITAD BIR RULING NO. 145-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-37-04 Embassy of the People's Republic of Korea 10F, Pacific Star Building Makati Avenue, Makati City Attention: Mr. Hong Sung Mog Minister and Consul General Gentlemen : This has reference to your Note No. KPH 2006-397 dated October 19, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Hong Sung Mog, Minister and Consul General of the Embassy of the People's Republic of Korea, specifically described as follows: Make: Model Year: Copyright 2017

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Honda CRV 4X4 2.4L A/T 2006 Philippine Taxation Encyclopedia (2017.1)

Engine Number: Chassis Number:

RRMD55-6400501 PADRD78506V400492

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of the People's Republic of Korea and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government allows similar exemption to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4L A/T for the personal use of Mr. Hong Sung Mog, Minister and Consul General of the Embassy of the People's Republic of Korea is exempt from value-added tax. (BIR Ruling No. 138-05 DA-ITAD- dated November 15, 2005) 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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November 21, 2006

DA ITAD BIR RULING NO. 144-06 Art. 13, Philippines-United States of America Tax Treaty; BIR Ruling No. DA-ITAD 108-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: M.F.A. Balili Tax Services Gentlemen : This refers to your letter dated July 28, 2006, filed with this Office on August 21, 2006, requesting confirmation of your opinion that the royalties paid by Warner Bros. (F.E.) Inc. — Philippine Branch (Warner Philippines) to Twentieth Century Fox International Corporation (Fox-US) for the use in the Philippines of motion picture films owned by Fox-US are subject to (1) the preferential rate of 15% final withholding tax pursuant to the provisions of Article 13(2)(b)(iii) of the Philippines-United States of America (Philippines-US) tax treaty, and (2) the 12% value-added tax. It is represented that Fox-US is a nonresident foreign corporation and a resident of the United States of America for purposes of U.S. taxation as shown in the Certification dated July 13, 2006 issued by Andrew E. Zuckerman, Field Director, Philadelphia Accounts Management Center, Department of the Treasury, Internal Revenue Service, Philadelphia, PA 19255; that its principal office is located at 10201 West Pico Boulevard, Los Angeles, California; that Fox-US is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration dated August 1, 2006 issued by the Securities and Exchange Commission; that Warner Philippines is a company duly organized under the laws of the State of New York, with its principal offices at 10201 West Pico Boulevard, Los Angeles, California 90035, U.S.A. and the Philippines branch of Warner Bros. (F.E.), Inc., a company duly organized under the laws of the State of Delaware, with its principal branch offices at 4th Floor, Ramon Magsaysay Award Foundation Center, 1680 Roxas Boulevard, Manila. It is further represented that on August 15, 2001, Fox-US and Warner Philippines entered into a Philippines Motion Picture License Agreement whereby the former grants to the latter the exclusive Theatrical Rights in the Language 1(21) for the Picture(s) in the Territory 2(22); that in consideration of the rights granted to Warner Philippines, the former shall pay Fox-US a royalty equal to 92% of Gross Billings accrued in each fiscal year less 100% of the Allowable Distribution Expenses; and that the issue or transaction subject of above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. EACIaT

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paid by Warner Philippines to Fox-US are subject to the preferential tax rate under Article 13 of the Philippines-US tax treaty, to wit: "Article 13 ROYALTIES 1.

Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States.

However, the tax imposed by that other Contracting State shall not exceed —

In the case of the United States, 15 percent of the gross amount of the royalties, and

In the case of the Philippines, the least of: (i)

25 percent of the gross amount of the royalties,

(ii)

15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and

(iii)

the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.

The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term 'royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. xxx

xxx

xxx"

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In looking for a third country which grants a most-favored-nation tax treatment on royalties, among the countries you cited you placed emphasis on Russia, particularly, the Convention between the Government of the Republic of the Philippines and the Government of the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Russia tax treaty), whose provisions on taxes apply on income derived or which accrued January 1, 1998. As to the first condition for the most-favored-nation tax treatment, it is noteworthy that payments for copyright of literary, artistic or scientific work (to which royalties for the theatrical rights to be paid by Warner Philippines to Fox-US are assimilated), which are considered royalties under paragraph 3, Article 13 of the Philippines-United States tax treaty, are likewise considered as such under paragraph 2, Article 12 of the Philippines-Russia tax treaty, to wit: "Article 12 ROYALTIES 1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State, but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. xxx

xxx

xxx"

As to the second condition for the most-favored-nation tax treatment, it is also noteworthy that the United States and Russia employ the same mechanism in mitigating the effects of double taxation of foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under their respective articles on Elimination of Double Taxation of their tax treaties with the Philippines, to wit: United States: "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: 1.

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law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1(b) and (2) of Article 1 (Taxes Covered) shall be considered to be income taxes. DHITCc

xxx

xxx"

Russia: "Article 23 RELIEF FROM DOUBLE TAXATION In the case of the Philippines, double taxation shall be avoided in the following manner: Subject to the provisions of the laws of the Philippines relating to the allowances as credit against Philippine tax of tax payable in any country other than the Philippines, income taxes paid or have accrued under the laws of the Russian Federation and in accordance with this Convention, whether directly or by deduction, in respect of income from sources within the Russian Federation shall be allowed as a credit against Philippines tax payable in respect of that income. In the case of a Philippine corporation owning more than 50 per cent of the voting stock of a Russian company from which it receives dividends in any taxable year, the Philippines shall also allow credit for the appropriate amount of taxes paid or accrued in the Russian Federation to a Russian company paying such dividends with respect to the profits out of which such dividends are paid. The deduction shall not, however, exceed that part of the Philippine income tax, as computed before the deduction is given, which is appropriate to the income which may be taxed in the Russian Federation. In the case of the Russian Federation, double taxation shall be avoided in the following manner: Where a resident of the Russian Federation derives income from the Philippines, the amount of tax of that income payable in the Philippines in accordance with the provisions of this Convention, may be credited against the tax levied in the Russian Federation imposed on that resident. The amount of credit, however, shall not exceed the amount of the Russian tax on that income computed in accordance with taxation laws and regulations of the Russian Federation.

Under the ordinary credit method, the United States and Russia (as countries of residence of the income recipient) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is attributable to the income taxed in the Philippines (the country of source or country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the United States and of Russia on a particular income, the taxpayer would not receive full credit for the income tax imposed by the Philippines on such income. Therefore, because the two conditions for the most-favored-nation tax treatment on royalties are both satisfied, this Office is of the opinion and so holds that the royalties for the theatrical copyrights to be paid by Warner Philippines to Fox-US are subject to the preferential income tax rate of 15% based on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to Copyright 2017

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paragraph 2, Article 12 of the Philippines-Russia tax treaty. (BIR Ruling No. DA-ITAD 108-02 dated May 30, 2002) ISCHET

Finally, as regards value-added tax (VAT), the royalties for the theatrical rights to be paid by Warner Philippines to Fox-US are subject to VAT under Section 108(A) of the National Internal Revenue Code of 1997 (Tax Code), as amended, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A)

The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx

xxx" 3(23)

xxx

With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Warner Philippines shall be responsible for the withholding of the VAT on the royalties before remitting them to Fox-US. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, Warner Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Warner Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Warner Philippines may include as part of the cost of the musical copyrights licensed to it by Fox-US the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Warner Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Fox-US and the fourth copy for Warner Philippines as its file copy. 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.

Very truly yours, Commissioner of Internal Revenue By:

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Bureau of Internal Revenue Footnotes 1.

2. 3.

The "Language" shall be Tagalog and English. A Picture shall be deemed to be in the Language if its original soundtrack is in the language, or if its is sub-titled or dubbed in the Language if and as approved by Fox in Advance in writing. The soundtrack on any sub-titled version shall be in the English language. The "Territory" shall be in the Philippines and its respective territories and possessions, as their political borders exist on the Commencement Date. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, as amended Section 108(A) to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). . . . The phrase 'sale or exchange of services shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

November 17, 2006

DA ITAD BIR RULING NO. 143-06 Sec 106 & 108 of the National Internal Revenue Code 1997; Article 34, Vienna Convention; BIR Ruling No. ITAD-156-02 Delegation of European Commission in the Philippines Copyright 2017

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7th Floor, Salustiana D. Ty Tower 104 Paseo de Roxas Legaspi Village Makati City Attention: Mr. Gabriel Munuera Vinals First Secretary and Head of Political/Economic/Trade/Public Affairs Section Gentlemen : This has reference to your Note No. 06-180 dated October 6, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, Office of Protocol, requesting for the exemption from payment value-added tax (VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. Gabriel Munuera Vinals, First Secretary and Head of Political/Economic/Trade/Public Affairs Section of the Delegation of the European Commission, specifically described as follows: Make: Model Year: Color: Engine Number: Frame Number:

Hyundai Santa Fe 4X2 CRDI 2WD 2.2L A/T 2006 Platinum Silver D4EB6950742 KMHSH81WP6U086497

In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic Relations, pertinent portion of which reads: "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of goods or services: aSAHCE

"xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the VAT on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall, in general, be subject to the value-added tax prescribed under Sections 106 and 108, both of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to Mr. Gabriel Munuera Vinals, a Spanish national, and whose Embassy in the Philippines is included in the updated list of diplomatic missions entitled to VAT exemption on the purchase of locally-assembled motor vehicles, on the basis of reciprocity, as confirmed by the Office of Protocol of the DFA in its letter dated October 18, 2005, that his Government allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in his country. Hence, the herein request for VAT exemption on the local purchase of one (1) unit of 2006 Copyright 2017

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Hyundai Santa Fe 4X2 CRDI 2WD 2.2L A/T, for the personal use of Mr. Gabriel Munuera Vinals, First Secretary and Head of Political/Economic/Trade/Public Affairs Section of the Delegation of the European Commission in the Philippines, is hereby granted. (BIR Ruling No. ITAD-156-02 dated September 10, 2002) 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

November 17, 2006

DA ITAD BIR RULING NO. 142-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. ITAD-19-04 Embassy of Australia 23rd Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave. cor. Sen. Gil Puyat Ave., Makati City Attention: Mr. Justin Wade Reuben Sibley Second Secretary Gentlemen : This has reference to your Note No. 427/06 and File No. MN94/00109 dated October 20, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of ad valorem and value-added taxes (VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. Justin Wade Reuben Sibley, Second Secretary of the Embassy of Australia specifically described as follows: Copyright 2017

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Make: Model Year: Color: Frame Number: Engine Number:

Ford Escape XLT 3.0L V6 4X4 A/T 2006 Panther Black PE2ET68151WE00583 AJ013154

"xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from VAT and ad valorem tax on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm the exemptions to the Embassy of Australia or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government allows similar exemptions to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles thereat. Hence, the local purchase of one (1) unit of 2006 Ford Escape XLT 3.0L V6 4X4 A/T for the personal use of Mr. Justin Wade Reuben Sibley, Second Secretary of the Embassy of Australia is exempt from VAT and ad valorem tax. (BIR Ruling No. ITAD-19-04 dated February 23, 2004) 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. EacHCD

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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November 8, 2006

DA ITAD BIR RULING NO. 141-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-119-01 Embassy of the State of Qatar 1378 Caballero St. corner Lumbang St., Dasmariñas Village Makati City Gentlemen : This has reference to your Note No. QAT/MNL/080/2006 dated October 2, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use of the Embassy of the State of Qatar, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Toyota Fortuner 4X2 G Gas A/T 2006 Lithium 2TR-8003409 MROZX69G8-00009942

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

Thus, the tax exemption privilege of an Embassy an/or its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. DEICTS

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of the State of Qatar and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Fortuner 4X2 G Gas A/T for the official use of the Embassy of the State of Qatar is exempt from value-added tax. (BIR Ruling No. DA-ITAD-119-01 dated December 6, 2001) 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,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

November 8, 2006

DA ITAD BIR RULING NO. 140-06 Article 11 — Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-27-06 Gramata & Associates Law Office 2nd Floor, FCC Building 7494 Santillan Street 1230 Makati City Attention: Mr. Delfin N. Gramata Gentlemen : This refers to your application for relief from double taxation dated March 14, 2006, requesting confirmation on behalf of your client, T & S Laser Solutions, Inc. (hereinafter referred to as "TLS") that Copyright 2017

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the interest arising from its loan in the amount of Forty Six Million Japanese Yen (JpY46,000,000.00) from T & S, Inc. (hereinafter referred to as "T&S") to be financed by the Japan Bank for International Cooperation (JBIC), a financial institution wholly owned by the Japanese government, is exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Japan tax treaty. It is represented that T&S is a nonresident foreign corporation duly organized and existing under the laws of Japan with principal address at 256-1, Ukizuka, Yashio City, Saitama Pref. Japan; that T&S holds 99.97% of the total subscribed shares of TLS, a corporation duly organized and existing under the laws of the Philippines with principal address at Lot-44 First St., First Philippine Industrial Park, Sta. Anastacia Sto. Tomas, Batangas; that TLS is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-62. It is further represented that on October 13, 2005, T&S and TLS entered into a Loan Agreement whereby the former granted to the latter the principal loan in the amount of Forty Six Million Japanese Yen (JpY46,000,000.00) with an interest rate of One and 60/100 percent (1.6%) per annum; and that sometime in December of 2005, a certification was issued by the JBIC to the effect that on October 28, 2005, T&S obtained a loan in the amount of JpY46,000,000.00 to be used to finance the loan that T&S as lender, made available to TLS as borrower, per Loan Agreement dated October 13, 2005. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. DHEACI

However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of the Contracting State but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a)

10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures;

15 per cent of the gross amount of the interest in all other cases.

Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest.

Notwithstanding, the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. (Emphasis supplied)

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means:

(a)

In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency;

(b)

In the case of the Philippines, the Development Bank of the Philippines; and

(c)

Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub-paragraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States.

The term "interest" as used in this Article means income derived from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures."

Based on the above provisions, interest derived in the Philippines by the Government of Japan including its political subdivisions, local authorities and financial institutions; or from debt-claims guaranteed or indirectly financed by a financial institution wholly owned by the Japanese government, shall not be subject to Philippine income tax. TcEDHa

In the instant case, however, it should be noted that the Loan Agreement in the amount of JpY46,000,000.00 from which the subject interest is derived is solely by and between T&S and TLS, and, there is nothing therein which, as represented, provides that JBIC guarantees or shall finance indirectly, the said loan of TLS. While it is true that the amount of JpY46,000,000.00 which T&S lent to TLS came from JBIC, still, such amount was obtained by T&S through another loan agreement it executed with JBIC on October 28, 2005. Therefore, it cannot be said that the subject interest is derived from a loan which was indirectly financed/guaranteed by the JBIC. The second loan agreement between T&S and JBIC is a separate and distinct loan agreement from that executed between T&S and TLS. This is so notwithstanding a certification from JBIC that the amount of JpY46,000,000.00 borrowed by T&S shall be used by the latter to finance a loan made by TLS. In view of all the foregoing, this Office is of the opinion and so holds that the interest derived from the Loan Agreement between T&S and TLS dated October 13, 2005 is subject to the preferential tax rate of 15% of its gross amount, pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-27-06 dated March 16, 2006) Moreover, the said Loan Agreement is subject to documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended, at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement. This ruling is issued on the basis of the foregoing 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.

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Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

November 8, 2006

DA ITAD BIR RULING NO. 139-06 Articles 5 (Permanent Establishment), 7 (Business Profits) Philippines-Germany tax treaty; BIR Ruling No. DA-ITAD 93-06 Regalado Bautista & Menzon Law Offices Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City Attention: Atty. Edith Abana-Bautista Atty. Rhodora Corcuera-Menzon Gentlemen : This refers to your letter dated August 10, 2006 on behalf of your client, Canon Information Technologies Philippines, Inc. (Canon-Philippines), requesting a ruling on the tax implication of the purchase of software by Canon-Philippines from Gentleware AG (Gentleware-Germany) pursuant to Article 7 of the Philippine Germany tax treaty. It is represented that Gentleware-Germany is a nonresident foreign corporation, organized and existing under the laws of Germany, with principal office at Ludwigstr. 12, 20357 Hamburg, Germany; that Gentleware-Germany is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration of Corporation/Partnership dated August 9, 2006 issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and Copyright 2017

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software development involving imaging, communications and related technologies; It is further represented that Canon-Philippines purchased a Poseidon for UML Standard Edition 4.x (software) from Gentleware-Germany; that under the Gentleware Single User License Terms and Conditions (Agreement), Gentleware-Germany grants to Canon-Philippines a nonexclusive, nontransferable, perpetual, limited right and license to: a)

permit Licensed Developers to install and use the Licensed Software, on per product or per module basis, for the sole purpose of creating Applications;

copy or have copied the Licensed Software as necessary for the purpose of exercising the rights granted under this Section 2 for back-up or disaster recovery purposes, provided, that Gentleware's copyright notice and other proprietary rights notices are reproduced on each copy.

That Canon-Philippines may not, nor may permit any other person or entity to use, copy, modify, or distribute the Licensed Software (electronically or otherwise), or any copy, adaptation, transcription, or merged portion thereof, or the Documentation except as expressly authorized by Gentleware-Germany; that Canon-Philippines may not modify or port the Licensed Software to operate on platforms other than those for which it has paid the appropriate fees; that Canon-Philippines may not, nor may permit any other person or entity to, reverse assemble, reverse compile, or otherwise translate any binary forms of the licensed Software, except to the extent applicable laws specifically prohibit such restriction; that Canon-Philippines' rights may not be transferred, leased, assigned, or sublicensed except for a transfer of the License Agreement in its entirety to (1) a successor in interest of Canon-Philippines' entire business who assumes the obligations of this License Agreement or (2) any other party who is reasonably acceptable to Gentleware-Germany, enters into a substitute version of this License Agreement, and pays an administrative fee intended to cover attendant costs; that no service bureau work, multiple-user license, or time-sharing arrangement is permitted, except as expressly authorized by Gentleware-Germany; that if Canon-Philippines uses, copies, or modifies the Licensed Software or transfers possession of any copy, adaptation, transcription, or merged portion thereof to any other party in any way not expressly authorized by Gentleware-Germany, all licenses under this License Agreement are automatically terminated; that Gentleware-Germany shall have the sole and exclusive ownership of all right, title, and interest in and to the Licensed Software and all modifications and enhancements thereof (including ownership of all trade secrets and copyrights pertaining thereto), subject only to the rights and privileges expressly granted to Canon-Philippines; that this License Agreement does not provide Canon-Philippines with title or ownership of the Licensed Software, but only a right of limited use; that the consideration for the purchase of the software is $2,241.00; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. DaHISE

In reply please be informed as follows: Concerning software payments, the Human of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(24)) covers software payments made as of November 18, 2003 and until the effectivity of the second Circular and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software:

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"The term "royalties" as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term "use" as contained herein shall include the reselling or distribution of software. "Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(25)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a., Transfer of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i. The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; ii. The right to prepare derivative computer programs based upon the copyrighted software; iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

Transfer of copyrighted articles. A copyrighted article incorporating a software

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includes a copy of the software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any other medium. If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. "xxx

xxx

xxx"

The substantial difference between the two Circulars is their characterization of payment from the purchase of a copyrighted article incorporating a software, like the license fee for the Licensed Software where the licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and not readily the right to market or exploit the Licensed Software. Under the first Circular, the license fee is treated as royalties and taxable as such, while under the second Circular, the license fee is treated as business income (or business profits) and taxable as such, as described above. The fact that what is being transferred to Canon-Philippines is only a copyrighted article incorporated in a software and there was no transfer of ownership thereto including pertinent rights protected under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005, Section 5b thereof, will apply in this case which states that "If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income." Thus, payments made by Canon-Philippines to Gentleware-Germany, being business income (or business profits), is subject to income tax in the Philippines only if it is attributable to a permanent establishment which Gentleware-Germany has in the Philippines, under paragraph 1, Article 7 in relation to Article 5 of the Philippines-Germany tax treaty, to wit: ScAHTI

"Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. Copyright 2017

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The term 'permanent establishment' shall include specially:

a place of management;

a branch;

an office;

a factory;

a workshop;

a warehouse, in relation to a person providing storage facilities for others;

a mine, quarry or other place of extraction of natural resources;

h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months; xxx

xxx

xxx"

Based on the foregoing, in order for Gentleware-Germany to be considered to have a permanent establishment to which said business profit may be attributed, it must satisfy the following conditions 3(26): —

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

—

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

—

Since it appears, based on the SEC Certificate that Gentleware-Germany is not registered either as a corporation or as a partnership in the Philippines, that Gentleware-Germany does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, Gentleware-Germany is deemed as not having permanent establishment to which said business profits may be attributed to. Thus, for as long as Gentleware-Germany is deemed not to have a permanent establishment in the Philippines to which its profits may be attributable, income from its sale of software, such as that made to Canon-Philippines in the instant case, shall be exempt from income tax and consequently withholding tax. (BIR Ruling No. DA-ITAD 93-06 dated August 22, 2006) However, the electronic transfer of software from the nonresident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the National Internal Revenue Code, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% VAT from its payments before it telegraphically transfers it to the Copyright 2017

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account of the Gentleware-Germany. With regard to the procedures for withholding and paying the VAT, Canon-Philippines shall be responsible for the withholding of the 10 percent/(12 percent effective February 1, 2006) VAT on the license fee before making any payment to Gentleware-Germany. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Canon-Philippines may include as part of the cost of the purchased software provided to it by Gentleware-Germany the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Gentleware-Germany and the fourth copy for Canon-Philippines as its file copy. [Section 4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2(b), RR No. 16-05); Section 4.114(D), RR No. 2-98, as last amended by RR No. 28-03] 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. DIESaC

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

November 8, 2006

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DA ITAD BIR RULING NO. 138-06 Arts. 5 & 7, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 145-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Romeo H. Duran Tax Principal Gentlemen : This refers to your letter dated January 16, 2006 requesting confirmation that the service fees paid by Creative Diecast Philippines Corporation (CDPC) to Creative Diecast Corporation (CDC) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code) and the Philippines-Japan tax treaty. It is represented that CDC is a nonresident foreign corporation taxable under the laws of Japan with business address at 3677-4 Ohata, Tsuru-shi, Yamanashi 402-0045, Japan and Tax Reference Number 00501271, as certified by the District Director of Ohtsuki Tax Office in Japan on October 5, 2005; that CDC is not registered either as a corporation or as a partnership licensed to engaged in business in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 23, 2005; that CDPC, on the other hand, is a company organized and existing under the laws of the Philippines with principal office at Block 7, Lot 5, Complex Avenue, CCIE Compound, Maduya, Carmona, Cavite; that it is primarily engaged in the manufacture of aluminum and zinc alloy diecast products, machine parts and other related products and merchandise, such as, but not limited to, electric appliances, communication and office automation equipment; that CDPC is registered with the Philippine Economic Zone Authority as an export enterprise per Certificate of Registration No. 05-04 dated January 27, 2005. It is further represented that CDPC and CDC entered into a Service Agreement dated December 29, 2003, pursuant to which CDC agreed to provide the following services to CDPC for a fee:

Procurement/sourcing qualified vendors residing overseas;

Marketing and sales promotion planning;

Customer relations and handling of product complaints, if any;

Periodic business and financial reviews, as may be requested;

Consultancy services; and

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Related services.

that the foregoing services shall in no case involve the transfer of CDC's technology, know-how or other intellectual property rights; that in general, CDC shall perform the aforementioned services in Japan or in other countries outside the Philippines; that in cases where it would be necessary for CDC to send employees to the Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed 90 days in any given 12-month period; and that in consideration for the services, CDPC shall pay CDC an annual fee in the amount of Japanese Yen, Twenty Two Million Three Hundred Forty Thousand Nine Hundred Forty Nine (JPY22,340,949.00) for a completed year of service; and that the Service Agreement shall be effective for a period of one (1) year commencing on January 1, 2004 and ending December 31, 2004, subject to an automatic renewal for another twelve-month period, unless one party gives written notice to the other of its intent not to renew at least thirty (30) days prior to the expiration of the initial or renewed term. TEacSA

In reply, please be informed that paragraph 1 of Article 7 of the Philippines-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. xxx

xxx

xxx"

In view of the foregoing, the profits of a Japanese enterprise shall be taxable only in Japan unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Japanese enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by CDC for the 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

6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in the 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 Copyright 2017

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any taxable year. . . . xxx

xxx

xxx."

Inasmuch as it has been represented that the services will generally be performed by CDC outside the Philippines and that should it be necessary to send its employees to the Philippines, said employees will not stay in the Philippines for more than ninety (90) days in any given 12-month period in their rendition of services to CDPC, CDC may be considered as not having a permanent establishment in the Philippines. In other words, CDC is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than six months within any taxable year in the course of their rendition of services to CDPC. (BIR Ruling No. DA-ITAD 145-05 dated November 23, 2005) In such a case, the income derived by CDC from services rendered to CDPC shall not be subject to Philippine income tax and, consequently, to withholding tax. SaTAED

As regards the imposition of the VAT on the rendition of services of CDC, please be informed further that Section 108 of the Tax Code of 1997 1(27) provides as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2(28) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, in general, the VAT is imposed on services rendered by CDC in the Philippines. On every payment of service fees, CDPC is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3(29) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment of services fees by CDPC, being a PEZA-registered enterprise, to CDC under the above Service Agreement should be, as it is hereby confirmed to be, exempt from VAT. 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:

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Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

November 7, 2006

DA ITAD BIR RULING NO. 137-06 Paragraph 4 (a), Diplomatic Exchange of Notes dated May 6, 2002; Art 5, Agreement between the Govt. of the Federal Republic of Germany and the Govt. of the Republic of the Philippines Sec 109 (K), National Internal Revenue Code of 1997, as amended; BIR Ruling No. DA-ITAD-149-05 Embassy of the Federal Republic of Germany 25th Floor, The RCBC Plaza, Tower 2 6819 Ayala Avenue Makati City Attention: Klaus Tesch First Secretary Gentlemen : This has reference to your Note Verbale WZ 445.11/Auto KFZ No. 54/2006 dated September 11, 2006 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA), Office of Protocol, requesting for exemption from payment of tax on the local purchase of two (2) motor vehicles, for the official use of the Small & Medium Enterprise Development for Sustainable Employment Program under the project of GDC-GTZ Office of the German Embassy, specifically described as follows: Type of use:

Official use Organization: German Development Cooperation-German Technical Cooperation (GDC-GTZ)

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Make: Model year: Color: Engine No.: Frame No.:

9/F, PDCP Bank Center, L.P. Leviste corner V.A. Rufino Streets, Salcedo Village, Makati City two (2) units Toyota Innova 2.5E Diesel M/T 2006 Quick Silver (1) 2KD-9681210 (2) 2KD-9682456 (1) KUN40-5010958 (2) KUN40-5010981

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides, viz: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"

exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees, and ensure that such material is cleared by customs without delay. The aforementioned exemptions shall, with regard to value-added tax (VAT), also apply to material and services (including consulting services) procured in the Republic of the Philippines, as well as to the renting of office premises and accommodation for seconded experts; (Emphasis supplied)

In view thereof, this Office is of the opinion and so holds that the purchases made by GDC-GTZ of materials and services in the Philippines under the Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation executed on September 7, 1971, with Diplomatic Exchange Notes dated May 6, 2002, are exempt from VAT, pursuant to Sec. 109(K) of the NIRC of 1997, as amended. Hence, your herein request for exemption from VAT on the local purchase of two (2) units Toyota Innova E Diesel 2.5L M/T, for the official use of the Small & Medium Enterprise Development for Sustainable Employment Program under the project of GDC-GTZ is hereby granted. (BIR Ruling No. DA-ITAD-149-05 dated November 30, 2005 HTScEI

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Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Article 1 of the Agreement states that the Contracting Parties "may conclude arrangements concerning individual projects of technical co-operation."

November 6, 2006

DA ITAD BIR RULING NO. 136-06 Sec 106 & 108 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-001-99 Embassy of the Federal Republic of Nigeria 2211 Paraiso Street Dasmariñas Village Makati City Attention: Mr. Sam Azuibike Dada Olisa Charge d' Affaires and Head of Mission Gentlemen : This has reference to your Note No. NE/07/10/2006 dated October 11, 2006, referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of taxes on the local purchase of a motor vehicle, for the personal use of Mr. Sam Azuibike Dada Olisa, Charge d' Affaires and Head of Mission of the Embassy of the Federal Republic of Nigeria, specifically described as follows: Type of Use: Make: Model Year: Copyright 2017

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Chassis Number: Engine Number:

TGN40-5007579 1TR-6276135

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of locally-assembled motor vehicles. In other words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles shall, in general, be subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm exemption to the Embassy of the Federal Republic of Nigeria and its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Gas 2.0 M/T, for the personal use of Mr. Sam Azuibike Dada Olisa of the Embassy of the Federal Republic of Nigeria is exempt from value-added tax. (BIR Ruling No. DA-ITAD-001-99 dated June 24, 1999) 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. ITScAE

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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October 31, 2006

DA ITAD BIR RULING NO. 135-06 Sec 106 & 108 of the National Internal Revenue Code of 1997; Article 34, Vienna Convention; BIR Ruling No. ITAD-156-02 Delegation of European Commission in the Philippines 7th Floor, Salustiana D. Ty Tower 104 Paseo de Roxas Legaspi Village Makati City Attention: Mr. Holger Rommen First Secretary Gentlemen : This has reference to your Note No. 06-131 dated September 11, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), Office of Protocol, requesting for the exemption from payment value-added tax (VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. Holger Rommen, First Secretary and Head of Contracts & Finance of the Delegation of the European Commission, specifically described as follows: Make: Model Year: Color: Engine Number: Frame Number:

Hyundai Starex GRX Jumbo 2.5L CRDi MT 2006 Noble White D4CB6036171 KMJWWH7JP6U751056

xxx

xxx"

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105

of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to Mr. Holger Rommen, a German national, and whose Embassy in the Philippines is included in the updated list of diplomatic missions entitled to VAT exemption on purchase of locally-assembled motor vehicles on the basis of reciprocity as confirmed by the Office of Protocol of the DFA in its letter dated October 18, 2005 that his Government allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in your country. Hence, the herein local purchase of one (1) unit of 2006 Hyundai Starex GRX Jumbo 2.5L CRDi MT, for the personal use of Mr. Holger Rommen, First Secretary and Head of Contracts & Finance of the Delegation of the European Commission in the Philippines is hereby granted. (BIR Ruling No. ITAD-156-02 dated September 10, 2002) IDAEHT

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 27, 2006

DA ITAD BIR RULING NO. 134-06 Arts. 7 & 5, Philippines-Malaysia Tax Treaty; BIR Ruling No. DA-ITAD 152-02 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Fulvio D. Dawilan Tax Partner Gentlemen : This refers to your letter dated December 28, 2005 requesting confirmation that the management Copyright 2017

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fees received by Metro Parking (M) Sdn Bhd (MPM) from Metro Parking Management (Philippines), Inc. (MPMPI) are not subject to Philippine income tax and value-added tax (VAT) pursuant to the Philippines-Malaysia tax treaty. It is represented that MPM is a nonresident foreign corporation duly organized and existing under the laws of Malaysia with business address at Lot 1-4, Level 5, Block B South, Pusat Bandar Damansara, Damansara Height, 50490 Kuala Lumpur, Malaysia; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on December 5, 2005; that MPMPI, a subsidiary of MPM, is a corporation organized and existing under the laws of the Philippines with principal business address at 10/F Tower I, The Enterprise Center, 6766 Ayala Avenue, Makati City; that it is engaged in the business of operating and managing one or more buildings for the purpose of renting or leasing property for use as car park, and for the conduct of any lawful trade or business normally associated with the operation of a car park. It is further represented that on January 1, 2005, MPM and MPMPI entered into a Management Consultancy Agreement (Agreement) whereby MPM agreed to render the following services and support functions: 1)

provision of management time, planning and training,

provision of financial support,

provision of review management accounting and audit report annually,

provision of car park survey data and analytical studies,

provision of car park management consultancy,

provision of training and recommendation for improvement on car park operational matters,

provision and recommendation of suitable car park equipment,

and others as may be required by the MPMPI from time to time.

That the above services shall be carried out by MPM from its home office in Malaysia; that for purposes of better coordination to areas of concern that may arise, employees of MPM may visit the Philippines from time to time, whenever necessary; that in consideration for the services to be performed by MPM to MPMPI, the latter shall pay the agreed management consultancy fees in the total amount of P4,800,000.00 (fixed) plus either P3,000,000.00 or 6% of the total gross revenue per annum, whichever is higher, from January 2005 onward; that the fee shall be inclusive of out-of-pocket or any incidental expenses such as airline tickets, hotel accommodation, meal allowances, telecommunication expenses, travel expenses, and the like, incurred by the MPM in coming to the Philippines from Malaysia to perform its duties under this Agreement; that the Agreement shall commence on the 1st day of January 2005 and shall continue in force under the same terms and conditions, unless either party gives written notice to the other, not later than sixty (60) days before the end of the current financial year, of its desire to renegotiate the terms and conditions hereof; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. SHECcT

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In reply, please be informed that Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty provide: "Article 7 BUSINESS PROFITS 1.

The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much thereof as is attributable to that permanent establishment. xxx

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT 1.

For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

The term 'permanent establishment' shall include especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce;

a farm or plantation;

a building site or construction, installation or assembly project which exists for more than 6 months. xxx

xxx

xxx"

Pursuant to Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if such enterprise has a permanent establishment situated in the Philippines and only so much of such profit that is attributable to that permanent establishment. Inasmuch as MPM does not have a fixed place of business in the Philippines, and, as such, is deemed not to have a permanent establishment in the Philippines, the service fees to be paid by MPMPI for the services rendered under the subject Agreement are not subject to Philippine income tax. (BIR Ruling No. DA-ITAD 152-02 dated August 29, 2002) However, inasmuch as it has been represented that MPM may send its personnel to the Philippines to perform the abovementioned services for purposes of better coordination to areas of concern that may arise, whenever necessary, please be informed that Section 25(A)(1) of the National Internal Revenue Copyright 2017

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Code (Tax Code) of 1997 provides: "Sec. 25.

Tax on Nonresident Alien Individual. —

(A) Non-resident Alien Engaged in Trade or Business Within the Philippines. — (1) In general. — A nonresident alien individual engaged in trade or business in the Philippines shall be subject to income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines', Section 22(G) of this Code notwithstanding. xxx

xxx

xxx"

Based on the foregoing provision, a nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines and therefore shall be subject to Philippines income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. Applying this to the instant case, any income that would be received by the MPM's personnel in the course of their rendition of the abovementioned services to MPMPI, shall be subject to Philippine income tax if their aggregate period of stay in the Philippines exceeded 180 days. Otherwise, said income shall be tax exempt. As regards the deductibility of the management consultancy fee as an ordinary and necessary business expense on the part of MPMPI, this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer from treating the same as a deductible item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34(A)(1)(b) of the Tax Code of 1997. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003) Moreover, while the payments for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for MPMPI within the Philippines are, however, subject to 10% (12% effective February 1, 2006, under Republic Act No. 9337) 1(31) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, MPMPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to MPI. In remitting the VAT withheld, MPMPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from MPMPI if it is VAT-registered taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchase or treated as an "expense" or as an "asset", whichever is applicable. In addition, it is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for MPI and the fourth copy for MPMPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall Copyright 2017

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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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

RMC 7-2006 Publishing the Full text of the Memorandum of Executive Secretary Eduardo R. Ermita dated January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax Rate from Ten Percent to Twelve Percent.

October 30, 2006

DA ITAD BIR RULING NO. 133-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. ITAD-19-04 Embassy of Australia 23rd Floor, Yuchengco Tower, RCBC Plaza, 6819 Ayala Ave. cor. Sen. Gil Puyat Ave., Makati City Attention: Mr. Sam Paul Zappia Counsellor Gentlemen : This has reference to your Note No. 341/06 and File No. MN94/00109 dated September 14, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for Copyright 2017

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the exemption from payment of ad valorem and value-added taxes (VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. Sam Paul Zappia, Counsellor of the Embassy of Australia specifically described as follows: Make: Model Year: Color: Frame Number: Engine Number:

Toyota Innova G Gas 2.0 A/T 2006 Light Green Mica Metallic TGN40-5007982 ITR-6287620

indirect taxes of a kind which are normally incorporated in the price of goods or services; "xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from VAT and ad valorem tax on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm the exemptions to the Embassy of Australia or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government allows similar exemptions to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles thereat. Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Gas 2.0 A/T for the personal use of Mr. Sam Paul Zappia, Counsellor of the Embassy of Australia is exempt from VAT and ad valorem tax. (BIR Ruling No. ITAD-19-04 dated February 23, 2004) 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. aHECST

Very truly yours,

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October 27, 2006

DA ITAD BIR RULING NO. 132-06 Article 10 (2) (a), Philippines-Netherlands tax treaty; ITAD Ruling No. 28-99; BIR Ruling No. 559-88 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your application for relief from double taxation dated June 26, 2006, on behalf of your client, Diageo Philippines, Inc. (DPI), requesting confirmation of your opinion that the dividend payments of DPI to Selviac Nederland B.V. (Selviac) are subject to a 10% preferential withholding tax rate, pursuant to Article 10(2) of the Philippines-Netherlands tax treaty. It is represented that Selviac is a nonresident foreign corporation organized and existing under the laws of The Netherlands with office address at Molenwerf 10-12, 1014 BG Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated June 23, 2006 issued by the Securities and Exchange Commission; that DPI is a corporation duly organized and existing under laws of the Philippines, with principal office and place of business at 23rd Floor, The Enterprise Center, Ayala Avenue, Makati City 1226, Philippines. It is further represented that DPI has an authorized capital stock of Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand (500,000) shares with a par value of One Hundred Pesos (PhP100.00) per share; that out of 500,000 DPI shares, Two Hundred Eighty Two Thousand Five Hundred (282,500) shares have been issued and outstanding; that Selviac is the registered owner of One Hundred Forty Four Thousand Seventy Two (144,072) common shares of DPI with a par value of One Hundred Pesos (PhP100.00) per share or an aggregate value of Fourteen Million Four Hundred Seven Thousand Two Hundred Pesos (PhP14,407,200.00) representing 50.99% of the total amount subscribed and paid up shares in DPI; that on February 15, 2006, the Board of Directors of DPI declared cash dividends in the amount of Three Hundred Twenty Million Nine Hundred Thirty Four Thousand One Hundred Twenty Five Pesos (PhP320,934,125.00), to be distributed among DPI's stockholders of record as Copyright 2017

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of December 30, 2005 pro-rata to the number of shares held by them as of December 30, 2005, payable on a date not earlier than March 31, 2006 but not later than December 31, 2006; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Article 10 of the Philippines-Netherlands tax treaty provides as follows, viz: "Article 10 DIVIDENDS 1.

Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. EaISTD

However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a)

10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at leas 10 per cent of the capital of the company paying the dividends;

15 per cent of the gross amount of the dividends in all other cases. xxx

xxx

The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the above-cited provisions, the 10 percent preferential tax rate on dividends apply whenever the beneficial owner of the dividend owns directly at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that Selviac holds more than 10% of the capital of DPI, this Office is of the opinion and so holds that the dividend payments by DPI to Selviac shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 28-99; see also BIR Ruling No. 559-88) 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.

Very truly yours,

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Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 27, 2006

DA ITAD BIR RULING NO. 131-06 Articles 7 & 5, Philippines-Switzerland tax treaty; Section 109, NIRC of 1997, as amended by R.A. No. 9337; R.A. No. 7916 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen/Ladies : This refers to your application for relief from double taxation dated October 21, 2005, on behalf of your client, Philippine Associated Smelting and Refining Corporation (PASAR), requesting confirmation of your opinion that the sale of goods by Glencore AG and Glencore International AG (collectively referred to hereunder as "GLENCORE") shall not be taxable in the Philippines, pursuant to the Philippines-Switzerland tax treaty. It is represented that the PASAR is an enterprise registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 82-40 dated September 23, 1982 as an Ecozone Export Enterprise, with principal office at Leyte Industrial Development Estate, Isabel, Leyte; that PASAR is entitled to the 5% on gross income tax incentive in lieu of all national and local taxes, per certification issued by PEZA dated February 28, 2003; that it is also a VAT-registered taxpayer; that it is registered to engaged in the manufacture of copper cathodes and its by-products namely: dore metal, sulfuric acid, granulated slag, iron concentrate slag, tellurium, palladium, platinum, gypsum, EP dust, selenium powder, and copper telluride; that PASAR has storage facilities at its plant site in Isabel, Leyte (the Warehouse), where it stores copper concentrates for processing at its smelting and refining facilities; that Glencore AG Copyright 2017

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is a nonresident foreign corporation duly organized and existing under the laws of Switzerland with office address at Baarermattstrasse 3, P.O. Box 666, CH-6341 Baar, Switzerland; that it is engaged in the business of trading in raw materials of all kinds on an international scale; that it is not registered either as a corporation or a partnership in the Philippines per certification dated October 7, 2005 issued by the SEC; that Glencore International AG is also a nonresident foreign corporation duly organized and existing under the laws of Switzerland with office address at Baarermattstrasse 3, P.O. Box 777, CH-6341 Baar, Switzerland. It is further represented that on August 29, 2005, PASAR entered into separate Consignment Agreements ("Agreements") with GLENCORE for the deposit and storage of copper concentrates ("Concentrates"); that such Agreements have been duly approved by the PEZA in its letter dated October 12, 2005; that under the Agreements, it is the primary concern of PASAR to reduce the accumulation of inventory, reduce order scheduling, production and delivery leadtime, ensure continuous supply for its continuous operations/production even in times of global shortages of Concentrates and improve over-all efficiency in production; that GLENCORE wishes to ensure timely supply and delivery of the Concentrates to PASAR; and that to achieve these objectives, GLENCORE and PASAR intend to deposit and store Concentrates in the Warehouse owned by PASAR subject to the following terms and arrangements, to wit:

Upon arrival of Concentrates in the Philippines, PASAR will store the Concentrates delivered by GLENCORE in separate lots. Each parcel of Concentrates will be segregated from all other materials and will be clearly identified and marked as GLENCORE's property. The Concentrates will be kept safe, secure and in good condition;

II.

The storage area provided in the Warehouse must meet GLENCORE's reasonable satisfaction. GLENCORE or its duly appointed representative will have the right to access and inspect the storage area as well as the stored quantity of Concentrates at any time. Cost of inspection to be at GLENCORE's expense. The stored Concentrates will furthermore be kept at GLENCORE's irrevocable disposal until release of the material. In case PASAR should need to transfer the Concentrates to another location, PASAR must get the prior written consent of GLENCORE. PASAR shall bear the risk and expense of such transfer and also the liability for storage and/or reduction in value as the result of the transfer of the goods. GLENCORE shall have the right to access and inspect the new storage area as well as the transferred Concentrates at any time;

III.

PASAR will provide storage in the Warehouse for a monthly fee at the prevailing market rate of US$ 0.20 per wet metric ton, to be paid by GLENCORE in US Dollars promptly after receipt of the invoice for storage by telegraphic transfer. At the end of each month, PASAR will undertake an inventory in the presence of a GLENCORE representative, which will be submitted together with the invoice for storage fees. PASAR will undertake to issue a Holding Certificate in such form as provided in the Schedule immediately upon arrival of each shipment of Concentrates, countersigned by GLENCORE's independent inspector. Each Holding Certificate will set out the exact point of stockpiling, confirm that the Concentrates are stockpiled separately at the Warehouse and are clearly identified as the property of GLENCORE, and show the wet weight and origin of the Concentrates stockpiled in the Warehouse as evidenced in the weighing notes (as set out in clause VI below) upon the arrival of the Concentrates at the port of discharge. If the Concentrates are not sold to PASAR, but directed to another destination, all charges related to loading/handling from the

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carrying vessel to the Warehouse and from the Warehouse to the new carrying vessel will be at GLENCORE's expense. On such charges PASAR will recognize a mark-up of 10%; IV.

PASAR will make periodic withdrawals of Concentrates from the Warehouse. The parcel(s) withdrawn by PASAR will be determined by GLENCORE subject to the technical constraints of PASAR. Withdrawal by PASAR shall be made in line with the instructions given by GLENCORE and only upon receipt of GLENCORE's prior consent to such release. After the sales of the Concentrates and the issuance of the invoice for such Concentrates, GLENCORE will release the corresponding quantity of Concentrates to PASAR by means of a fax or e-mail (the "Release") as soon as PASAR has made provisional payment to GLENCORE as agreed in the corresponding contract;

As long as the title to the Concentrates has not passed to PASAR as per the corresponding Sales Contract, GLENCORE has unconditional property in the Concentrates as set out in the Holding Certificate and PASAR confirms not to part with possession, charge or otherwise encumber the Concentrates or prejudice GLENCORE's rights to it or give any third party any rights (whether possessory or legal) to the Concentrates;

VI.

GLENCORE will not recognize any sale upon delivery of the Concentrates to the Warehouse. It will only recognize the sale and issue the invoice upon withdrawal by PASAR of the Concentrates for production purposes. On the other hand, PASAR will not recognize the Concentrates stored in its Warehouse as part of its inventory until GLENCORE's Release. ADSTCI

It is further represented that PASAR is a custom smelter of Concentrates; that it smelts the Concentrates to produce copper anodes; that these anodes are in turn processed in the refinery to produce copper cathodes which are then sold to the export market; that the smelter is fed a mix of Concentrates with an average copper content of between 29-32%; that PASAR purchases Concentrates with a copper content ranging from 25-37%; that raw materials with content below 25% are considered too low a quality to be able to blend with higher grade material (to produce 29-32%) due to the scarcity of high grade (32%+) raw materials; that PASAR, with the consent of GLENCORE, may transfer the Concentrates to another storage area also within PASAR's plant site in Isabel, Leyte, if the existing storage area will be required by PASAR for other purposes; that the Concentrates may not be sold to PASAR should the Concentrates' physical and chemical composition differ significantly from the required specifications or should the Concentrates not be of the quality and/or quantity specified by PASAR for the copper smelting process. Further, if due to production limitations, PASAR is unable to consume the raw materials within reasonable time, GLENCORE has the option to ship the materials to another customer outside the Philippines; possibly to any custom smelter in the world, but most likely one in South East Asia; that as spelled out in the Agreements, the Concentrates are owned by GLENCORE and PASAR cannot (i) part with the possession, (ii) charge or otherwise encumber the Concentrates, (iii) prejudice GLENCORE's right to it, or (iv) give any third party any rights (whether possessory or legal) to the Concentrates; and that in no instance may a third party acquire any possessory or legal rights to the Concentrates since PASAR is specifically prohibited from giving any third party such right. In reply, please be informed that Article 7 (1) of the Philippines-Switzerland tax treaty provides as follows, viz: "Article 7 BUSINESS PROFITS Copyright 2017

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1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment." Applying the foregoing provision, the income payments to GLENCORE by PASAR in case the Concentrates are sold to PASAR are subject to Philippine income tax if such payments are attributable to a permanent establishment which GLENCORE has or might have in the Philippines. A permanent establishment, as defined in the paragraph 1, Article 5 (Permanent Establishment) of the same tax treaty, means "a fixed place of business through which the business of the enterprise is wholly or partly carried on". In the instant case, the warehouse which will be utilized (in whole or in part) by GLENCORE under its Agreement with PASAR for the deposit and storage of the Concentrates, can be considered a permanent establishment if the general requisites of a permanent establishment are determined to be attendant in the use of the warehouse. The 2003 Organization for Economic Cooperation and Development (OECD) Model Tax Convention Commentary (pages 85-91) give guidance as to when a facility such as a warehouse can become a permanent establishment, as it explains: "2. Paragraph 1 gives a general definition of the term 'permanent establishment' which brings out its essential characteristics of a permanent establishment in the sense of the Convention (tax treaty), i.e., a distinct 'situs', a 'fixed place of business'. The paragraph defines the term 'permanent establishment' as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: —

the existence of a 'place of business', i.e., a facility such as premises or, in certain instances, machinery or equipment;

—

this place of business must be 'fixed', i.e., it must be established at a distinct place with a certain degree of permanence;

—

xxx

4. The term 'place of business' covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g., for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. Copyright 2017

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4.1

As noted above, the mere fact that an enterprise has a certain of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is therefore required. Thus, for instance, a permanent establishment could exist where an enterprise illegally occupied a certain location where it carried on its business.

4.2

Whilst no formal legal right to use a particular place is required for that place to constitute a permanent establishment, the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise. These principles are illustrated by the following examples where representatives of one enterprise are present on the premises of another enterprise. A first example is that of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that cases, the customer's premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a fixed place of business through which the business of that enterprise is carried on . . . . xxx

4.6

xxx

The words 'through which' must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose. Thus, for instance, an enterprise engaged in paving a road will be considered to be carrying on its business 'through' the location where this activity takes place.

5. According to the definition, the place of business has to be a 'fixed' one. Thus in the normal way there has to be a link between the place of business and a specific geographical point. . . . cTIESD

xxx

6. Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e., if it is not of a purely temporary nature. . . . xxx

xxx

7. For a place of business to constitute a permanent establishment the enterprise using it must carry on its business wholly or partly through it. As stated in paragraph 3 above, he activity need not be of a productive character. Furthermore, the activity need not be permanent in the sense that there is no interruption of operation, but operations must be carried out on a regular basis. xxx

xxx

10. The business of an enterprise is carried on mainly by the entrepreneur or persons who are in paid-employment relationship with the enterprise (personnel). This personnel includes employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The powers of such personnel in its relationship with third parties are irrelevant. It makes no difference whether or not the dependent agent is authorized to conclude contacts if he works at the fixed place of business. . . ."

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Accordingly, the subject warehouse can constitute a permanent establishment if (1) it is a place of business at the disposal of GLENCORE; (2) it is fixed, or established at a distinct place with a certain degree of permanence; and (3) it is used for carrying on the business of GLENCORE where personnel dependent on them conduct business on their behalf at the warehouse. Concerning requirement number (1), the subject warehouse owned by PASAR can become a place of business at the disposal of GLENCORE if the warehouse will be used for a sufficiently long period of time and if the activities that will be performed in the warehouse go beyond preparatory and auxiliary activities. As to whether or not the warehouse will be used for a sufficiently long period, the fact that the relevant Agreements do not contain a fixed term of at most six months for GLENCORE to deliver the Concentrates to PASAR and to use the warehouse to store the Concentrates shows that the warehouse will be used for a sufficiently long period of time. As to whether or not the activities that will be performed in the warehouse go beyond preparatory and auxiliary activities, it is noteworthy that the respective subparagraphs (a) and (b), paragraph 3, Article 5 of the Philippines-Switzerland tax treaty provides that "the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise" and "the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery" by themselves are activities of a preparatory and auxiliary character. The fact that the activities of storing and delivering the Concentrates are of a preparatory and auxiliary character shows that the warehouse for this purpose cannot be regarded as a place of business that will constitute a permanent establishment of GLENCORE. Concerning requirement number (2), the fact that the warehouse is established at a distinct place in the Philippines with a certain degree of permanence constitutes the same as a fixed place of business. Concerning requirement number (3), although not expressly mentioned in the relevant Consignment Agreements, the fact that PASAR will store the Concentrates in its warehouse prior to its use thereof for GLENCORE's account and that PASAR's personnel will be responsible for the storage, inventory and security of the Concentrates, is sufficient to consider these personnel as dependent on GLENCORE who conduct businesses on their behalf. AcICTS

In view of the foregoing, this Office is of the opinion and so holds that although the subject warehouse can be considered a fixed place of business through which the business of Glencore can be wholly or partly carried on, the same does not constitute a permanent establishment under the Philippines-Switzerland tax treaty because the activities connected to such warehouse as embodied in the subject Agreements are merely of a preparatory and auxiliary character. This is buttressed by the fact that GLENCORE (i.e., Glencore AG and Glencore International AG) are not licensed to engaged in business in the Philippines as confirmed by the relevant certificates issued by the SEC which support the conclusion that GLENCORE do not have other fixed places of business in the Philippines which may be constituted as their permanent establishments. Hence, payments received by GLENCORE from the sale of their Concentrates to PASAR are exempt from Philippine income tax. However, Section 107 of National Internal Revenue Code of 1997 (Tax Code) provides that the importation of the Concentrates is subject to ten percent (10%) value-added tax (VAT), to wit: "Section 107. Value-added Tax on Importation of Goods. — (A) In General. — There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) 1(32) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if Copyright 2017

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any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody . . ."

For purposes of this provision, an "importer" refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business (Section 4.107-1, Revenue Regulations No. 16-2005). GLENCORE is deemed to be the importer of the Concentrates because it retains it ownership over such Concentrates until the time they reach the territorial jurisdiction of the Philippines and that PASAR will acquire ownership over the Concentrates only when such have been sold to PASAR. Section 24 of Republic Act No. (RA) 7916 (The Special Economic Zone Act of 1995), as amended by RA 8748, provides as follows, viz: "SEC. 24. Exemption from National and Local Taxes. — Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a)

Three percent (3%) to the National Government;

(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." (Emphasis supplied)

Furthermore, Section 4(c) of the same law states that "(e)nterprises located in export processing zones are allowed to import capital equipment and raw materials free from duties, taxes and other import restrictions." It is clear from the foregoing provisions, that the incentives given by RA 7916 such as tax exemptions from payment of taxes pertain only to "business establishments operating within the ECOZONE" or "(e)nterprises located in export processing zones". Thus, it cannot be said that such incentives may extend to GLENCORE since statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom. (Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue, et al., G.R. No. 117359, July 23, 1998, 96 SCRA 527). Such being the case, GLENCORE shall pay value-added tax prior to the release of the Concentrates from customs custody. It must be emphasized, however, that PASAR shall still be enjoying the incentives given to it by the aforequoted Section 24 and jurisprudence for being a "Philippine Economic Zone Authority (PEZA)-registered enterprise under Certificate of Registration No. 82-40 dated September 23, 1982 as Ecozone Export Enterprise" in line with "the policies of the special law creating the zone". In Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: Copyright 2017

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"Special laws may certainly exempt transactions from the VAT. 2(33) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 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. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an ecozone. . . . An ecozone — indubitably a geographical territory of the Philippines — is, however, regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone. . . . 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: . . ., 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. 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. xxx

xxx

xxx"

It is clear from the foregoing pronouncement that no VAT may be passed on, whether directly or indirectly, to PASAR, being a PEZA-registered enterprise. And GLENCORE, not being a VAT registered taxpayer, cannot directly pass on VAT to PASAR. However, GLENCORE may still include the VAT Copyright 2017

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charged on the importation of Concentrates as part of its cost to sell and thereby indirectly passing VAT to PASAR. Accordingly, to comply with the mandate of RA 7916 that no VAT may be passed on to business establishments operating in the ECOZONE like PASAR, the importation of Concentrates by GLENCORE which will ultimately be sold to PASAR is hereby considered exempt from VAT, pursuant to Section 109(q) 3(34) of the Tax Code, as amended. To recapitulate, this Office is of the opinion and so holds that: (a)

the subject warehouse, although a fixed place of business through which the business of GLENCORE can be wholly or partly carried on, is not a permanent establishment because the activities that are performed therein are merely of a preparatory and auxiliary character. Hence, income payments received by GLENCORE from the sale of the Concentrates to PASAR are exempt from Philippine income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-Switzerland tax treaty;

(b)

The importation of the Concentrates by GLENCORE with a copper content ranging from 25% to 37% AND are ultimately sold to PASAR are exempt from VAT, pursuant to Section 109 of the Tax Code, as amended by RA 9337.

All rulings inconsistent herewith are therefore modified or amended accordingly. 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 considered to be without force and effect insofar as the herein parties are concerned. DcTAIH

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG Commissioner Bureau of Internal Revenue Footnotes 1. 2. 3.

Effective February 1, 2006, the rate shall be twelve percent (12%). Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No. 9337] SEC. 109. Exempt Transactions. — The following transactions shall be exempt from the value-added tax: xxx

xxx

(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529, and 1590;

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October 27, 2006

DA ITAD BIR RULING NO. 130-06 Art. 11, Philippines-Netherlands Tax Treaty; BIR Ruling No. DA-ITAD-193-03; BIR Ruling No. DA-ITAD-45-03 Caltex (Philippines), Inc. 6F 6750 Ayala Avenue Makati City Attention: Mr. Nigel T. Avila Tax Manager Finance & Accounting Services Gentlemen : This refers to your letter dated June 14, 2004, requesting confirmation of your opinion that the interest on refinancing loans to be extended by Chevron Texaco Finance B.V. (CTFBV) to your company, Caltex (Philippines), Inc. (CPI), shall be subject to the preferential tax rate of 15% pursuant to the Philippines-Netherlands tax treaty. It is represented that CTFBV is a corporation organized and existing under the laws of the Netherlands with principal address at Weena-Zuid 166 3012 NC Rotterdam, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated November 17, 2003; that CPI is a corporation duly organized and existing under the laws of the Philippines with principal address at 6/F 6750 Ayala Avenue, Makati City; that on April 15, 2004, CTFBV and CPI entered into a Credit Agreement (Agreement) whereby CTFBV agrees to make loans to CPI during the period covering the date of the Agreement up to and including the Commitment Termination Date, in an aggregate principal amount of Four Hundred Million US Dollars (US$400,000,000.00) at any one time outstanding up to but not exceeding CTFBV's Commitment 1(35), as it is originally executed or as it may from time to time be supplemented, modified or amended; that under the Agreement, CPI promises to pay CTFBV interest on the unpaid principal amount of each loan for the period commencing on the date of the loan and continuing until the Final Maturity Date at a rate equal to the Applicable Rate as determined with respect to each interest period, provided that interest shall be payable at the Post-Default Rate on any loan or any installment thereof or any interest thereon which shall not be paid in full when due for the period commencing on the due date thereof until the same is paid in full; that during the period commencing on the date of the Agreement and terminating on the Commitment Termination Date, CPI agrees to pay CTFBV a Commitment Fee, which shall be payable quarterly on each Quarter day and at the rate of 0.05% per annum; that the Commitment Fee shall be payable quarterly on each Quarter day and at the Final Maturity Date and shall be computed on the basis of a 360-day year and actual days elapsed; that the Final Maturity Date of the said credit agreement is on April 30, 2016. In reply, please be informed that Article 11 of the Philippines-Netherlands tax treaty provides as Copyright 2017

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follows: "Article 11 INTEREST 1.

Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. aDSHCc

However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a)

10 per cent of the gross amount if such interest is paid: (i)

in connection with the sale on credit of any industrial, commercial or scientific equipment, or

(ii)

on any loan of whatever kind granted by a bank, or any other financial institution,

(iii)

in respect of public issues of bonds, debentures or similar obligations.

15 per cent of the gross amount of the interest in all other cases. xxx

xxx

The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. xxx

xxx

xxx"

Based on the aforequoted provisions, interest income arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a preferential tax rate not exceeding ten percent (10%) of the gross amount of interest if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or on any loan of whatever kind granted by a bank, or any other financial institution, or in respect of public issues of bonds, debentures or similar obligations; and in all other cases, fifteen percent (15%) of the gross amount of the interest. Such being the case, this Office hereby confirms your opinion that the interest payments by CPI to CTFBV shall be subject to a preferential tax rate of fifteen percent (15%) based on the gross amount of the interest, pursuant to the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD-193-03 dated December 16, 2003) In addition thereto and with regard to the Commitment Fee payable under the Agreement, please be informed that the term "interest" refers to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of the money during the term of the loan, as well as for his detention of money after the due date for its repayment. (Sec. 2(a), Revenue Regulations No. 13-00) Thus, payment for interest presupposes the use of one person of another person's money. The commitment fee, however, constitutes payment for CTFBV's Copyright 2017

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undertaking to make available a credit line to CPI but which the latter failed to fully use or avail of. In fact, the payment of the commitment fee assumes the non-use of the full credit line by CPI and for this reason, could not be considered as interest payment. Therefore, the commitment fee, not being interest payment, shall not be subject to the 10% final withholding tax. Further, the commitment fee is considered as payment for services rendered by CTFBV outside the Philippines, and thus the same shall not be subject to any Philippine income tax. (BIR Ruling No. DA-ITAD-45-03 dated March 17, 2003) Moreover, even if considered as derived from Philippine sources, the commitment fee is not taxable to CTFBV because the latter has no permanent establishment in the Philippines as defined under the Philippines-Netherlands tax treaty, CTFBV not having a branch, or an office in the Philippines. Finally, the Credit Agreement executed by and between CTFBV and CPI shall be subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

"Commitment" shall mean the obligation of Lender to make Loans to the Borrower in an aggregate amount equal to US$400,000,000.00 outstanding at any time, subject to the provisions of Section 3.02 hereof.

October 27, 2006

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BIR Ruling No. DA-ITAD 91-06 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated June 28, 2006 requesting confirmation on the following Philippine tax implications arising from the Service Level Agreement (Agreement) which your client, Sony Philippines, Inc. (SPI) entered into with Sony Electronics Asia Pacific Pte. Ltd. (SEAP): 1.

The income payments to be made by SPI to SEAP in consideration for the services to be provided pursuant to the Agreement are service fees and not royalties as defined under Article 12 paragraph 3 of the Philippines-Singapore tax treaty;

Since SEAP does not carry on business in the Philippines through a permanent establishment as defined under Article 5 in relation to Article 7 of the Philippine-Singapore tax treaty, the income payments it receives from SPI are business profits of SEAP which should not be subject to Philippine income tax and consequently, to withholding tax;

The income payments are likewise not subject to value-added tax (VAT) since the services will be performed by SEAP outside the Philippines, pursuant to Section 108(A) of the 1997 Tax Code, as amended.

It is represented that SEAP (formerly Sony Marketing Asia Pacific Pte. Ltd.) is a nonresident foreign corporation organized and existing under the laws of Singapore with principal office address at No. 2 International Business Park, #01-10 Tower One, The Strategy, Singapore 609930 as shown in the Memorandum and Articles of Association of SEAP; that SEAP is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 10, 2006; that SPI, on the other hand, is a company organized and existing under the laws of the Philippines with principal office at 26th Floor, The Enterprise Center, Tower 1, 6766 Ayala Avenue corner Paseo de Roxas Street, Makati City. It is further represented that on April 3, 2006, SEAP and SPI entered into a Service Level Agreement (Agreement) whereby the former agreed to provide to the latter the following services: cSIADa

System Support •

Business Operation Support •

Provide the SIMPLE system covering the following application modules SD, MM, FI & Co.

Maintain and upkeep common business process and Process Definition Document

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(PDD);

•

Maintain system user guide;

•

Evaluate process and system change requests, co-ordinate process and system change control;

Application Support and Maintenance •

Troubleshooting and resolution of 'application problems'. Note that "application problems' refers to the failure of the application to provide correct output or correct results in accordance with its intended design.

•

Troubleshooting and resolution of Customer's on-line screen errors, output printing errors and report errors;

•

Troubleshoot data transmission and interface problems with EAI, local staging and other linked systems

Daily System Operation Support •

Provide monthly/weekly system offline backup and daily online backup for production server;

•

Coordination with Customer and other sales companies on planned down-time to minimize system and operation impact;

•

Coordination and scheduling of registered production jobs. Preparation and processing job parameter changes and Customer ad-hoc job requests for registered jobs;

•

System load balancing and performance monitoring;

•

Perform user ID registration and system authorization changes;

Provision of Helpdesk Services Helpdesk will be provided to the Customer as single point of contact. The Helpdesk will provide the following services:

•

An assigned resolution engineer will respond within 1 hour of the initial incident logged. After Vendor official working hours, the response is within 4 hours;

•

Vendor will apply established escalation processes and procedures to provide an increased level of technical and management resources to resolve the problem in an orderly and timely manner;

•

Ensure all incidents are closed promptly;

•

Monitoring, logging and management of all incidents raised;

•

Maintain knowledge database of frequent problems encountered.

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That the Agreement covers the system application, support and maintenance services of the SIMPLE system; that SIMPLE system is a shared SAP system that supports a few Sony sales companies in Pan Asia region; that the system will automate certain back-office business functions of SPI such as sales and distribution, materials management, financial management and controlling, so as to ensure the smooth running of the critical business operations of SPI; that in consideration for the foregoing services, SPI will pay SEAP service fees in accordance with the schedule provided in the Agreement; that the termination of the contract should be carried out in writing and informed to Vendor one (1) month in advance; that the services shall be performed outside the Philippines except in cases when it is necessary that SEAP shall provide onsite services to SPI provided that such onsite services or related activities in the Philippines shall not continue for a period or periods aggregating more than 183 days; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply please be informed as follows: Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(36)) covers software payments made as of November 18, 2003 and until September 7, 2005 and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software: The terms 'royalties' as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term 'use' as contained herein shall include the reselling or distribution of software. Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus, payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(37)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a.

Transfers of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: EaHDcS

The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease

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or lending; ii.

The right to prepare derivative computer programs based upon the copyrighted software;

iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright.

The determination of whether a transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale or exchange because not all substantial rights have been transferred will be classified as a license generating royalty income. When only copyright rights are transferred, payments made in consideration therefor are royalties. On the other hand, when copyright ownership is transferred, payments made in consideration therefor are business income. b.

xxx

After-Sales Service, Contracts for the use of software are often accompanied with the provision of services (e.g., installation, maintenance, and customization of the software) by personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and distributor. Payments as consideration for after-sales service in a mixed contract are not royalties alone, but will include income from services. The appropriate course to take with such a contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated payments according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. Thus, the part of the payments representing the use of the software will be treated as royalties and taxable as such and the other part of the payments representing the provision of services will be treated as income from services and taxable as such. (Emphasis supplied) IASTDE

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licensee is merely granted access to and use of the Licensed Software and not readily the right to market or exploit the licensed software. Under the first Circular, the license fee is treated as royalty and taxable as such, while under the second Circular, the license fee is treated as business income (or business profits) and taxable as such, as described above. Thus, fees for the software and services made under the Agreement by SPI to SEAP are business profits which will be taxed in the Philippines in accordance with Article 7 of the Philippine-Singapore tax treaty, which provides: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx."

Based on the foregoing, the profits of a Singapore enterprise shall be taxable only in Singapore unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Singapore enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by SEAP for the services rendered in the Philippines under the Service Level Agreement shall be taxable in the Philippines in connection with the activities giving rise to such income only if it has a permanent establishment in the Philippines. In relation thereto, Article 5 of the Philippines-Singapore tax treaty provides: "Article 5 PERMANENT ESTABLISHMENT

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

The term "permanent establishment" includes specially but is not limited to: a)

A seat of management,

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse, in relation to a person providing storage facilities for others;

DSAEIT

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A mine, quarry, or outer place of extraction of natural resources;

A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and

The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. xxx

xxx

xxx."

Inasmuch as the Agreement does not expressly provide for a specific term, the whole of such Agreement, including any continuance and renewal thereof, shall be regarded as being part of the "same or connected project" for the purpose of counting the aggregate period of 183 days above. In other words, the 183 day period shall be counted based on the total number of days the services are rendered in the Philippines beginning the effectivity of the Agreement, including all periods resulting from its continuance and renewal. Accordingly, for as long as the employees or agents of SEAP do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to SPI for the "same or connected project", then SEAP is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 91-06 dated August 14, 2006) Moreover, while the compensation for services rendered outside the Philippines is not subject to the 12% VAT, the fees paid for that portion of the services of SEAP which are rendered in the Philippines are, however, subject to 12% VAT pursuant to Section 108 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337. Accordingly, SPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 12% final VAT on such fees before making any payment to SEAP. In remitting the VAT withheld, SEAP shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from SPI if it is a VAT-registered taxpayer. In case SPI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, SPI is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for SEAP and the fourth copy for SPI as its file copy. [Section 4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2(b), RR No. 16-05); Section 4.114(D), RR No. 2-98, as last amended by RR No. 28-03] 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. SHEIDC

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By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2.

Classification of Payments for Software for Income Tax Purposes. Taxation of Payments for Software.

October 23, 2006

DA ITAD BIR RULING NO. 128-06 Sec 109 (K) of the National Internal Revenue Code of 1997, as amended; BIR Ruling No. DA-ITAD-149-05 Embassy of the Federal Republic of Germany 25th Floor, The RCBC Plaza, Tower 2 6819 Ayala Avenue Makati City Attention: Klaus Tesch First Secretary Gentlemen : This has reference to your Note Verbale WZ 445.11/Auto KFZ No. 55/2006 dated September 11, 2006 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA), Office of Protocol, requesting for exemption from payment of tax on the local purchase of one (1) motor vehicle, for the official use of GDC-GTZ Office of the German Embassy, specifically described as follows: Type of use:

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Make: Model year: Color: Engine No.: Frame No.:

V.A. Rufino Streets, Salcedo Village, Makati City one (1) unit Toyota Innova 2.5E Diesel M/T 2006 Quick Silver 2KD-9681586 KUN40-5010960

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides, viz: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" DAEICc

Based on the Section 109 above, a transaction is exempt from VAT when a special law or an international agreement to which the Philippines is a signatory provides for such exemption. The Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation 1(38) executed on September 7, 1971, with Diplomatic Exchange Notes dated May 6, 2002 partakes the nature of an international agreement as required under Section 109. Paragraph 4(a) of the Diplomatic Exchange of Notes dated May 6, 2002 and which provides as follows, is, in effect, a grant of exemption from VAT: "4. The Government of the Republic of the Philippines shall make the following contributions: It shall (a) exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees, and ensure that such material is cleared by customs without delay. The aforementioned exemptions shall, with regard to value-added tax (VAT), also apply to material and services (including consulting services) procured in the Republic of the Philippines, as well as to the renting of office premises and accommodation for seconded experts; (Emphasis supplied)

In view thereof, this Office is of the opinion and so holds that the purchases made by GDC-GTZ of materials and services in the Philippines under the Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation executed on September 7, 1971, with Diplomatic Exchange Notes dated May 6, 2002, are exempt from VAT, pursuant to Sec. 109(K) of the NIRC of 1997, as amended. Hence, your herein request for exemption from VAT on the local purchase of one (1) unit Toyota Innova E Diesel 2.5L M/T, for the official use of GDC-GTZ is hereby granted. (BIR Ruling No. DA-ITAD-149-05 dated November 30, 2005)

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(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Article 1 of the Agreement states that the Contracting Parties "may conclude arrangements concerning individual projects of technical co-operation."

October 23, 2006

DA ITAD BIR RULING NO. 127-06 Article 13 (Royalties) Philippines-United States of America tax treaty; Sections 23(F), 42 (A) (3), 105, 108 (A) and 109 (q) National Internal Revenue Code of 1997 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated August 19, 2005 requesting confirmation of the following: 1.

That the payments for the Electronic Data Automation (EDA) Costs to be made by TI Philippines Inc. (TI Philippines) to Texas Instruments Incorporated (Texas Instruments) (originally, Geophysical Service Inc.) under an Information Technology Service Agreement (Agreement) are payments for 'know-how', and, therefore, royalties, which are subject to 10% income tax under Article 13 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (Philippines-United States tax treaty), in relation to Article 12 of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-China tax treaty);

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That the payments for the Other Information Technology (IT) Costs to be made by TI Philippines to Texas Instruments under the Agreement are payments for services and not royalties; and

That the payments for the EDA costs and for the other IT costs are exempt from value-added tax (VAT).

Basic facts It is represented that Texas Instruments is a corporation organized and existing under the laws of the United States of America, with registered office at 1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware, United States of America (as confirmed by its Restated Certificate of Incorporation dated April 18, 1985), and with principal place of business at 12500 TI Boulevard, Dallas, Texas 75423, United States of America (as indicated in the Information Technology Service Agreement dated January 1, 2005); that Texas Instruments is not registered as a corporation or as a partnership in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated May 27, 2005 issued by the Securities and Exchange Commission; that, on the other hand, TI Philippines is a corporation organized and existing under the laws of the Philippines, with office address at Baguio City Economic Zone, Loakan Road, Baguio City, Philippines; that TI Philippines is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Baguio City Economic Zone under Certificate of Registration No. 01-010 dated March 1, 2001 and under the Registration Agreement also dated March 1, 2001; and that TI Philippines' business activities consist in (1) the manufacture, assembly and fabrication of products in the electronics industry and other articles of kindred nature, upgrading of test and quality production processes, and production of Quad Flat Pack "QFP", (2) the manufacture of Flip Chip-BGA package, and (3) the manufacture of Generic Ball Grid Array (g-BGA). aTEHCc

It is further represented that on January 1, 2005, Texas Instruments and TI Philippines entered into an Information Technology Service Agreement (Agreement), with an initial effectivity of one year from January 1, 2005, and renewable automatically for succeeding one-year periods; that under the Agreement, Texas Instruments agreed to grant to TI Philippines services relating to certain phases of its information technology needs, including but not limited to, upgrades, maintenance, repair, modification, management, coordination, security, and implementation of global information systems and computer software including but not limited to SAP, ORACLE, Peoplesoft, Unix, and Electronic Design Automation software used for product design and verification, information technology training on the use of systems employed by Texas Instruments, and access to other Texas Instruments Information Technology services and support such as batch processing, inquiring services, on-line system input/output services, off-line system input/output services, magnetic tape service, disk storage service, data conversion service, data archiving and applications programming; that Texas Instruments will assign such personnel to the execution of the services as will ensure the expeditious and efficient performance of the services, and that Texas Instruments may choose to subcontract such services to third parties at its discretion; that services provided by Texas Instruments will be performed in the United States; that in consideration, TI Philippines will pay Texas Instruments an amount, in United States dollars, allocated by the latter in the following manner: 1.

Electronic Data Automation (EDA) Costs. The EDA costs incurred by Texas Instruments and subject to allocation and reimbursement will be allocated to TI Philippines based on the number of seconds TI Philippines personnel (i.e., employees and subcontractors) are logged

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on to any of the EDA software packages provided by Texas Instruments to TI Philippines. 2.

Other IT Costs. Other IT costs will be allocated to TI Philippines on the basis of a fixed activity based per person charge.

that any costs incurred by Texas Instruments not covered by the per-second of use charge or by the per-person charge will be allocated to TI Philippines on a mutually agreed basis; AND that Texas Instruments will periodically notify TI Philippines of the amounts of the cost per second and per person charge used to determine the allocable charge. In addition, it is represented that the payments for the EDA Costs are compensation for the provision of information or 'know-how' by Texas Instruments to TI Philippines relating to the global information systems and computer software including SAP, ORACLE, Peoplesoft, Unix, and Electronic Design Automation used for product design and verification, and access to other Texas Instruments Information Technology services and support such as batch processing, inquiring services, on-line system input/output services, off-line system input/output services, magnetic tape service, disk storage service, data conversion service, data archiving and applications programming; and that, on the other hand, the payments for the Other IT Costs are compensation for the provision of services such as upgrades, maintenance, repair, modification, management, coordination, security, training and implementation of the global information systems; and that Texas Instruments' will provide the services in the United States using its customary skills. Finally, it is also represented that based on the letter of the Intellectual Property Office dated February 18, 2005, the Agreement does not comply with certain provisions of Sections 87 and 88, Article IX (Voluntary Licensing) of the Intellectual Property Code, particularly: AEDCHc

Section 88.1, which states that the Philippine laws shall govern the interpretation of the Agreement and that in the event of litigation, the venue shall be the proper court in the place where TI Philippines, the licensee, has its principal office; and

Section 88.4, which requires that the Philippine taxes on all payments relating to the technology transfer arrangement shall be shouldered by Texas Instruments, the licensor.

Ruling In reply please be informed as follows. 1.

The payments for the EDA Costs are royalties.

With respect to the payments for the EDA Costs, inasmuch as they are compensation for the provision of information or 'know-how' relating to the global information systems and computer software, and access to other Texas Instruments Information Technology services and support, the payments for the EDA Costs are royalties, such payments being considered payments for information concerning industrial, commercial or scientific experience under paragraph 3, Article 13 of the Philippines-United States tax treaty: "Article 13 ROYALTIES 1. Copyright 2017

Royalties derived by a resident of one of the Contracting States from sources within the

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other Contracting State may be taxed by both Contracting States. 2.

However, the tax imposed by that other Contracting State shall not exceed — a)

In the case of the United States, 15 percent of the gross amount of the royalties, and

In the case of the Philippines, the least of: (i)

25 percent of the gross amount of the royalties,

(ii)

15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and

(iii)

the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.

The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." (emphasis supplied) DIETcH

In addition, because Texas Instruments will provide the subject information to TI Philippines through Electronic Commerce (E-Commerce) means where the payments for the EDA Costs are computed based on the number of seconds TI Philippines personnel are logged on to any of the EDA software packages, such payments are characterized as royalties, based on the Report entitled 'Tax Treaty Characterization Issues Arising from E-Commerce' and dated February 1, 2001, prepared by the Technical Advisory Group on Treaty Characterisation of Electronic Commerce Payments of the Organisation for Economic Co-operation and Development (OECD). The payments for the EDA Costs are under Category 19 of the Report, which provides: "Category 19: Technical information Definition The customer is provided with undivulged technical information concerning a product or process (e.g., narrative description and diagrams of a secret manufacturing process). Analysis and conclusions: 33. The Group agrees that payments arising from this category of transactions constitute royalties as they are made for the supply of know-how, i.e., 'for information concerning industrial, commercial or scientific experience." (emphasis supplied)

Being royalties, the payments for the EDA Costs are subject to the income tax rates mentioned in paragraph 2(b), Article 13 of the Philippines-United States tax treaty; subparagraph (iii) thereof provides that the payments are subject to the lowest rate of income tax that may be imposed on the royalties of the same kind paid under similar circumstances to a resident of a third State (commonly known as the Copyright 2017

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most-favored-nation tax treatment of royalties). In relation to the most-favored-nation tax treatment of royalties, the Supreme Court, in Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25, 1999), has cited two conditions for royalties arising in the Philippines and derived by a resident of another country (in this case, the United States) to be subject to a most-favored-nation tax treatment. First, the royalties in question derived by a resident of the other country (the United States) must be of the same kind as those derived by a resident of the third country which are subject to a most-favored-nation tax treatment under the existing tax treaty between the Philippines and the third country. Secondly, the mechanism employed by the other country (the United States) in mitigating the effects of double taxation of foreign-sourced income derived by its residents must be the same with that employed by the third country, which can be determined by taking into account and comparing the respective articles on Elimination of Double Taxation of the other country (the United States) and the third country under their respective tax treaties with the Philippines. In looking for a third country that grants a most-favored-nation tax treatment on royalties, you cited China and, accordingly, the Philippines-China tax treaty whose Article 12 provides: "Article 12 ROYALTIES 1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: ScaAET

15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or

10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design, or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities."

Under Article 12 of the Philippines-China tax treaty, royalties for information concerning industrial, commercial or scientific experience (to which payments for the EDA Costs are assimilated), and even royalties for the use or the right to use of any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial, or scientific equipment, are subject to 10% income tax based on the gross amount of the royalties. This is on the condition that the contracts that give rise to the royalties are approved by the proper Philippine competent authority, namely, the Intellectual Property Office of the Philippines. Copyright 2017

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As to the condition that the contracts that give rise to royalties are approved by the Intellectual Property Office, we take note that based on the letter of the Intellectual Property Office dated February 18, 2005, the Information Technology Service Agreement between Texas Instruments and TI Philippines does not comply with all of the provisions of Sections 87 and 88, Article IX (Voluntary Licensing) of the Intellectual Property Code. This being so, we understand that the non-compliance of the Agreement means that the same is not approved by the Intellectual Property Office, and, therefore, the desired 10% income tax rate on the payments for the EDA Costs, using the Philippines-China tax treaty as a basis, cannot be given due course. Nonetheless, we are pleased to inform you that other than the Philippines-China tax treaty, the 10% income tax rate on royalties is also available under the Convention between the Czech Republic and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Czech tax treaty), which entered into force recently on September 23, 2003 and whose provisions on taxes apply on income derived or which accrued beginning January 1, 2004. Unlike the Philippines-China tax treaty, the 10% rate under the Philippines-Czech tax treaty can be availed of even without the approval by the Intellectual Property Office of the contract that gives rise to the royalty payments, as such requirement is lacking in Article 12 of this tax treaty, to wit: "Article 12 ROYALTIES 1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. DETcAH

However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed: a)

10 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work, other than that mentioned in sub-paragraph (b), any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience;

15 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of cinematograph films, and films or tapes for television or radio broadcasting.

The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations."

Using the Philippines-Czech tax treaty as a basis for the grant of the 10% preferential tax rate, it is noteworthy that for purposes of the first condition of the most-favored-nation tax treatment, under paragraph 2(a), Article 12 of the tax treaty, royalties for information concerning industrial, commercial or scientific experience (to which payments for the EDA Costs are assimilated), and even royalties for the use or the right to use of any copyright of literary, artistic or scientific work (except copyright on cinematograph films, and films or tapes for television or radio broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment, are Copyright 2017

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subject to 10% income tax based on the gross amount of the royalties. As mentioned previously, the 10% rate can be availed of even without the approval by the Intellectual Property Office of the contract that gives rise to the royalty payments. As to the second condition for the most-favored-nation tax treatment, it is noteworthy that the United States and Czech employ the same mechanism in mitigating the effects of double taxation of foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under their respective articles on Elimination of Double Taxation of their tax treaties with the Philippines, to wit: United States: "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: 1.

In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes." TCADEc

Czech: "Article 22 ELIMINATION OF DOUBLE TAXATION xxx 2.

xxx

In the case of a resident of the Czech Republic, double taxation shall be eliminated as follows: a)

xxx

The Czech Republic, when imposing taxes on its residents, may include in the tax base upon which such taxes are imposed the items of income which according to the provisions of this Convention may also be taxed in the Philippines, but shall allow as a deduction from the amount of tax computed on such a base an amount equal to the tax paid in the Philippines. Such deduction shall not, however, exceed that part of the

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Czech tax, as computed before the deduction is given, which is appropriate to the income which, in accordance with the provisions of this Convention, may be taxed in the Philippines. b)

Where in accordance with any provision of the Convention income derived by a resident of the Czech Republic is exempt from tax in the Czech Republic, the Czech Republic may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income."

Under the ordinary credit method, the United States and Czech (as countries of residence) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is attributable to the income that is taxed in the Philippines (the country of source or country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the United States and Czech on a particular income, the United States and Czech would not grant the taxpayer a full credit for the income tax imposed by the Philippines on such income. Under the article on Elimination of Double Taxation of the Philippines-Czech tax treaty, Czech applies the ordinary credit method to all items of income derived by its residents from sources in the Philippines and which may be taxed in the Philippines in accordance with the provisions of the tax treaty (paragraph 2(a), Article 22 of the tax treaty). In addition, Czech retains the right to take the amount of income exempted in Czech into consideration when determining the tax to be imposed on the rest of the income (paragraph 2(b), Ibid.). In fine, because the two conditions for the most-favored-nation tax treatment on royalties under the Philippines-United States and the Philippines-Czech tax treaties are both satisfied, this Office is of the opinion and so holds that the payments for the EDA Costs to be made by TI Philippines to Texas Instruments under the Information Technology Service Agreement are subject to 10% income tax rate based on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to paragraph 2(a), Article 12 of the Philippines-Czech tax treaty. 2.

The payments for the Other IT Costs are payments for services.

Inasmuch as the payments for the Other IT Costs are compensation for services provided by Texas Instruments to TI Philippines, including upgrades, maintenance, repair, modification, management, coordination, security, training and implementation of the global information systems, and the services are performed in the United States using Texas Instruments' customary skills, and the payments are computed on the basis of a fixed activity based per person charge, the payments for the Other IT Costs are truly payments for services and not royalties. DCaEAS

Being performed in the United States, the subject services are not considered as being derived from sources within the Philippines, under Section 42(A)(3) of the National Internal Revenue Code of 1997 (Tax Code), and the payments for the services, being derived by a foreign corporation, are exempt from income tax, based on Section 23(F) of the Tax Code, to wit: "SEC 42. (A)

Income from Sources Within the Philippines. —

Gross Income from Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx

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(3)

Services. — Compensation for labor or personal services performed in the Philippines;"

"SEC 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx (F)

xxx

A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines."

In fine, because the services that give rise to the payments for the Other IT Costs are not derived from sources within the Philippines and such payments are made to a foreign corporation, this Office is of the opinion and so holds that the payments for the Other IT Costs to be made by TI Philippines to Texas Instruments under the Information Technology Service Agreement are exempt from income tax, under Sections 42(A)(3) and 23(F) of the Tax Code. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005) 3.

The payments for the EDA Costs and for the Other IT Costs are exempt from VAT.

The payments for the EDA Costs, being compensation for the supply of know-how or information concerning industrial, commercial or scientific experience, are generally subject to VAT, under Section 108(A)(3) of the Tax Code: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A)

Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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. . . The phrase 'sale or exchange of services' shall likewise include: xxx (3)

xxx

The supply of scientific, technical, industrial or commercial knowledge or information;" 1(39) (emphasis added)

On the other hand, with respect to the payments for the Other IT Costs, pursuant to Section 108(A) above, such payments are not subject to VAT because the services that give rise to the payments are not performed in the Philippines. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005) IAcTaC

However, with respect to the payments for the EDA Costs, the same can be exempt from VAT pursuant to Section 109(q) of the Tax Code, where the transaction that gives rise to the payments are exempt under special laws: "SEC. 109. Exempt Transactions. — The following shall be exempt from the value-added tax: xxx (q)

xxx

Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and

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1590;" 2(40)

In relation thereto, Section 24 of Republic Act No. 7916 (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) and Section 1, Rule XIV (Incentives to ECOZONE Developers/Operators) of the Rules and Regulations to Implement this Act, provide VAT exemption, among others, to TI Philippines and other PEZA-registered enterprises, to wit: "Section 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent of the gross income earned by all business and enterprises within the ECOZONE shall be remitted to the national government. . ." "Section 1. ECOZONE Developers/Operators. — ECOZONE Developers/Operators shall be entitled to the following incentives: A.

Exemption from National and Local Taxes and Licenses. — An ECOZONE Developer/Operator shall to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and local government impost, fees, licenses or taxes, including but not limited to the following: 1.

Internal revenue taxes such as gross receipts tax, value-added tax, ad valorem and excise taxes;

Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises."

Under Section 105 of the Tax Code, since VAT is an indirect tax, the VAT on the payments for the EDA Costs may be shifted or passed on by Texas Instruments to TI Philippines: "SEC 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services . . ."

However, pursuant to Section 24 of Republic Act No. 7916 which provides that TI Philippines and other PEZA-registered enterprises are exempt from VAT and other internal revenue taxes, Texas Instruments cannot shift or pass on the VAT to TI Philippines; hence, the transaction that gives rise to the payments for the EDA costs is exempt from VAT. (Commissioner of Internal Revenue vs. Seagate Technology (Philippines), G.R. No. 153866 dated February 11, 2005) HSacEI

The same conclusion is reached in VAT Ruling No. 100-99 dated September 16, 1999, the dispositive portion of which provides: "In the case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor. However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then payment of royalties to a non-resident lessor, . . . , should be as it is hereby confirmed to be, exempt from VAT." (BIR Ruling Nos. DA-ITAD 112-05 dated September 30, 2005) Copyright 2017

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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,

(SGD.) JOSE MARIO C. BUÑAG Commissioner Bureau of Internal Revenue Footnotes 1.

Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 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 . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information;" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. Republic Act No. 9337 renumbered and amended Section 109(q) thus: "SEC. 109. Exempt Transactions. — (1) Subject to the provisions of Subsection (2) hereof the following transaction shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"

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October 23, 2006

DA ITAD BIR RULING NO. 126-06 Sec 106 & 108 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-150-04 British Embassy 17th Floor, LV Locsin Building 6752 Ayala Avenue 1226 Makati, Manila Attention: Mr. Jon Huseyin Mustafa Third Secretary (Visa and Immigration) Gentlemen : This has reference to your Note No. 146-06 dated September 19, 2006, referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for a refund of value-added tax (VAT) on the local purchase of a motor vehicle, for the personal use of Mr. Jon Huseyin Mustafa, Third Secretary (Visa and Immigration) of the British Embassy, specifically described as follows: Type of Use: Make: Model Year: Chassis Number: Engine Number:

Personal Isuzu Crosswind Wagon Sportivo A/T 2006 PABTBR54F62037998 4JA1-MOO535

xxx

xxx"

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Revenue Code of 1997.

SCaEcD

However, applying the principle of reciprocity, this Office may grant exemption to the British Embassy and its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in your country. Hence, the local purchase of one (1) unit of 2006 Isuzu Crosswind Wagon Sportivo A/T, for the personal use of Mr. Jon Huseyin Mustafa of the British Embassy is exempt from VAT. (BIR Ruling No. DA-ITAD-150-04 dated December 20, 2004) This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of determining whether Mr. Jon Huseyin Mustafa of the British Embassy is entitled to VAT exemption on the basis of reciprocity. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be endorsed to the proper office for processing and investigation.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 17, 2006

DA ITAD BIR RULING NO. 125-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-120-05 Embassy of the Russian Federation 1245 Acacia Road Dasmariñas Village Makati City

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Attention: Mr. Andrey Shumilov Third Secretary Gentlemen : This has reference to your Note No. 129 dated September 21, 2006 referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Andrey Shumilov, Third Secretary of the Embassy of the Russian Federation, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Nissan X-Trail 200 2.0L A/T 2006 Gray X QR20-650908A TDAALAAT30-A45864

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of the Russian Federation and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Nissan X-Trail 2.0L A/T for the personal use of Mr. Andrey Shumilov, Third Secretary of the Embassy of the Russian Federation is exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-120-05 dated October 21, 2005) 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. Copyright 2017

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Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 13, 2006

DA ITAD BIR RULING NO. 124-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-122-02 Embassy of the Holy See (Apostolic Nunciature) 2140 Taft Avenue, P.O. Box 3364 Manila Gentlemen : This has reference to your Note No. 174/06 dated September 6, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use of the Embassy of the Holy See (Apostolic Nunciature), specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Honda CRV 4X4 2.4 A/T 2006 Shoreline Mist RRMD5565400456 PADRD78506V400479

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regional or municipal, except: (a) services;

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of the Holy See (Apostolic Nunciature) and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that the Holy See allows similar exemption to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles thereat. Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4 A/T for the official use of the Embassy of the Holy See (Apostolic Nunciature) is exempt from value-added tax. (BIR Ruling No. DA-ITAD-122-02 dated July 3, 2002) 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,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 13, 2006

DA ITAD BIR RULING NO. 123-06 Articles 23 & 34, Vienna Convention on Diplomatic Relations;

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BIR Ruling Nos. DA-ITAD-88-05 & 65-03 British Embassy 15th-17th Floors L.V. Locsin Building 6752 Ayala Avenue cor. Makati Avenue Makati City Gentlemen : This refers to your Note Verbale No. 162-05 dated December 20, 2005 indorsed to this Office by the Department of Foreign Affairs (DFA), requesting the issuance of a certification exempting the British Embassy from all national, regional and municipal dues and taxes, in respect of the new Embassy the British Government intends to construct at McKinley Hall, Taguig, Metro Manila. In reply, please be informed of Article 23 of the Vienna Convention on Diplomatic Relations (Convention) adopted on April 18, 1961, pertinent portion of which reads: "ARTICLE 23 1.

The sending state and the head of mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for services rendered. (Emphasis supplied)

The exemption from taxation referred to in this article shall not apply to such dues and taxes payable under the law of the receiving state by the person contracting with the sending state or the head of the mission. cHAaEC

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It is clear from the aforequoted provisions of the Convention that the British Embassy is exempt from all national, regional or municipal dues and taxes on the acquisition of real property for their new Embassy, except those imposed on services rendered in connection with their intended construction project on this property. With respect to the services referred to in the preceding paragraph, this Office may confirm VAT and ad valorem tax exemptions to a foreign Embassy in the Philippines upon favorable indorsement from the DFA based on information that the same tax exemptions are enjoyed by the Philippine Embassy in the home country of such Embassy. In relation to this, we note DFA's Undersecretary Franklin M. Ebdalin's letter dated June 13, 2006, which states that VAT will be imposed on the acquisition and construction activities of the British Embassy in Manila in relation to your new chancery. According to Undersecretary Ebdalin's letter, "The Philippine Government has recently acquired a property in London for use as the new chancery of the Philippine Embassy. The Philippine Government was required to pay VAT in the amount of GBP 787,500.00 as a result of the property acquisition. VAT shall also be collected in relation to the refurbishment of the property." Hence, we regret that the British Embassy cannot be exempted from the payment of VAT on services related to its property acquisition at McKinley Hall. As to documentary stamp taxes, please note that the National Internal Revenue Code of 1997 (Tax Code), as amended 1(41), provides that whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the Copyright 2017

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tax. Accordingly, since the British Embassy is exempt from all taxes in respect of the premises of the mission and, as such, is exempt from DST arising from its property acquisition for the new chancery in the Philippines, the seller of the real property to the British Embassy shall be the party directly liable for the payment of the documentary stamp tax thereon. (BIR Ruling No. DA-ITAD-88-05 dated August 30, 2005) For your information and guidance.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. — Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax.

October 13, 2006

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Makati City 1227 Philippines Attention: Mr. Ricardo A. Galano III Corporate Counsel Gentlemen : This refers to your application for relief from double taxation dated June 7, 2006, requesting confirmation of your opinion that the dividends paid by KEPCO International Philippines, Inc. (KIPI) to Korea Electric Power Corporation (KEPCO) are subject to the preferential tax rate of 10% pursuant to the Philippines-Korea tax treaty. It is represented that KEPCO is a nonresident foreign corporation duly organized and existing under the laws of Korea with business address at 167 Samseong-Deong, Gangnam-Gu, Seoul 135-791, Korea; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 29, 2006; that KIPI is a domestic corporation with office address at 18th Floor Citibank Tower, 8741 Paseo de Roxas, Makati City, Philippines; that as of May 4, 2004, KEPCO is the registered owner of Eight Hundred Seven Thousand Three Hundred Ninety Five (807,395) of the authorized, subscribed and paid-up shares of KIPI with a par value of Ten Pesos (PhP10.00) representing a percentage ownership of 99.9% of the outstanding shares of KIPI as shown in the certification issued by the Corporate Secretary of KIPI dated June 2, 2006; that on April 29, 2004 the Board of Directors of KIPI declared cash dividends in the amount of Eight Million Two Hundred Sixty Two Thousand Dollars ($8,262,000.00), net of 10% withholding of Nine Hundred Eighteen Thousand Dollars ($918,000.00) to KEPCO, payable on May 4, 2004; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Article 10 of the Philippines-Korea tax treaty provides as follows: "Article 10 Dividends 1)

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. cHDAIS

However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed: (a)

10 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; and

(b)

25 per cent of the gross amount of the dividends in all other cases. xxx

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The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profit, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the above-cited provisions, the 10 percent preferential tax rate on dividends apply whenever the beneficial owner of the dividends owns directly at least 25 percent of the capital of the paying company. In all other cases, the 25 percent preferential tax rate applies. Such being the case and considering that KEPCO holds 99.9% of the authorized, subscribed and paid-up shares of KIPI, this Office is of the opinion and so holds that the dividend payments by KIPI to KEPCO shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Korea tax treaty. (BIR Ruling No. ITAD 114-00 dated August 29, 2000) This ruling is issued based on 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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 12, 2006

DA ITAD BIR RULING NO. 121-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-37-04 Embassy of the People's Republic of Korea Copyright 2017

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Unit 1002 10th Floor, Ayala Life FGU Center Ayala Avenue Makati City Attention: Mr. Hong Chang Seok Deputy Trade Commissioner of Korea Trade Investment Promotion Agency (KOTRA) Gentlemen : This has reference to your Note No. 06-2187 dated August 31, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Hong Chang Seok, Deputy Trade Commissioner of Korea Trade Investment Promotion Agency (KOTRA), specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Toyota Fortuner 4X2 G Diesel A/T 2006 Lithium Silver Metallic 2KD-7149581 MROZR69G7-00003270

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

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Promotion Agency is exempt from value-added tax. (BIR Ruling No. 37-04 DA-ITAD-dated April 20, 2004) 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.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 11, 2006

DA ITAD BIR RULING NO. 120-06 Articles 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD-160-02; BIR Ruling No. ITAD-16-05 Samsung Electro-Mechanics Philippines Corp. Blk. 5 Calamba Premier International Park Bgy. Batino, Prinza, Calamba Laguna Attention: Mr. Hoseok Han Finance Group Senior Manager Gentlemen : This refers to your letter dated January 6, 2006, requesting clarification on the taxability of commissions received by Samsung Electro-Mechanics Pte., Ltd. (SEMPL) from Samsung Electro-Mechanics Philippines Corporation (SEMPHIL) under a Commission Agreement. It is represented that SEMPL is a nonresident foreign corporation with office address at 83 Clemenceau Ave., 09-01 UE Square, Singapore; that per certification issued by the Securities and Exchange Commission dated October 26, 2005, SEMPL with SEC No. A200300008 was licensed to establish a representative office in the Philippines on February 6, 2003 to carry out the following Copyright 2017

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activities: (a) to conduct a market survey of electronic components, appliances, apparatus, equipment, workstation, facsimile machines and other business equipment, software products and all other related works; (b) to act as communication link between its Head Office and the customers in the Philippines; and (c) to conduct such other activities which will be purely coordination work and to act as the message center between the Head Office and the affiliates of SEMPL; that SEMPHIL is a PEZA-registered corporation organized and existing under the laws of the Philippines with principal address at Blk 5 Calamba Premier International Park, Bgy. Batino, Prinza, Calamba City, Laguna. It is further represented that on January 1, 2006, SEMPL and SEMPHIL entered into a Commission Agreement (Agreement) wherein SEMPHIL appoints SEMPL as non-exclusive and independent sales representative to market and sell SEMPHIL's Products within the territory 1(42) upon the terms and conditions under the said Agreement; that the services rendered by SEMPL to SEMPHIL under the said Agreement are done outside the Philippines per Sworn Statement issued by SEMPHIL dated June 8, 2006; and that SEMPL shall use its best efforts to perform and complete the following objectives: SCETHa

Customer Relation SEMPL acknowledges that prompt, courteous and professional service to all customers and fostering and maintenance of good relations with customers is of paramount importance to SEMPHIL and the said Agreement, and SEMPL agrees to use its best effort to serve customers and promote such relations with customers. SEMPL shall call upon customers regularly, provide assistance and information to customers as requested by customers or SEMPHIL, serve liaison between customers and SEMPHIL and comply with such policies and procedures as SEMPHIL may from time to time communicate to SEMPL

SEMPL's Expertise SEMPL shall take all necessary steps to ensure that it and all its sales personnel are fully familiar with the Products, SEMPHIL then-current price list, and applicable SEMPHIL's policies and procedures.

Delinquent Account SEMPL shall, when requested by SEMPHIL, call upon customers with delinquent accounts and use its best efforts to procure payment thereon.

Meetings and Conventions SEMPL shall attend such sales meeting for, among other things the training and education of its personnel, as SEMPHIL may request. SEMPL shall attend such conventions as SEMPL deems necessary to meet its best efforts obligation hereunder. All expenses, including such meeting shall be borne by SEMPL.

Reports (a)

SEMPL shall promptly furnish complete and detailed reports of every new potential customers contact to enable SEMPHIL to make proper judgments for this new potential business.

(b)

SEMPL shall provide SEMPHIL in written form with as much as possible

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information concerning change of business activity, strategy, change of personnel, change in technology and potential new sales opportunities with all customers and competing products, business activities of competitors and any proposal for product improvement on an ongoing basis. (c)

SEMPL shall supply the following to SEMPHIL to assist SEMPHIL in maintaining scheduled delivery dates, planning new production, maintaining customers quality standards, and assist SEMPHIL in planning long term growth and expansion. —

a three month rolling forecast

—

copies of all quotations made, negotiated and transmitted by SEMPL regarding sales or potential sales of Products

—

new market information, if any.

that SEMPHIL, at its expense, shall provide periodic sales and technical assistance to SEMPL and its personnel to assist them in effective marketing of products, education of customers and relations with customers, and may accompany SEMPL or its personnel from time to time on calls to customers; that SEMPHIL, agrees to pay, as compensation for SEMPL's service, commission for Applicable Sales Revenue (0.8%) as a Direct Sale per purchase order obtained from the customers in the territory; and that the term of the said Agreement shall commence on the date first written and remain in full force until December 31 of the same calendar year, and it shall be automatically renewed for successive terms of one (1) year each unless either party notifies the other in writing of its intention not to renew at least sixty (60) days prior to the expiration of the initial, or any extension thereof. TaDAHE

In reply, please be informed that Article 5 (Permanent Establishment) and, in relation thereto, Article 7 (Business Profits) of the Philippines-Singapore tax treaty provides: "Article 5 PERMANENT ESTABLISHMENT

For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

The term 'permanent establishment' includes specially but is not limited to: a)

A seat of arrangement;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse, in relation to a person providing storage facilities for others;

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A mine, quarry, or other place of extraction of natural resources;

xxx

xxx"

"Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other state but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx"

According to paragraph 1 of Article 7, the service fees are subject to Philippine income tax only if they are attributable to a permanent establishment which SEMPL has in the Philippines. ISDCaT

A permanent establishment, as defined in paragraphs 1 and 2, Article 5 (Permanent Establishment) of the same tax treaty, means "a fixed place of business through which a resident of one of the Contracting States engages in trade or business," and includes, for example, "a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop." It also includes "the furnishing of services, including consultancy services, which continues for a period or periods aggregating more than 183 days." In the first instance, where it is required that there be a fixed place of business and with respect to the representation that SEMPL has an office in the Philippines (representative office), the same may constitute a permanent establishment if the activities carried out therein are not preparatory and auxiliary in character and if the representative office has a certain degree of permanency. As regards examples of activities that have a preparatory and auxiliary character, paragraph 3, Article 5 of the tax treaty mentions: "3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include any one or more of the following: a) The use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the resident; b) The maintenance of a stock of goods or merchandise belonging to the resident solely for the purpose of storage, display, or occasional delivery; c) Copyright 2017

The maintenance of a stock of goods or merchandise belonging to the

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resident solely for the purpose of processing by another person; d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the resident; e) The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or f) The furnishing of services, including the provision of equipment, in one of the Contracting States by a resident of the other Contracting State, including consultancy firms, in accordance with, or in the implementation of an agreement between the Contracting States regarding technical cooperation."

Where it is represented that the representative office's functions are to conduct a market survey, act as communication link between its Head Office and the customers in the Philippines, and to conduct such other activities which will be purely coordination work and to act as the message center between the Head Office and the affiliates of SEMPL, the same may be considered as preparatory or auxiliary. However, if such activities extend to negotiation and/or signing of contracts and/or after-sales services, the same are regarded as being beyond preparatory and auxiliary and as such can deem the representative office a permanent establishment. AaIDCS

As regards permanency, where it is represented that the representative office has been in existence immediately after it was given license by the Securities and Exchange Commission on February 6, 2003 and it continues to be so at present or for more than three years now, the representative office is considered as already having acquired a certain degree of permanency. However, since the activities carried out by the representative office are merely preparatory and auxiliary, the fact that it has, over time, already acquired a certain degree of permanency, still said representative office does not yet constitute a permanent establishment of SEMPL. (BIR Ruling No. ITAD-16-05 dated February 24, 2005) Considering that the income derived by SEMPL under the Agreement is not attributable to its representative office in the Philippines as the latter is not privy to the transaction, and that the representative office of SEMPL is not deemed to be a permanent establishment in the Philippines to which its business profits may be attributed to since it is merely performing preparatory and auxiliary activities, the payments made by SEMPHIL to SEMPL are therefore, not subject to Philippine income tax. (BIR Ruling No. DA-ITAD-160-02 dated September 13, 2002) (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 3(43) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . ." (Emphasis supplied).

Thus, in general, the VAT should be imposed when SEMPL provides the above services in the Philippines "for short durations and in no case shall exceed an aggregate of 3 months in any given calendar year". SEMPHIL shall then be required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section Copyright 2017

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4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 4(44) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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: . . ., 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. 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. xxx

xxx

xxx"

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provision for exempt transactions under Section 109 (K) of the Tax Code of 1997, as amended which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment by SEMPHIL, being a PEZA-registered enterprise to SEMPL, under the above Agreement should be as it is hereby confirmed to be exempt from VAT. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3. 4.

The Territory shall be Asia and Oceania, excluding Korea, Japan, China, Hongkong, Taiwan, Turkey, Israel and former Soviet Bloc countries. Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Effective February 1, 2006, the rate shall be 12%. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No. 9337].

October 10, 2006

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30th Floor, Citibank Tower 8741 Paseo de Roxas, Makati City Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated April 17, 2006 received by this Office on June 26, 2006, requesting confirmation of your opinion that the payments for services rendered by BASF Asia-Pacific Service Centre Sdn. Bhd. (BASC) to BASF Philippines, Inc. (BPI) are not subject to Philippine income tax pursuant to the Philippines-Malaysia tax treaty and that the value added taxes and the payments are deductible business expenses of BPI. It is represented that BASC is a nonresident foreign corporation duly organized and existing under the laws of Malaysia as confirmed by the Certification of Incorporation of Private Company issued by the Registry of Companies of Malaysia on November 24, 2004; that its business address is located at Level 14, Uptown 1, No. 1 Jalan SS21/58, Damansara Uptown, 47400 Petaling Jaya, Selangor Darul Ehsan, Malaysia; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on March 20, 2006; that BPI is a domestic corporation with business address at 103 Progress Ave., Phase 1, GIZ, Carmelray Industrial Park 1, Canlubang, Laguna. It is further represented that on July 1, 2006, BPI and BASC entered into a Master Service Agreement (MSA) whereby BASC agreed to render the following services: •

Finance & Accounting (F&A): Accounts Payable, Accounts Receivable, General Accounting, Treasury and Financial Reporting, as set out in Annex 1;

•

Human Resources (HR): payroll processing, salary payments and general ledger posting, employee data administration and processing, training administration, compensation and performance management administration, as set out in Annex 2; and ASTDCH

•

Such other services as the parties may agree to in writing from time to time

That under the MSA, BASC will provide the foregoing services at its own business premises in Malaysia; that in performing its obligations under the said MSA, BASC shall at all time:

provide such qualified and/or experienced personnel and all necessary equipment and other resources as may be required to perform its obligations professionally, efficiently and safely;

exercise the degree of diligence, skill and care which could reasonably be expected of a reasonably competent, skilled and experienced person engaged in the provision of services similar to the Services;

to arrange and maintain at its own cost and expense all licenses, approvals and consents from the government authorities, ministries, departments required under the applicable laws and regulations necessary to perform its obligations and keep such licenses, approvals and consents valid;

carry out its obligations promptly and in accordance with any time schedule agreed upon by

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the parties; and e)

execute its obligations in a professional, safe and efficient manner in conformity with all relevant laws and regulations.

That the documents and information required from BPI to enable BASC to render the service shall be made available by BPI by fax, phone or email; that the MSA shall be valid from July 1, 2006 and shall continue for eight (8) years (Initial Term) and indefinitely thereafter; that in consideration for the services, BPI shall pay BASC for the full cost incurred for the provision of the services plus 5% mark-up; and that the herein transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty provides: "Article 7 BUSINESS PROFITS 1.

The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only on so much thereof as is attributable to that permanent establishment. cESDCa

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT

For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

The term 'permanent establishment' shall include especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, an oil or gas well, a quarry or other place of extraction of natural resources including timber or other forest produce;

a farm or plantation;

a building site or construction, installation or assembly project which exists

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for more than 6 months."

Pursuant to Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty, the Philippines is allowed to tax the business profits of an enterprise which is a resident of Malaysia if it has a permanent establishment situated in the Philippines and only so much of such profit that is attributable to that permanent establishment. Inasmuch as BASC cannot be deemed to have a permanent establishment in the Philippines, as such, the service fees to be paid by BPI for the services performed are not subject to Philippine income tax. (BIR Ruling No. DA-ITAD 152-02 dated August 29, 2002) As regards the deductibility of the service fees as an ordinary and necessary business expense on the part of BPI, this Office declines to rule on the matter considering the factual nature of the issue. However, this does not preclude the taxpayer to treat it as a deductible item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation requirements under Section 34(A)(1)(b) of the National Internal Revenue Code. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003) DSCIEa

Moreover, while the payments for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for BPI within the Philippines are, however, subject to 10% (12% effective February 1, 2006, under Republic Act No. 9337) 1(45) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, BPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to BASC. In remitting the VAT withheld, BPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from BPI if it is VAT-registered taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, it is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for BASC and the fourth copy for BPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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Footnotes 1.

RMC 7-2006 Publishing the Full text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax Rate from Ten Percent to Twelve Percent.

October 10, 2006

DA ITAD BIR RULING NO. 118-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 122-04; ITAD Ruling No. 16-05 C & E Corporation Meralco Avenue corner General Araneta St. Pasig City, Metro Manila Philippines 1603 Attention: Ms. Lourdes P. Reyes Finance/Admin. Principal Manager and Treasurer Gentlemen : This refers to your application for tax treaty relief dated August 30, 2005, requesting confirmation that the dividend payments of C & E Corporation to Chiyoda Corporation are subject to the 10% preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Chiyoda Corporation is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 12-1 Tsurumichuo, 2-chome, Tsurumi-ku, Yokohama, Japan 230-8601; that it was licensed to establish its regional or area headquarters in the Philippines on April 29, 2004 per Certification dated August 26, 2005 issued by the Securities and Exchange Commission; that the Chiyoda Corporation regional or area headquarters (RHQ) does not participate in any manner in the management of C & E Corporation and its activities are limited to acting as supervisory, communications and coordinating activities for C & E Corporation; that C & E Corporation is a corporation organized and existing under the laws of the Philippines, with office address at Meralco Avenue, corner General Araneta Street, Pasig City, Metro Manila, Philippines; that C & E Corporation is duly registered with the Board of Investments as a New Service Exporter in the fields of Design and Construction of Industrial Plants under Certificate of Registration No. 96-168 dated August 9, Copyright 2017

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1996 and as a New IT Service Export Service Firm in the Field of Engineering Plan and Design of Industrial Plants under Certificate of Registration No. EP2002-112 dated August 27, 2002; that per certification by the C & E Corporation's Corporate Secretary dated September 14, 2005, Chiyoda Corporations' percentage of ownership of shares of stock in C & E Corporation is as follows: cDCaHA

No. of shares Par value per share Total Amount Authorized Cap. Stock % to total

February 15, 1995 to June 10, 2005

June 11, 2005 to September 14, 2005

20,246 PhP1,000.00 PhP20,246,000.00 PhP27,000,000.00 75%

20,246 PhP1,000.00 PhP20,246,000.00 PhP31,153,000.00 65%

It is further represented that during the meeting held on June 10, 2005, the Board of Directors of C & E Corporation resolved and approved the declaration of cash dividends in the total amount of One Hundred Sixty Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP165,013,271.00) from its unrestricted retained earnings; and that payment of the cash dividends declared shall be Forty Million Pesos (PhP40,000,000.00) in July 2005, Thirty Million Pesos (PhP30,000,000.00) in December 2005, and the balance of Ninety Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP95,013,271.00) payable in six (6) years beginning Year 2006. In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides as follows: "Article 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b)

25 per cent of the gross amount of the dividends in all other cases.

The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. ESCcaT

xxx

4. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. 5. Copyright 2017

The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the

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dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx

xxx

xxx"

Based on the abovequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds directly at least 25 percent either of the voting shares or of the total shares of the issuing company during the period of six (6) months immediately preceding the date of payment of the dividends. The preceding paragraph, however, does not apply if the recipient of the dividend, being a resident of Japan, carries on business in the Philippines through a permanent establishment to which the dividend income is attributable. Relative thereto, Article 5 of the Philippines-Japan tax treaty provides: "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. 2.

The term 'permanent establishment' includes especially: a)

a store or other sales outlet;

a branch;

an office;

a factory;

a workshop;

a warehouse;

g) resources.

TcIAHS

a mine, an oil or gas well, a quarry or other place of extraction of natural

3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. 4. Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

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c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of preparatory or auxiliary character." xxx

xxx

xxx"

Based on paragraph 2(c), Chiyoda Corporation may be considered as having a permanent establishment in the Philippines since it maintains therein a representative office. However, in the instant case, since it was shown that the function of the representative office in the Philippines is limited only to acting as a supervisory, communications and coordinating activities for C & E Corporation, then Chiyoda Corporation is not deemed to have a permanent establishment in the Philippines. EaScHT

Therefore, considering that from February 15, 1995 to June 10, 2005, Chiyoda Corporation directly held 75% of the total shares of C & E Corporation and that as of June 11, 2005 to date, Chiyoda Corporation directly holds 65% of the total shares of C & E Corporation, dividends payable to Chiyoda Corporation in July 2005 in the amount of Forty Million Pesos (PhP40,000,000.00), and in December 2005 in the amount of Thirty Million Pesos (PhP30,000,000.00), are subject to the 10% preferential tax rate based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty (BIR Ruling No. DA-ITAD-122-04 dated November 3, 2004; ITAD Ruling No. 16-05 dated February 24, 2005). Likewise, dividends declared in June 10, 2005 in the amount of Ninety Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP95,013,271.00) and payable to Chiyoda Corporation in six (6) years beginning year 2006 are subject to such 10% preferential tax rate under the Philippines-Japan tax treaty. This ruling is issued based on 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.

Very truly yours, Commissioner of Internal Revenue By:

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Assistant Commissioner Legal Service Bureau of Internal Revenue

October 6, 2006

DA ITAD BIR RULING NO. 117-06 Art. 5&7, Philippines-Singapore tax treaty; Sec. 108 of the NIRC of 1997; BIR Ruling No. 077-84 RPI Communications Inc. 2008 Herrera Tower, Herrera St., Salcedo Village, Makati City Attention: A.S. Anderson Gentlemen : This refers to your letter dated July 22, 2005, applying for relief from double taxation on the payment of RPI Communications Inc. (RPI) to Computer Printing Specialist Pte Ltd. (CPS-Singapore), for the work carried out as their consultant, pursuant to their Service Agreement. It is represented that CPS-Singapore is a nonresident foreign corporation duly organized and existing under the laws of Singapore with office address at Level 31, 6 Battery Road, Singapore 049909 as certified by the Accounting and Corporate Regulatory Authority of Singapore on September 6, 2005; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated August 17, 2005; that RPI is a corporation duly organized and existing under the laws of the Philippines with principal address at Suite 2008 Herrera Tower, V.A. Rufino cor. Valero Sts., Salcedo Village, Makati City. It is further represented that RPI and CPS-Singapore entered into a Service Agreement for a project, the duration of which is from June 15, 2005 to November 30, 2005; that under the Agreement. RPI has agreed to get the service of CPS-Singapore through its subcontractor John Stanley-Critchlow for technical management and consultancy services for RPI's forthcoming projects to include initial project appraisal, evaluation, installation, documentation and commissioning oversight; that Mr. Critchlow visited the Philippines to render the said services on May 29 to June 2, 2005 and in October 19 to October 21, 2005; that in consideration for the said service, RPI agreed to pay CPS-Singapore the amount of One Hundred Twenty Thousand Singapore Dollars (S$120,000.00) net of taxes and bank charges and exclusive of the Copyright 2017

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expenses incurred on behalf of RPI by the Project Manager or any representative of CPS-Singapore.

HSAcaE

In reply, please be informed that Article 7(1) of the Philippines-Singapore tax treaty provides: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx"

In relation, thereto, paragraph (1), (2) and (3) of Article 5 of the same treaty provide, viz: "Article 5 PERMANENT ESTABLISHMENT 1. For the purpose of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2.

The term "permanent establishment'' includes especially but is not limited to: (a)

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse, in relation to a person providing storage facilities for others;

A mine, quarry, or other place of extraction of natural resources;

the furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. (Emphasis ours) ITSacC

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3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or occasional delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise. xxx

xxx

xxx"

Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if among others, the furnishing of services through its employees or other personnel continue (for the same or connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the services rendered by Mr. Critchlow on behalf of CPS-Singapore did not exceed an aggregate 183 days, CPS-Singapore is deemed not to have a permanent establishment in the Philippines. Hence, the service fees paid by RPI to CPS-Singapore under the subject Agreement are not subject to Philippine income tax and consequently to withholding tax. (BIR Ruling No. 077-84 dated April 27, 1984) However, the fees paid by RPI to CPS-Singapore for the services rendered in the Philippines through its personnel are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, RPI being the payor in control of the payment shall be responsible for the withholding of VAT on such fees by filing a separate VAT return for and on behalf of CPS-Singapore using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If RPI is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input VAT by RPI upon filing its own VAT return. If it is not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the services purchased which may be treated as an "expense" or "asset" on the part of RPI, whichever is applicable. In addition, RPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for CPS-Singapore and the fourth copy for RPI as its file copy. caEIDA

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

October 3, 2006

DA ITAD BIR RULING NO. 116-06 Sec 109 (K) of the National Internal Revenue Code of 1997, as amended; BIR Ruling No. DA-ITAD-149-05 Embassy of the Federal Republic of Germany 25th Floor, The RCBC Plaza, Tower 2 6819 Ayala Avenue Makati City Attention: Klaus Tesch First Secretary Gentlemen : This has reference to your Note Verbale KFZ No. 41/2006 dated August 16, 2006 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA), Office of Protocol, requesting for exemption from payment of tax on the local purchase of one (1) motor vehicle, for the official use of GDC-GTZ Office of the German Embassy, specifically described as follows: Type of use:

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V.A. Rufino Streets, Salcedo Village, Makati City Make:

one (1) unit Honda Motorcycle XR200

Model year:

2006

Color:

Red

Engine No.:

KCNO4E000597

Frame No.:

KCN0400597

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides, viz: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" CEcaTH

Based on the Section 109 above, a transaction is exempt from VAT when a special law or an international agreement to which the Philippines is a signatory provides for such exemption. The Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines Concerning Technical Co-operation 1(46) executed on September 7, 1971, with Diplomatic Exchange Notes dated May 6, 2002 partakes the nature of an international agreement as required under Section 109. Paragraph 4(a) of the Diplomatic Exchange of Notes dated May 6, 2002 and which provides as follows, is, in effect, a grant of exemption from VAT: "4. The Government of the Republic of the Philippines shall make the following contributions: It shall (a) exempt the material and motor vehicles supplied for the Office from taxes, licenses, harbour dues, import and export duties and other public charges, as well as storage fees; and ensure that such material is cleared by customs without delay. The aforementioned exemptions shall, with regard to value-added tax (VAT), also apply to material and services (including consulting services) procured in the Republic of the Philippines, as well as to the renting of office premises and accommodation for seconded experts; (Emphasis supplied)

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XR200 Motorcycle, for the official use of GDC-GTZ is hereby granted. (BIR Ruling No. DA-ITAD-149-05 dated November 30, 2005)

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

Footnotes 1.

Article 1 of the Agreement states that the Contracting Parties "may conclude arrangements concerning individual projects of technical co-operation."

September 27, 2006

DA ITAD BIR RULING NO. 115-06 Article 12, Philippines-Japan tax treaty Section 109 (K) National Internal Revenue Code of 1997, as amended; BIR Ruling No. DA-ITAD-82-06 Fernandez Aguja Law Firm CPA-Lawyers Suite 5F JL Building Don Jose Avila cor. Don Gil Garcia Streets Cebu City, Philippines 6000 Attention: Atty. Rita A.S. Fernandez Partner Gentlemen : This refers to your letter dated September 4, 2006 on behalf of your client, Yamashin Cebu Filter Manufacturing Corporation (Yamashin Philippines), requesting confirmation that its payments to Copyright 2017

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Yamashin-Filter Corporation, formerly Yamashin Filter Manufacturing Corporation of Japan, are royalties subject to the 25% preferential tax rate, pursuant to Article 12 of the Philippines-Japan tax treaty, and that the said royalty payments are not subject to value-added tax (VAT) under Section 109(K) of the National Internal Revenue Code of 1997, as amended (Tax Code of 1997). It is represented that Yamashin-Filter Corporation (Yamashin Japan) is a nonresident foreign corporation duly organized and existing under the laws of Japan, with office address at 1-11-5 Nishi-kanagawa, Kanagawa-ku, Yokohama, Japan; that is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated August 22, 2006; that Yamashin Philippines is a domestic corporation with office address at Mactan Economic Zone II, Lapulapu City, Philippines; that it is registered with the Export Processing Zone Authority under Certificate of Registration No. 89-014 dated April 14, 1989 and is enjoying the tax regime of 5% in lieu of all taxes. It is further represented that on October 15, 2001, Yamashin Philippines and Yamashin Japan entered into a Technical Support and Service Agreement which provides that since Yamashin Japan has developed and holds certain technology and expertise involving the designing, development, manufacture and production of advanced and state of the filters for industrial and other uses, and through its years of experience and reputations, has built-up goodwill and markets for its products which it intends and plans to transfer to exclusive right in the Philippines for the latter's technical advice, design cooperation, information, experience, quality control, and business support for Yamashin Japan's own products which it produces in the Philippines for export to Japan and other parts of the world; that by virtue thereof, Yamashin Japan agrees to provide to Yamashin Philippines the following: 1.

Full assistance and furnishing of its recent technical advise, design cooperation, and business support for the production and development of filters;

Provide and accept access to its Japanese and worldwide intelligence system to carry out and effect its production of up to date and state of the art filters and applications acceptable to the market;

Allow and accept the availment of the following: a.

Training the production, quality control and administrative employees.

Seminars and conferences for training of Yamashin Philippines' employees

Materials for training

Engineers and professional who are experts in all disciplines necessary in the implementation of advice to Yamashin Philippines as regards filter manufacture, development and application, design development, and business support.

AaHcIT

That, moreover, in consideration for the services under the Agreement, Yamashin Philippines shall pay to Yamashin Japan a fee equivalent to Four Million Philippine Pesos (P4,000,000.00) each fiscal year effective October 1, 2001 up to September 30, 2006. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides as follows: "Article 12 Copyright 2017

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Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a)

15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting;

25 per cent of the gross amount of the royalties in all other cases.

Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties.

The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx

xxx

xxx"

Based on the above provision, royalty payments will be taxed at a preferential rate of ten percent (10%), if the payor is a BOI-registered enterprise and engaged in preferred areas of investment; fifteen percent (15) if the payments are in respect of the use of or right to use cinematograph films and films or tapes for radio or television broadcasting; and in all other cases, twenty-five (25%) of the gross amount of the royalties. Considering that Yamashin Philippines is not a BOI-registered enterprise engaged in preferred pioneer areas of investment and the subject royalties are not payments in respect of the use or right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the said payments are royalty payments in consideration for information concerning industrial, commercial or scientific experience and as such are subject to the preferential tax rate of 25% of the gross amount of royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-82-05 dated July 28, 2006) As regards the imposition of VAT on royalties, Section 106 of the Tax Code of 1997, provides that: "SEC. 106 1(47) .

Value-added Tax on Sale of Goods or Properties. —

"(A) Rate and Based of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchange, such tax to be paid by the seller or Copyright 2017

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transferor. "(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: xxx

xxx

"(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; HTSAEa

xxx

However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT 2(48) . However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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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. xxx

xxx

xxx"

Such being the case, the royalty payment of Yamashin Philippines, being an EPZA-registered enterprise, now PEZA, to Yamashin Japan under the subject Agreement should be, as it is hereby confirmed to be, exempt from VAT. 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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Amended by Republic Act No. 9337, effective November 1, 2005, to read as follows: "SEC. 106. Value-added Tax on Sale of Goods or Properties. — xxx xxx xxx "(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of goods or properties sold, bartered or exchange, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx "(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: xxx xxx xxx "(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or CD Technologies Asia, Inc. and Accesslaw, Inc.

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process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No. 9337].

September 27, 2006

DA ITAD BIR RULING NO. 114-06 Article 20, Philippines-Germany tax treaty; BIR Ruling No. DA-ITAD-85-05 European International School 75 Swaziland Street, Better Living Subdivision 1711 Parañaque City Metro Manila, Philippines Attention: Mr. Ludwig Etzel Administrator Deutsche Schule Manila Gentlemen : This refers to your letter dated February 7, 2000, requesting confirmation of your opinion that the salaries and/or other remunerations received by a teacher engaged to teach in Deutsche Schule Manila (German School Manila) (hereinafter, DSM) namely, Mr. Florian Rudolf Simmelbauer, for a period not exceeding two (2) years, are exempt from Philippine taxation pursuant to Article 20 of the Philippines-Germany tax treaty. It is represented that DSM is the German component of the European International School with principal address at No. 75 Swaziland St., Better Living, Subd., Parañaque City; that Mr. Florian Rudolf Simmelbauer was a resident of Germany before coming to the Philippines; that Mr. Florian Rudolf Simmelbauer is engaged to teach at the European International School for the Deutsche Schule Manila for the school year 2005-2008 from February 1, 2006 to January 31, 2008; and that his employment with the school ends on the 31st of January 2008 without requiring a written termination of contract of resignation and is renewable per agreement of both parties. In reply, please be informed that Article 20 (Teachers and Researchers) of the Philippines-Germany tax treaty provides as follows:

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"Article 20 TEACHERS AND RESEARCHERS 1.

Remuneration which a professor or teacher, who is or immediately before was a resident of a Contracting State and who visits the other Contracting State for a period not exceeding two years for the purpose of carrying out advanced study or research or for teaching at a university, college, school or other educational institution, receives for such work shall not be taxed in that Contracting State.

This Article shall not apply to income from research if such research is undertaken not in the general interest but primarily for the private benefit of a specific person or persons." DCSTAH

Based on the aforequoted provision, it is clear that the remuneration paid to the teachers, who are or immediately before, were residents of Germany and who stay in the Philippines for the purpose of teaching for a period not exceeding two years shall not be subject to Philippine income tax. In view thereof, this Office is of the opinion and so holds that the subject remuneration of Mr. Florian Rudolf Simmelbauer for teaching in DSM for a period not exceeding two (2) years shall not be subject to Philippine income tax. (BIR Ruling No. DA-ITAD-85-05 dated August 23, 2005) 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.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 27, 2006

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Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD-26-06; BIR Ruling No. 165-94 Fujitsu Ten Corporation of the Philippines 100 South Science Ave. Laguna Technopark Don Jose, Sta. Rosa, Laguna Attention: Ms. Mary Jane H. Go Accounting Dept. Manager Gentlemen : This refers to your application for relief from double taxation dated November 7, 2005, requesting confirmation of your opinion that the dividends paid by Fujitsu Ten Corporation of the Philippines (FTCP) are subject to the preferential tax rates of 10% and 15%, pursuant to the Philippines-Japan and Philippines-Singapore tax treaties, respectively. It is represented that Fujitsu Ten (Singapore) Pte., Ltd. (FTSL) is a nonresident foreign company duly organized and existing under the laws of Singapore with office address at 20 Science Park, Road #02-01/03, Teletech Park, Singapore Science Park II, Singapore 117674; that it is engaged in trading of raw materials; that FTSL is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities & Exchange Commission dated August 22, 2005; that Fujitsu Ten Limited. (FTL) is a nonresident foreign company duly organized and existing under the laws of Japan with office address at 2-28 Gosho-Dori, 1-Chome, Hyogo-ku, Kobe, Japan; that FTL is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities & Exchange Commission dated August 19, 2005; that FTCP is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 100 South Science Ave., Laguna Technopark, Don Jose, Sta. Rosa, Laguna, Philippines; that it is engaged in the manufacture of car audio and car electronic products and is a Philippine Economic Zone Authority (PEZA) registered export enterprise under Registration Certificate No. 01-063 dated October 29, 2001 issued by the PEZA. It is also represented that FTCP has an authorized capital stock of Two Hundred Million Pesos (PhP200,000,000.00) (divided into 2,000,000 common shares with a par value of PhP100 per share); that out of such authorized capital stock, 1,300,000.00 shares have been subscribed by FTL, whose stockholdings of 975,000 shares, with a total value of Ninety Seven Million Five Hundred Thousand Pesos (P97,500,000.00), constitute seventy five percent (75%) of the total subscribed and paid up capital stock of FTCP amounting to One Hundred Thirty Million Pesos (PhP130,000,000.00), and by FTSL, whose stockholdings of 325,000 shares with a total value of Thirty Two Million Five Hundred Thousand Pesos (PhP32,500,000.00) constitute twenty five percent (25%) of the total subscribed and paid up capital stock of FTCP; that such stockholding of 325,000 shares is evidenced by a stock certificate issued to FTSL on July 25, 1997; that on July 21, 2005, FTCP's Board of Directors declared cash dividends amounting to Sixty Five Million Pesos (PhP65,000,000.00) out of the unappropriated retained earnings of Five Hundred Thirty Million Three Hundred Twenty Nine Thousand One Hundred Sixty Nine Pesos (PhP530,329,169.00) as of March 31, 2005, to be paid on or before August 31, 2005 to stockholders of record as of July 21, 2005, at the rate of Fifty Pesos (PhP50.00) per share; that the amount of cash dividends which pertains to FTL is Forty Eight Million Seven Hundred Fifty Thousand Pesos Copyright 2017

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(PhP48,750,000.00) and to FTSL, Sixteen Million Two Hundred Fifty Thousand Pesos (PhP16,250,000.00); and that the issue/s or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. DHaEAS

In reply, please be informed that dividends received by FTL and FTSL are subject to Philippine tax as follows: 1.

for FTSL

Article 10 of the Philippines-Singapore tax treaty provides as follows: "Article 10 Dividends 1.

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a)

15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and

in all other cases, 25 per cent of the gross amount of the dividends. xxx

(4)

xxx

The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the aforequoted provisions, the 15% preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 15% percent of the outstanding voting shares of the paying company, which fifteen percent (15%) shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since FTSL held 25% percent of the total outstanding capital stock of FTCP from July 25, 1997 as evidenced by a stock certificate issued in favor of FTSL, dividends received by FTSL shall be subject to the preferential tax rate of 15%, pursuant to Article 10(2)(a) of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-26-06 dated March 16, 2006) Copyright 2017

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for FTL

Article 10 of the Philippines-Japan tax treaty provides as follows: "Article 10 (1)

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. ESDHCa

(2)

However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a)

10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends;

(b)

25 per cent of the gross amount of the dividends in all other cases. xxx

(4)

xxx

The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that as of July 21, 2005, FTL holds only 75% of the outstanding capital stocks of FTCP, as shown in the Certification issued by the Corporate Secretary of FTCP dated August 17, 2005, the dividends paid to FTL by FTCP are subject to 10% preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. 165-94 dated December 5, 1994) This ruling is issued based on 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.

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(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 19, 2006

DA ITAD BIR RULING NO. 112-06 Sec 109 — National Internal Revenue Code 1997; Article III, Section 10 — Vienna Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations United Nations-World Food Programme (UN-WFP) 5th Floor, Jaka II Building 150 Legaspi Street, Legaspi Village Makati City Gentlemen : This refers to your letter dated July 11, 2006, indorsed to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the purchase of one (1) locally-produced motor vehicles, for the official use of the United Nations-World Food Programme (UN-WFP), specifically described as follows: Make:

Toyota Camry 2.4 V A/T

Model Year:

2006

Color:

Quick Silver

Engine Number:

2AZ-2226612

Chassis Number:

ACV30-9002175

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005 provides as follows: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the Copyright 2017

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following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"

In relation, thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations dated November 21, 1947 provides: "Article III xxx

xxx

xxx"

Based on the above provisions, important purchases of goods and services in the Philippines for official use of the specialized agencies of the United Nations (UN) are accorded exemption from indirect taxes such as the VAT imposed under Section 107 of the NIRC. Such being the case, and since the UN-WFP is a specialized agency of the UN 1(49), this Office is of the opinion and so holds that aforementioned purchase of one (1) unit 2006 Toyota Camry 2.4 V A/T for the official use of the UN-WFP, is exempt from ad valorem and value-added taxes. It is hereby understood that this exemption applies only to vehicles purchased under the name of United Nations Fund for Population Activities for its official use. 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. AScTaD

Very truly yours, Commissioner of Internal Revenue By:

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Footnotes 1.

VAT Ruling No. 146-90 dated May 24, 1990.

September 19, 2006

DA ITAD BIR RULING NO. 111-06 Arts. 5&7, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-02-03; BIR Ruling No. DA-ITAD 39-03; BIR Ruling No. DA-161-05; VAT Ruling No. 004-04 Punongbayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Maria Victoria C. Españo Tax Partner Gentlemen : This refers to your letter dated November 7, 2005 on behalf of your client, Ina Micro Opto Corporation (IMO), requesting confirmation of your opinion that service fees paid by IMO to Masuda Co., Ltd. (MCL) under the Management and Marketing Agreement are not subject to Philippine income tax and to value-added tax (VAT), pursuant to the provisions of the Philippines-Japan tax treaty and the National Internal Revenue Code of 1997 (Tax Code). It is represented that MCL is a nonresident foreign corporation duly organized and existing under the laws of Japan with office address at 6689-1 Miyada-Mura, Kamiina-Gun, Nagano-Ken, Japan; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission (SEC) dated December 15, 2005; that, on the other hand, IMO is a corporation duly organized and existing under the laws of the Philippines with office address at Mactan Economic Zone II, Basak, Lapu-Lapu City, Cebu; that IMO is registered with the Philippine Economic Zone Authority (PEZA) with Certificate of Registration No. 00-007 dated January 25, 2000. It is further represented that, on April 1, 2004, MCL and IMO entered into a Management and Copyright 2017

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Marketing Service Agreement (Agreement) whereby MCL shall provide marketing and management services to IMO in the following areas: 1.

Administrative support, such as but not limited to the accounting, reconciliation and administration of IMO's bank accounts maintained in Japan;

Support in the procurement and shipment of IMO's raw materials and supplies in and their shipment in Japan;

Training of IMO's employees and managerial support in Japan;

Advertisement and promotion of the products manufactured by IMO in the Philippines to potential clients in Japan and other countries outside the Philippines;

MCL may identify, contact and make presentations to potential buyers of IMO's products;

MCL can participate in the initial stages of the negotiation of the terms and condition of the contract by and between the potential buyer and IMO;

Development and maintenance of marketing strategies for IMO outside the Philippines; and

Undertake such other incidental marketing services as may be required by IMO to promote the latter's business in other countries;

that the above-described services shall in no case involve the transfer of MCL's technology, know-how or other intellectual property rights; that the aforementioned services are to be performed in Japan or in other countries outside the Philippines; that in case it would be necessary for MCL to send its employees to the Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed six (6) months; that in consideration for the above services, IMO shall pay MCL a monthly fee of Three Million Five Hundred Thousand Japanese Yen (JPY3,500,000) and a maximum of Five Million Japanese Yen (JPY5,000,000) covering the period from April 1, 2004 to March 31, 2005; that thereafter, the monthly fee shall be evaluated and agreed upon by IMO and MCL; and that the Agreement shall be subject to automatic renewal for another twelve-month term unless one of the parties serves a written notice of non-renewal to the other party not later than one (1) month prior to the expiration of the current term. DEcITS

In reply, please be informed that Article 7, and, in relation thereto, Article 5 of the Philippines-Japan tax treaty provide that: "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. xxx

xxx

xxx"

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(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.

(2)

The term 'permanent establishment' includes especially: (a)

a store or other sales outlet;

(b)

a branch;

(c)

an office;

(d)

a factory;

(e)

a workshop;

(f)

a warehouse;

(g)

a mine, an oil or gas well, a quarry or other place of extraction of natural resources. xxx

(6)

xxx

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 abovementioned provisions and inasmuch as it has been represented that the services will generally be performed by MCL outside the Philippines, and that if it be necessary to send its employees to the Philippines, said employees will not stay in the Philippines for more than six months in their rendition of services to IMO, MCL may be considered as not having a permanent establishment in the Philippines. In other words, MCL is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than six months in the course of their rendition of services to IMO. Such being the case, the service fees to be paid by IMO to MCL under Management and Marketing Agreement are not subject to Philippine income tax. However, the service fees paid by IMO for the portion of the services to be rendered in the Philippines are subject to VAT pursuant to Section 108 of the Tax Code 1(50). Accordingly, IMO, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to MCL. In remitting the VAT withheld, IMO shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from IMO if it is a VAT-registered taxpayer. In case IMO is a non-VAT registered taxpayer, the passed-on VAT withheld Copyright 2017

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shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, IMO is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies thereof be given to MCL and the fourth copy to be retained by IMO. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002) This ruling is issued on the basis on 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. TIADCc

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Section 108 was amended by Republic Act No. 9337, which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — A. Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipt derived from the sale or exchange of services, including the use or lease of properties selling price of gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%) . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

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September 19, 2006

DA ITAD BIR RULING NO. 110-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations Embassy of the Republic of Singapore 35th Floor Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Mr. Yogaindran Yogarajah Counsellor Gentlemen : This has reference to your Note No. 06-1859 dated August 1, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Yogaindran Yogarajah, Counsellor of the Embassy of the Republic of Singapore, specifically described as follows: Make:

Toyota Innova G Diesel 2.5 M/T

Model Year:

2006

Color:

Light Green Mica Metallic

Engine Number:

2KD-9681834

Chassis Number:

KUN40-5010974

indirect taxes of a kind which are normally incorporated in the price of goods or services; xxx

xxx

xxx"

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words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. DISaEA

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of the Republic of Singapore and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Diesel M/T for the personal use of Mr. Yogaindran Yogarajah, Counsellor of the Embassy of the Republic of Singapore is exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-057-01 dated July 2, 2001) 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,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 19, 2006

DA ITAD BIR RULING NO. 109-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations Embassy of Switzerland 24/F Equitable Bank Tower 8751 Paseo de Roxas Makati City Attention: Ms. Irene Fluckiger Copyright 2017

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Counsellor/Deputy Head of Mission Gentlemen : This has reference to your Note No. 93/2006 dated August 7, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Ms. Irene Fluckiger, Counsellor/Deputy Head of Mission of the Embassy of Switzerland, specifically described as follows: Make:

Honda CRV 4X4 2.4L A/T

Model Year:

2006

Color:

Night Hawk Black

Engine Number:

RRMD55-6400537

Chassis Number:

PADRD78506V400536

indirect taxes of a kind which are normally incorporated in the price of goods or services; xxx

xxx

xxx"

However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy of Switzerland and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4L A/T for the personal use of Ms. Irene Fluckiger, Counsellor/Deputy Head of Mission of the Embassy of Switzerland is exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-18-05 dated March 18, 2005) 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. Copyright 2017

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Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 19, 2006

DA ITAD BIR RULING NO. 108-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 063-01 MIYASAKA Polymer (Phils.), Inc. 20 Ampere Street, Light Industry & Science Park of the Philippines (LISPPI) Brgy. Diezmo, Cabuyao, Laguna Philippines Attention: Mr. Hiroki Itoh Gentlemen : This refers to your application for relief from double taxation dated April 17, 2006, on behalf of Miyasaka Polymer (Phils.), Inc. (Miyasaka Phils), requesting for a preferential tax rate of ten percent (10%) to be withheld on dividend remittances to Miyasaka Robber Co., Ltd. (Miyasaka Japan), pursuant to the Philippines-Japan tax treaty. It is represented that Miyasaka Japan with office address at 5350 Toyohira Chino-shi, Nagano-ken, Japan and whose nature of business is the manufacture and sales of industrial rubber parts, is a resident of Japan for tax purposes under Tax Reference Number 0621269 per Certificate of Status of Taxable Person issued by the District Director of the Suwa Tax Office, Japan dated March 24, 2006; that it is not registered either as a corporation or as a partnership per certification dated April 6, 2006 issued by the Securities and Exchange Commission; that Miyasaka Phils is a corporation organized and existing under the laws of the Philippines with office address at 20 Ampere Street, Light Industry & Science Park of the Philippines (LISPPI), Brgy. Diezmo, Cabuyao, Laguna, Philippines. Copyright 2017

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It is further represented that Miyasaka Japan is the registered and the legal owner of One Million Seven Hundred Forty Nine Thousand Nine Hundred Ninety Five (1,749,995) shares of stock representing 99.99% percent of the outstanding capital stock of Miyasaka Phils; that during the special meeting of the stockholders of Miyasaka Phils held on March 10, 2006 it was resolved that Miyasaka be authorized to declare a cash dividend for the period covering the fiscal year ending December 31, 2005 in the amount of Eight Million Seven Hundred Fifty Thousand Pesos (P8,750,000.00) to be distributed in favor of all its stockholders of record on July 1, 2006 in proportion to their respective equity holdings in the Corporation as evidenced by its Corporate Secretary's Certificate dated March 16, 2006; and that Miyasaka Japan has been holding the said shares of stock as of December 31, 2005. HSDaTC

In reply, please be informed that Article 10 of the Philippines-Japan Tax Treaty provides, viz: "ARTICLE 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a)

25 per cent of the gross amount of the dividends in all other cases.

The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx

xxx

xxx"

It is clear under paragraph 2 above that a resident of Japan may avail of the preferential tax rate of 10% if such resident, which is the beneficial owner of the dividends, is a company holding at least 25% either of the voting shares or of the total shares of the payor of the dividends during the period of six months immediately preceding the date of the payment of the dividends. In view thereof and since Miyasaka Japan holds directly 99.99% of the voting shares of Miyasaka Phils for a period of six months before the latter declared dividends, said dividends to be paid by Miyasaka Phils to Miyasaka Japan are subject to the 10% preferential withholding tax rate pursuant to the Philippines-Japan tax treaty. (BIR ITAD Ruling No. 063-01 dated July 31, 2001)

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This ruling is issued based on the foregoing 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. TcEaAS

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 15, 2006

DA ITAD BIR RULING NO. 107-06 Sec. 109 — National Internal Revenue Code 1997; Article III, Section 10 — Vienna Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations; BIR Ruling No. DA-ITAD-01-04 Food and Agriculture Organization of the United Nations (FAO/UN) 29th Floor, Yuchengco Tower RCBC Plaza 6819 Ayala Avenue Makati City Gentlemen : This refers to your letter dated June 29, 2006, indorsed to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of value-added tax (VAT) and ad valorem tax on the purchase of one (1) locally-purchased motor vehicle, for the official use of the Food and Agriculture Organization of the United Nations (FAO/UN), specifically described as follows:

Make:

Toyota Innova J. Diesel

Model Year:

2006

Color:

Quick Silver

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Engine Number:

2KD-9652709

Chassis Number:

KUN40-5010205

In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997 (NIRC), as amended by Section 7 of Republic Act No. 9337 which took effect on November 1, 2005, provides as follows: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; xxx

xxx

xxx" (Emphasis supplied)

In relation thereto, the November 2, 1977 letter of Ambassador Carlos J. Valdes to Director General Edouard Saouma of the Food and Agriculture Organization, which is part of the Exchange of Letters constituting the Agreement between the Government of the Republic of the Philippines and FAO, provides: "I have the honor to refer to the proposed appointment of an FAO representative to the Philippines and the establishment of his office. In this connection, we would like to present for your concurrence the following revised terms and conditions . . . To the extent that it is not already bound to do so, the Government agrees to apply to the Organization, its staff, funds, property and assets, the provisions of the Convention on the Privileges and Immunities of the Specialized Agencies. The FAO Representative shall be accorded the treatment provided for in Section 21 of the said Convention. The Government also agrees to grant FAO, and to the FAO Representative and his staff, privileges and immunities not less favourable than those granted to a representative of any other specialized agency or similar United Nations body in the Philippines. ICESTA

xxx

xxx"

Accordingly, Section 10, Article III of the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations dated November 21, 1947 provides: "Article III xxx

xxx

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Convention will, whenever possible, make appropriate administrative arrangements for the remission or return of the amount of duty or tax. "xxx

xxx

xxx"

Based on the above provisions, important purchases of goods and services in the Philippines for official use of the specialized agencies of the United Nations (UN) are accorded exemption from indirect taxes such as the ad valorem tax and VAT imposed under Section 107 of the NIRC. In view of the foregoing, this Office is of the opinion and so holds that aforementioned purchase of one (1) unit 2006 Toyota Innova J. Diesel, for the official use of the FAO/UN, is exempt from VAT, pursuant to the Agreement between the Government of the Philippines and the Convention on the Privileges and Immunities of the Specialized Agencies of the United Nations. It is hereby understood that this exemption applies only to vehicles purchased under the name of Food and Agriculture Organization of the United Nations for its official use. 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. cEAIHa

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 11, 2006

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Embassy of the People's Republic of China 4896 Pasay Road, Dasmariñas Village Makati City Attention: Mr. Huang Li Attaché Gentlemen : This has reference to your Note No. (06)PG-206 dated August 3, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Huang Li, Attaché of Embassy of the People's Republic of China, specifically described as follows: Make:

Mazda3 1.6 L S

Model Year:

2006

Color:

Techno Gray

Engine Number:

AT8712

Chassis Number:

PE3BVSV161ZG00897

indirect taxes of a kind which are normally incorporated in the price of goods or services; xxx

xxx

xxx"

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Hence, the local purchase of one (1) unit of 2006 Mazda3 1.6 L S for the personal use of Mr. Huang Li, Attaché of the Embassy of the People's Republic of China is exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-54-06 dated May 11, 2006) 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. IEcDCa

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

September 12, 2006

DA ITAD BIR RULING NO. 105-06 DFA Indorsement dated September 7, 2006; NICA letter dated February 21, 2006 Embassy of the Hashemite Kingdom of Jordan Tokyo, Japan Attention: Mr. Ali Mahmoud Ali-Al-Wishah First Secretary Gentlemen : This has reference to your Note No. PH/2/365 dated June 6, 2006 referred to this Office by the immunities and Privileges Division, Office of Protocol of the Department of Foreign Affairs (DFA), requesting for the issuance of value added tax (VAT) exemption certificate for Mr. ALI MAHMOUD ALI-AL-WISHAH, First Secretary of the Embassy of Jordan. In reply, please be informed of Article 34 of the Vienna Convention on Diplomatic Relations, pertinent portion of which reads: Copyright 2017

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"ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of the goods and services; "xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from value added tax (VAT) and ad valorem taxes on their local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall generally be subject to the value added tax prescribed under Sections 106 and 108, of the National Internal Revenue Code of 1997, as amended. However, applying the principle of reciprocity, this Office may confirm entitlement to VAT exemption of an Embassy and/or its personnel on their local purchases of goods and/or services if it appears from the list submitted by the DFA that the Government of such Embassy or personnel allows similar exemption to Philippine Embassy personnel on their purchase of goods and services in its country. We note that the Hashemite Kingdom of Jordan has no Embassy in the Philippines. Nevertheless, the DFA issued favorable endorsement of Mr. Ali Mahmoud Ali-Al-Wishah's request addressed to this Office, dated September 7, 2006. In this indorsement, the DFA stated: "The Office of Protocol and State Visits has the honor to request for the issuance of Value-added Tax Certificate in favor of Mr. Ali Mahmoud Wishah, First Secretary of the Embassy of Jordan. In this regard, the Department received a letter from National Intelligence Coordinating Agency (NICA) that this special arrangement between the Philippines and Jordan was a product of the discussion between then Crown Prince Abdullah of Jordan and her Excellency President Gloria Macapagal Arroyo sometime in early 2002. Furthermore, the grant of VAT exemption privilege to the Jordanian Diplomat and his wife has been cleared by the Office of the Secretary, Department of Foreign Affairs." Furthermore, the February 21, 2006 letter of Director General Cesar P. Garcia, Jr. of the NICA, Office of the President, stated that Mr. Virgilio Lacaba, our Filipino Liaison Officer in Jordan has been issued a tax exemption certificate. In view thereof, this Office is of the opinion and so holds that the grant of VAT exemption privileges in the instant case is in place. Hence, Mr. ALI MAHMOUD ALI-AL-WISHAH, First Secretary of the Embassy of The Hashemite Kingdom of Jordan is exempt from value added tax on his purchases of local goods and/or services. SHECcT

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG Commissioner Bureau of Internal Revenue

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August 30, 2006

DA ITAD BIR RULING NO. 104-06 Article 11, Philippines-Japan, Philippines-Germany and Philippines-Netherlands Tax Treaties; BIR Ruling No. DA-ITAD 195-03; BIR Ruling No. DA-ITAD 99-05; BIR Ruling No. 32-05; BIR Ruling No. DA-ITAD 164-05 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: C.P. Noel Vice Chairman and Deputy Managing Partner Gentlemen : This refers to your letter dated November 14, 2005 and February 23, 2006 requesting tax treaty relief for the Nippon Export and Investment Insurance (NEXI) Loan Facility of STEAG State Power, Inc. (SPI). It is represented that SPI, (formerly, State Power Development Corporation as evidence by the attached copy of its Certificate of Filing of Amended Articles of Incorporation), is a corporation organized and existing under the laws of the Philippines with office address at 20/F Yuchengco Tower, RCBC Plaza, 6819, Ayala Avenue, Makati; that SPI and National Power Corporation (NAPOCOR) executed a Power Purchase Agreement (PPA) on June 27, 1998, as amended, whereby SPI agreed to build, operate and transfer to NAPOCOR a 200 MW coal-fired power plant, otherwise known as the Mindanao Power Project ("Project") located at the Phividec Industrial Estate in Misamis Oriental, Mindanao; that under the terms of the PPA, SPI will construct the power station and operate the same during an agreed cooperation period of twenty-five (25) years ("Cooperation Period"); that the Project costs are currently estimated at about US$305,000,000, which is funded by 75% debt and 25% equity; that on November 28, 2003, for purposes of financing the said Project, SPI (as the Borrower) entered into an Omnibus Agreement, with JBIC and commercial bank lenders, guaranteed by NEXI (as Lenders), which consists as follows:

Tranche A or the JBIC Loan Facility will be financed by the JBIC, an entity wholly owned by the government of Japan in the amount of $60,600,000.00;

Tranche B or the NEXI Loan Facility will be financed by commercial banks/lenders and will benefit from an Extended Political Risk Insurance ("Extended PRI") or guarantee to be

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provided by NEXI, a Japanese export credit agency or financial institution, the capital of which is wholly-owned and fully funded by the Japanese government through which Ministry of Economy, Trade and Industry of Japan (METI) transferred some of its services including trade insurance service, export credit agency and investment insurance service.

It is further represented that among the commercial banks/lenders under the NEXI Facility are branch offices of Bayerische Hypo-und Vereinsbank AG (HVB-Germany), ING Bank N.V. (ING-Netherlands) and UFJ Bank Limited Facility will enjoy the Extended PRI or guarantee of NEXI; that Bayerische Hypo-und Verinsbank is a resident of Germany and is subject to corporate income tax of Germany with tax identification number 800/82007 as shown in the Certificate of Residence issued by the Tax Authority of Germany on July 5, 2005; that ING Bank N.V. is a nonresident corporation duly organized and existing under the laws of The Netherlands with registered office in Amsterdam as evidenced by its Articles of Association; that UFJ is a Japanese commercial bank with principal office located in Nagoya, Japan; that the abovementioned international commercial banks are not registered either as corporations or as partnerships in the Philippines as confirmed by the Certificates of Non-Registration, all dated March 17, 2005 issued by the Securities and Exchange Commission. HCATEa

Finally, it is represented that under the terms of the JBIC and NEXI Loan Facilities, SPI will pay interest to JBIC and the abovementioned commercial banks; that SPI will also pay service fees, namely, Intercreditor Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a non-resident German commercial bank, for performing services as the appointed agent of the JBIC and NEXI Loan Facility and for arranging the said credit facilities; and that the services of HVB as the appointed agent of JBIC and NEXI Loan Facilities are being performed entirely outside the Philippines as well as its services as the lead arranger of the said facilities. Based on the foregoing, you request confirmation that: (1)

The interest income derived by Japan Bank for International Cooperation (JBIC) under the JBIC Loan Facility arranged with Steag State Power, Inc. (SPI), is exempt from Philippine income tax and consequently from withholding tax pursuant to Article 11(4)(a) of the Philippines-Japan tax treaty;

(2)

The interest payments derived by UFJ Bank, Limited (UFJ) from SPI under the NEXI Loan Facility are also exempt from Philippine income tax pursuant to Article 11(4)(a) of the Philippines-Japan tax treaty; and

(3)

That the Philippines-Germany and Philippines-Netherlands tax treaties will apply to the respective interest income that would be derived by HBV-Germany and ING-Netherlands in the Philippines under the NEXI Loan Facility.

In reply, please be informed as follows: 1.

On INTEREST on Tranche A or the JBIC Loan Facility

Article 11 of the Philippines-Japan tax treaty provides: "Article 11 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

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However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a)

10 per cent of the gross amount of the interest if the interest is paid in respect of the Government securities, or bonds or debentures;

15 per cent of the gross amount of the interest in all other cases. xxx

xxx

Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means:

In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency;

In the case of the Philippines, the Development Bank of the Philippines; and

Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in subparagraphs (a) and (b) above, as may be agreed from time to time between the Governments of the two Contracting States.

The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx

xxx

xxx"

Based on the foregoing provisions, interest arising in the Philippines and derived by the Government of Japan or any financial institution wholly owned by Japan, specifically the Overseas Economic Cooperation Fund (OECF) and the Japan Cooperation Agency (JICA), shall be exempt from income tax in the Philippines. Considering that in BIR Ruling No. DA-ITAD 21-99 dated August 24, 1999, the JBIC was recognized as a financial institution wholly owned by the Government of Japan when it took over the factions of the OECF, which was dissolved as of the date of establishment of the JBIC, this Office is of the opinion and so holds that the interest income derived by the JBIC from the JBIC Loan Facility it executed Copyright 2017

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with SPI is exempt from Philippine income tax pursuant to the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 195-03 dated December 23, 2003) 2.

On INTEREST on Tranche B or the NEXI Loan Facility

Pursuant to Article 11(4)(c) of the Philippines-Japan tax treaty, interest derived by other residents of Japan will qualify for exemption from income tax provided it is arising from a debt claim that is guaranteed or indirectly financed by the Japanese Government or any financial institution wholly owned by the same and qualified entities referred to under the said treaty. Considering that NEXI is a Japanese export credit agency, the capital of which is wholly owned and fully funded by the Japanese government (as per letter dated may 17, 2004 of Mr. Masatsugu Asakawa, Director, International Tax Policy Division, Ministry of Finance Japan), this Office is of the opinion and so holds that the interest income received by UFJ-Japan from SPI on a loan guaranteed by NEXI is exempt from Philippine income tax and consequently from withholding tax (BIR Ruling NO. DA-ITAD 164-05 dated December 22, 2005) As regards the interest payments received by the branch office of HVB-Germany from SPI on the loan guaranteed by NEXI, Article 11 of the Philippines-Germany tax treaty provides: "Article 11 INTEREST 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed; a)

10 per cent if such interest is paid: (i)

in connection with the sale on credit any industrial, commercial or scientific equipment, or

(ii)

on any loan of whatever kind granted by a bank, or

(iii)

in respect of public issues of bonds, debentures or similar obligations,

15 per cent of the gross amount of such interest in all other cases xxx

xxx

xxx."

Based on the foregoing, and since the interest income derived by HVB-Germany in the Philippines from the subject loan and paid to it by SPI is not in connection with any sale on credit of any industrial, commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or paid in respect of public issues of bonds debentures or similar obligations the same is subject to the preferential tax rate of 15 per cent of the gross amount of the interest under paragraph Copyright 2017

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(2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No. 32-05 dated April 13, 2005)

EHDCAI

Moreover, as regards interest income received by ING-Netherlands, Article 11 of the Philippines-Netherlands tax treaty provides: "Article 11 INTEREST 1.

Interest arising in one of the States and paid to a resident of the other State may be taxable in that other State.

10 per cent of the gross amount if such interest is paid: (i)

in connection with the sale on credit of any industrial, commercial or scientific equipment, or

(ii)

on any loan of whatever kind granted by a bank, or any other financial institution.

(iii)

in respect of public issues of bonds, debentures or similar obligations.

25 per cent of the gross amount of the interest in all other cases xxx

xxx

The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation of the State in which the income arises. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. xxx

xxx

xxx."

Based on this, the interest income derived by ING-Netherlands in the Philippines do not fall under the instances enumerated in Article 11(2)(a) of the Philippines-Netherlands that treaty since the interest to be paid by SPI are not in connection with any sale on credit of any industrial, commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or paid in respect of public issues of bonds, debentures or similar obligations. Therefore, the interest income of ING-Netherlands from the subject loan is subject to the preferential tax rate of 15 per cent of the gross amount of the interest. (BIR Ruling No. 32-05 dated April 13, 2005) Lastly, the Omnibus Agreement executed by SPI and JBIC and the commercial bank lenders guaranteed by NEXI is subject to documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended. cIADaC

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 29, 2006

DA ITAD BIR RULING NO. 103-06 Articles 5 (Permanent Establishment), 8 (Business Profits) Philippines-United States of America tax treaty; BIR Ruling No. 14-06 Regalado Bautista & Menzon Law Offices Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City. Attention: Atty. Edith Abana-Bautista Atty. Rhodora Corcuera-Menzon Gentlemen : This refers to your letter dated June 29, 2006 requesting a ruling on the tax implication of the purchase of software by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Wind River Systems International Inc. pursuant to Article 8 in relation to Article 5 of the Philippines-United States of America (US) tax treaty. It is represented that Wind River Systems International Inc., a corporation which was formed or incorporated in the United States of America is registered in Singapore as Wind River Systems International Inc.-Singapore Branch (hereinafter, Wind River) per Certificate of Registration of Foreign Company issued by Mrs. Ng-Lou Geok Choo, Assistant Registrar of Companies and Businesses, Singapore; that Wind River office is located at 1, International Business Park, #03-01C, Tower Block, The Copyright 2017

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Synergy, S'pore 609917, Singapore; that Wind River is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated August 9, 2006 issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software development involving imaging, communications and related technologies. It is further represented that Canon-Philippines purchased the Annual Support and Maintenance of Tornado and Annual Support and Maintenance for VxWorks OEM License as renewal from Wind River; that as part of the software support and maintenance services agreement, maintenance services shall include the following: 1)

Periodic maintenance releases;

Periodic patch release;

Customer support through Central Support and Field Support;

Access to windsurf web support site, Wind River's 24-hour online support, providing access to known problems lists, frequently asked questions (FAQs), online publications, and knowledge-based services;

Notification service for changes in product functionality or company information;

Proactive Alerts: Automatic reporting of changes to TSR/SPR status;

1 to 1 exchange for hardware while on repair.

aDHCEA

That all the software and training material delivered to Canon-Philippines under the Wind River Systems, Inc. Software Support and Maintenance Services Agreement and any modification thereto shall be owned by Wind River; and that the consideration for the purchase of the software shall be $1,104.00 for the Annual Support and Maintenance for Tornado and $2,199.00 for Annual Support and Maintenance for VxWorks OEM License. In reply please be informed that Article 8 in relation to Article 5 of the Philippines-US tax treaty provides: "Article 8 BUSINESS PROFITS 1.

Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. xxx

xxx

xxx"

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PERMANENT ESTABLISHMENT 1.

For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business.

The term 'fixed place of business' includes but is not limited to: a)

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse;

A mine, quarry, or other place of extraction of natural resources;

A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and

aIcDCT

xxx

xxx."

Based on the foregoing, in order for Wind River to be considered to have a permanent establishment to which said business profit may be attributed, it must satisfy the following conditions 1(51): -

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

Since it appears, based on the SEC Certificate that Wind River is not registered either as a corporation or as a partnership in the Philippines and that Wind River does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Copyright 2017

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Philippines through which it may use for carrying on its business, Wind River is deemed as not having a permanent establishment to which said business profit may be attributed to. Thus, for as long as Wind River is deemed not to have a permanent establishment in the Philippines to which profits may be attributable, income from its sale of software or services, such as that made to Canon-Philippines in the instant case, shall be exempt from income tax and consequently withholding tax. However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the NIRC, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Cannon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% from its payments before it telegraphically transfers it to the account of the Wind River. With regard to the procedures for withholding and paying the VAT, pursuant to Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, Canon-Philippines shall be responsible for the withholding of the 10 percent/(12 percent effective February 1, 2006) VAT on the license fee before remitting it to Wind River. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Canon-Philippines may include as part of the cost of the services provided to it by Wind River the VAT consequently shifted or passed on it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Wind River and the fourth copy for Canon-Philippines as its file copy. ECTIHa

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Organization for Economic Cooperation and Development (OECD), 2005 edition, paragraph 2, pages 85-91.

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August 28, 2006

DA ITAD BIR RULING NO. 102-06 Article 11 & 12, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-40-05; BIR Ruling No. DA-ITAD-92-05 Nihon Garter Philippines, Inc. Lot 12 Block 8, Cavite Economic Zone Rosario, 4106 Cavite, Philippines Attention: Mr. Tsunehiro Takami VP/General Manager Gentlemen : This refers to your letter dated April 19, 2005, requesting confirmation that the "Goodwill charges", which constitute royalties, and the interest payments made by your company to your parent company, Nihon Garter Co., Ltd. (Nikon-Japan), are subject to ten percent (10%) and fifteen percent (15%) income tax, respectively, pursuant to the Philippines-Japan tax treaty. It is represented that Nihon-Japan is a nonresident foreign corporation duly organized and existing under the laws of Japan with office address at 5-13, Imai 3-Chome, Ome-shi, Tokyo, Japan and is a resident of Japan within the meaning of the Tax Convention between Japan and the Philippines, as certified by the District Director of the Ome Tax Office on April 27, 2005; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 29, 2005; that Nihon Garter Philippines, Inc. (Nihon-Phil) is a corporation duly organized and existing under the laws of the Philippines with office address at Lot 12, Blk 8, Main Ave., Rosario, Cavite; that it was registered with the then Export Processing Zone Authority (EPZA), now Philippine Economic Zone Authority (PEZA) as a Zone Export Enterprise under Registration Certificate No. 89-024 dated June 30, 1989. It is further represented that on March 17, 2003, Nihon-Japan and Nihon-Phil entered into a Memorandum of Loan Agreement wherein Nihon-Japan and Nihon-Phil agreed that the balance of the trade credit of Nihon-Phil amounting to Seventy-Five Million Yen (Y75,000,000) be converted to Ten (10) Year Term Loan; that the said loan has interest rate of 3 percent (3%) per annum, payable in forty (40) equal quarterly amortizations and shall be paid per schedule of payment attached to the Agreement, with the first quarterly amortization commencing on May 31, 2003 and on or before the first day of the succeeding quarter for the year thereafter, until the loan shall have been fully paid. TDEASC

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In addition, it is represented that on March 2005, Nihon-Japan and Nihon-Phil entered into a Memorandum of Agreement wherein, upon written request of Nihon-Phil, Nihon-Japan shall provide Nihon-Phil the following marketing support services: (a)

Souring of Slit PS Sheets, cover tapes and reels and manufacturing equipment;

(b)

Promotion of Nihon-Phil and its products (including embossed plastic carrier tapes) in world-wide trade chambers;

(c)

Providing business development and leads pertaining to potential customers in Asia, negotiation with buyers and suppliers;

(d)

Procuring materials, equipment and allied services needed by Nihon-Phil; and

(e)

Development and printing information materials, brochures, and other promotional materials;

that Nihon-Japan shall provide the foregoing services outside the Philippines; that Nihon-Japan shall bill Nihon-Phil annually depending on the extent of the work to be performed at a rate mutually agreed upon prior to Nihon-Japan's performance of any marketing support services, provided that the amount shall not exceed to Y3,000,000.00 in each month; that the said Memorandum of Agreement shall take effect on April 1, 2005 and shall continue unless terminated by prior written sixty-day notice by one party to the other. In reply, please be informed that interest income and royalty payments received by Nihon-Japan are subject to Philippine income tax as follows: 1.

One the Memorandum of Loan Agreement

Article 11 of the Philippines-Japan tax treaty provides, viz: "Article 11 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. IDaCcS

10 percent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures;

15 per cent of the gross amount of the interest in all other cases. xxx

xxx

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debentures. xxx

xxx

xxx"

Based on the above, the preferential tax rate to be withheld by Nihon-Phil on its interest payments to Nihon-Japan under their Memorandum of Loan Agreement shall be fifteen percent (15%) of the gross amount of the interest since it is not paid in respect of Government securities or bonds and debentures. Moreover, file Memorandum Loan Agreement between Nihon-Japan and Nihon-Phil dated March 17, 2003 is subject to (a) documentary stamp tax imposed under Section 180 of the National Internal Revenue Code (NIRC) of 1997 at a rate of Thirty Centavos (P0.30) on each of Two Hundred Pesos (P200), or fractional part thereof, of the face value of such contract. 2.

On the Memorandum of Agreement for services

Article 12 of the Philippines-Japan tax treaty provides, viz: "Article 12 1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

15 percent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting;

25 per cent of the gross amount of royalties in all other cases

Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investment and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties.

The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx

xxx

xxx"

Based on the aforequoted provisions, royalties paid by a resident of the Philippines to a resident of Japan may be taxed at a rate not exceeding 10% of the gross amount of the royalties if the payor is a Board of Investments (BOI)-registered enterprise engaged in preferred pioneer areas of investment, 15% if it is paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or Copyright 2017

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television broadcasting, and 25% in all other cases. Such being the case, this Office is of the opinion and so holds that since Nihon-Phil is not a BOI-registered enterprise engaged in preferred pioneer areas of investment, and that the subject royalty payments are not paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, said royalty payments made by Nihon-Phil to Nihon-Japan under the above Agreement shall be subject to Philippine income tax at a rate of 25% of the gross amount of the royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-40-05 dated May 9, 2005) As regards the imposition of the VAT on the rendition of services of Nihon-Japan, please be informed further that Section 108 of the NIRC of 1997 1(52) provides as follows, to wit: ''SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use of lease of properties. AHSEaD

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. . . . (Emphasis supplied).

Thus, in general, the VAT should be imposed when Nihon-Japan provides the above services in the Philippines "for short durations and in no case shall exceed on aggregate of 3 months in any given calendar year". Nihon-Phil shall then be required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [Now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 2(53) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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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, nee 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: . . . 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 exeptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded coming within the purview of the general rule. 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 the imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly. THEcAS

xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K) of the NIRC of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., RA 7916 or EPZA Law], is particularly applicable, to the instant case. Such being the case, the payment by Nihon-Phil, a PEZA-registered enterprise, to Nihon-Japan, under the above Agreement should be as it is hereby confirmed to be exempt from VAT. 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:

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Footnotes 1. 2.

Please not that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Referring to the old Section 109 (q) of the Tax Code of the 1997 [now Section 109(K), as amended by RA No. 9337].

August 28, 2006

DA ITAD BIR RULING NO. 101-06 Philippines-Canada tax treaty; BIR Ruling No. 124-88 SyCip Salazar Hernandez & Gatmaitan SSHG Law Centre 105 Paseo De Roxas Makati City 1226 Metro Manila Philippines Attention: Mr. Vicente D. Gerochi IV Ms. Carmen Amparo P. Limgenco Gentlemen : This refers to your application for relief from double taxation dated January 4, 2006, on behalf of your client, Catalyst Paper Corporation (CPC), formerly known as Norske Skog Canada Limited (NSCL), requesting confirmation of your opinion that the dividends payable by NSC Holdings (Philippines), Inc. (NSC Holdings) to CPC are subject to the preferential tax rate of 15%, pursuant to Article X(2)(a) of the Philippines-Canada tax treaty. It is represented that CPC is a corporation duly organized and existing under the laws of Canada, with principal office address at 16th Floor, 250 Howe Street, Vancouver, British Columbia, Canada; that it is not doing business in the Philippines; that CPC and NSCL are not registered either as corporations or as partnerships in the Philippines per Certification dated December 29, 2005 and November 14, 2005, respectively, issued by the Securities and Exchange Commission; that NSC Holdings is a corporation duly organized and existing under the laws of the Philippines, with business address c/o 3rd Floor, SSHG Law Centre, 105 Paseo de Roxas, Makati City, Philippines; that as evidenced by a Certification dated January 4, 2006, issued by the Assistant Corporate Secretary of NSC Holdings, CPC is the legal and beneficial Copyright 2017

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owner of Three Hundred Seven Thousand Nine Hundred Ninety Five (307,995) common shares and the beneficial owner of Five (5) common shares of the capital stock of NSC Holdings, with a par value of PhP100 per share or an aggregate par value of Thirty Million Eight Hundred Thousand Pesos (PhP30,800,000.00); that the total issued and outstanding capital stock of NSC Holdings is Three Hundred Eight Thousand (308,000) common shares. It is further represented that CPC is the beneficial owner of 100% of the shares of NSC Holdings; that at a special meeting held on November 15, 2002, the Board of Directors of NSC Holdings approved the declaration of cash dividends in the amount of Forty Nine Million Pesos (PhP49,000,000.00) in favor of all stockholders of record of NSC Holdings as of November 15, 2002, in proportion to their respective stockholdings; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. SDHAEC

In reply, please be informed that Article X of the Philippines-Canada tax treaty provides as follows, viz: "Article X Dividends xxx 2.

xxx

Dividends paid by a company which is a resident of the Philippines to a resident of Canada may be taxed in Canada. However, such dividends may also be taxed in the Philippines, but where the beneficial owner of the dividends is a resident of Canada the tax so charged shall not exceed: (a)

15 per cent of the gross amount of any dividend paid to a company which is a resident of Canada which controls at least 10 per cent of the voting power to the company paying the dividend; or

(b)

25 per cent of the gross amount of the dividends in all other cases. xxx

xxx

The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the above-cited provisions, the 15 percent (15%) preferential tax rate on dividends apply whenever the beneficial owner of the dividend controls at least 10 percent of the voting power of the paying company. In all other cases, the 25 percent (25%) preferential tax rate applies. Such being the case and considering that CPC is the owner of 100% percent of the voting shares of NSC Holdings, this Office is of the opinion and so holds that the dividend payments by NSC Holdings to CPC shall be subject to the preferential tax rate of 15 percent (15%), based on the gross amount of dividends, pursuant to Article X(2)(a) of the Philippines-Canada tax treaty. (BIR Ruling No. 124-88 dated March 28, 1988) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall Copyright 2017

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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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 25, 2006

DA ITAD BIR RULING NO. 100-06 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-028-99 Transitions Optical Phils., Inc. Block 4 Lot 1 Star Avenue, Laguna International Industrial Park Mamplasan, Biñan Laguna 4024 Attention: Suzanne B. Mondoñedo Finance Director (Asia Pacific) Gentlemen/Ladies : This refers to your application for relief from double taxation dated November 10, 2005, requesting confirmation of your opinion that the payment of dividends by Transitions Optical Phils., Inc. (TOPI) to Transitions Optical Holdings BV (TOH) is subject to final withholding tax at the preferential tax rate of 10 percent, pursuant to Article 10(2) of the Philippines-Netherlands tax treaty. It is represented that TOH is a nonresident corporation duly organized and existing under the laws Copyright 2017

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of the Netherlands with principal office at Rijkaweg West 22, 9608 PC, Werterbroek, The Netherlands; that TOH is a resident of The Netherlands within the meaning of Article 4 of the Convention for the Avoidance of Double Taxable Between the Netherlands and the Republic of the Philippines (Philippines-Netherlands tax treaty) per Declaration of Residence dated 8 November 2005 issued by the Inspector of the Tax Administration Noord/kantoor Groningen Engelse Kamp, the Netherlands; that it is not registered either as a corporation or a partnership in the Philippines per Certification dated 9 November 2005 issued by the Securities and Exchange Commission; that TOPI is a corporation duly organized and existing under and by virtue of the laws of the Philippines with business address at Block 4 Lot 1 Star Avenue, Laguna International Park, Mamplasan, Biñan, Laguna 4024; and that it is engaged in the manufacturing, distribution, selling and export (without, however, engaging in retail trade) of photochromic ophthalmic lenses. It is further represented that on 10 November 2005, TOPI's Board of Directors declared a cash dividend out of its retained earnings amounting to US$5,000,000,000, to its stockholders of record as of 10 November 2005, payable on 25 November 2005; that as of 10 November 2005, TOH is the registered owner of the 99.99% of the subscribed/outstanding capital stock of TOPI; and that the issue/s or transaction subject of the above request is not under investigation, neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. EacHCD

In reply, please be informed that Article 10 of the Philippines-Netherlands tax treaty provides as follows: "Article 10 DIVIDENDS 1.

Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State.

10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends;

15 per cent of the gross amount of the dividends in all other cases. xxx

xxx

The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx

xxx

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218

Accordingly, your opinion that the cash dividends declared by TOPI in favor of TOH is subject to the 10 percent preferential tax rate, pursuant to the Philippines-Netherlands tax treaty, is hereby confirmed considering that recipient TOH is a beneficial owner of the dividends which holds directly 99.99% of the outstanding capital stock of TOPI. (BIR Ruling No. 028-99) 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 herein parties are concerned.

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 25, 2006

DA ITAD BIR RULING NO. 099-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-143-05 JGLaw SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Philippines Attention: Ms. Mary Jane A. Delgado Mr. Ramoncito T.F. Pacis Gentlemen : This refers to your application for tax treaty relief dated November 18, 2005, on behalf of your client, United Steel Center Manila, Inc. (USCMI), requesting confirmation of your opinion that (1) dividends paid to Sumitomo Corporation (Sumitomo) are subject to the preferential tax rate of 10%; and (2) dividends paid to Mitsui & Co. Ltd. (Mitsui) are subject to the preferential tax rate of 25%, pursuant to Copyright 2017

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Article 10 of the Philippines-Japan tax treaty. It is represented that Sumitomo, having its head office at 1-8-11, Harumi, Chuoku, Tokyo, 104-8610, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty, and is subject to taxation in Japan per Residence Certificate dated September 21, 2005 issued by the District Director of the Kyobashi Tax Office, Japan; that Sumitomo has a branch office in the Philippines; that Sumitomo holds 89.99% of the total subscribed shares of USCMI; that Sumitomo's investment in USCMI came directly from Japan; that Mitsui, having its head office at address at 2-1 Ohtemachi I-Chome, Chiyoda-ku, Tokyo, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty, and is subject to taxation in Japan per Residence Certificate dated November 4, 2005 issued by the District Director of the Kojimachi Tax Office, Japan. It is also represented that Mitsui was licensed to engaged in business in the Philippines on March 17, 1967 and that to date no withdrawal or cancellation of license appears to have been filed by the corporation as certified by the Securities and Exchange Commission on October 11, 2005; that Mitsui's branch in the Philippines is licensed (1) to export, import, and engage in the domestic sale of various commodities, (2) to carry on an agency business, and (3) to manufacture all types of machines; that Mitsui holds 9.99% of the total subscribed shares of USCMI; that Sumitomo and Mitsui's investments in USCMI came directly from Japan and that such investments were made by Sumitomo and Mitsui independently of their respective Philippines branches. aHSTID

It is further represented that on May 9, 2005, USCMI declared cash dividends in the amount of Nine Million Pesos (PhP9,000,000.00) to all its stockholders of record as of May 9, 2005, payable on or before June 8, 2005; that the total dividends allocated to Sumitomo is Eight Million Ninety Nine Thousand Nine Hundred Ninety Seven (8,099,997.00); that the total dividends allocated to Mitsui is Eight Hundred Ninety Nine Thousand Nine Hundred Ninety Seven (899,997.00); that 10% of the dividends received by Sumitomo amounting to Eight Hundred Nine Thousand Nine Hundred Ninety Nine Pesos and Seventy Cents (PhP809,999.70) was deducted and withheld by USCMI; that 25% of the dividends received by Mitsui amounting to Two Hundred Twenty Four Thousand Nine Hundred Ninety Nine Pesos and Twenty Five Cents (PhP224,999.25) was similarly deducted and withheld by USCMI; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides: "Article 10 1.

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a)

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25 per cent of the gross amount of the dividends in all other cases. xxx

xxx

xxx"

Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident in Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares of the paying company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. In the instant case, it is represented that while Mitsui and Sumitomo are licensed to engaged in business in the Philippines, the investments giving rise to the subject dividend income came directly from Japan and that the same were made by Mitsui and Sumitomo independently of their respective Philippine branches. Such being the case, any income derived by Mitsui and Sumitomo independently of their respective Philippine branches shall be considered as income of Mitsui and Sumitomo alone, applying the rule enunciated in the case of Marubeni vs CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (italic ours)

In view thereof and considering that Sumitomo holds 89.99% of USCMI's shares of stock for the period of six (6) months immediately preceding the date of payment of the dividends, per Certification issued by the Corporate Secretary of USCMI dated April 25, 2006, this Office is of the opinion and hereby holds that the dividend payments of USCMI to Sumitomo are subject to the 10% preferential tax rate pursuant to the aforequoted Article 10(2)(a) of the Philippines-Japan tax treaty (BIR Ruling No. DA-ITAD 143-05 dated November 23, 2005) Moreover, considering that as of May 9, 2005, Mitsui holds 9.99% of the shares of stock of USCMI, as shown in the Certification issued by the Corporate Secretary of USCMI dated April 25, 2006, that dividends paid to Mitsui by USCMI are subject to the 25% preferential tax rate pursuant to Article 10(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 143-05 dated November 23, 2005) 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. Copyright 2017

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 25, 2006

DA ITAD BIR RULING NO. 098-06 Sections 105, 108 [(A) and (B) (3)] and 109 (q) National Internal Revenue Code of 1997 Articles II and IV, Philippines-United States of America Economic and Technical Cooperation Agreement; BIR Ruling No. DA-ITAD 16-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty. Maria Victoria C. Españo Tax Partner Gentlemen : This refers to your letter dated February 3, 2006 requesting confirmation that the service fees to be paid by the United States Agency for International Development (USAID) to Tetra Tech EM, Inc. (Tetra Tech) (formerly, PRC-Environmental Management, Inc.) in connection with Philippine projects funded by the USAID are not subject to value-added tax (VAT). BASIC FACTS Copyright 2017

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It is represented that Tetra Tech is a corporation, organized and existing under the laws of the United States of America, with address at 233 North Michigan Avenue, Suite 1621, Chicago, Illinois 60601, united States of America; that pursuant to an application approved by the Securities and Exchange Commission, Tetra Tech is licensed to establish a branch office in the Philippines to engage in the business of rendering technical support, preparation of feasibility studies, and project management in the area of environment; that the branch office refers to Tetra Tech Philippine Branch with Registration No. AF0930043, and with address at One Magnificent Mile, San Miguel Avenue, Ortigas Center, Pasig City, Philippines; and that on July 9, 1992, February 21, 1996 and September 19, 2003, respectively, the USAID granted Tetra Tech the Awards/Contracts to implement the following projects in the Philippines: 1.

The Industrial Environmental Management (IEMP) Project (Contract No. AID 492-0465-C-00-2147-00)

The Natural Resources Management Program Coastal Resources Management (CRM) Project (Contract No. 492-0444-C-6028-00), and

The Fisheries Improved for Sustainable Harvest (FISH) Project (Contract No. 492-C-00-03-00022-00).

The IEMP Project

That under the IEMP Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement activities that will directly impact upon the Government of the Republic of the Philippines, Industry Associations, public/private sector industrial firms and non-government organizations, by providing services including technical assistance, support for policy studies, public/private sector dialogue, training and commodity procurement; that Tetra Tech will deal with three project components; (1) Pollution Reduction Initiative, (2) Policy Studies and Public/Private Dialogues, and (3) Capacity Building; and that the service fee for the IEMP Project is US$10,358,525.00 (composed of project cost at US$9,591,227.00 and service fee at US$767,298.00). b.

The CRM Project

That under the CRM Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement the following performance objectives: (1) effective management of coastal waters along 2,000 kilometers of shoreline by communities for sustainable harvest, (2) increased public sector investment in CRM activities and policy implementation, and (3) mechanisms for providing equity in access to coastal resources, (4) sustainable management and an improved investment climate, and (5) other activities; and that the service fee for the CRM Project is US$10,789,707.12 (composed of project cost at US$10,083,838.43, fixed fee at US$201,676.77, and possible award fee at US($504,191.92). IAaCST

The FISH Project

That under the FISH Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement a wide range of activities it deems fit to achieve the Project's objective to conserve biological diversity in at least four biologically important marine ecosystems in the Philippines, as measured by an increase in targeted marine fish stocks and the maintenance of selected coastal resources that support them with environmental services; that the project activities are expected to reverse current trends on fish stock depletion and degradation of coastal resources in target areas and bring about more sustainable catch levels of marine fish stocks the benefit productivity and stakeholders; that the Project is designed, and will be implemented, to encourage the Bureau of Fish and Aquatic Resources of the Department of Agriculture Copyright 2017

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and Local Government Units to replicate this ecosystem management approach in other marine and coastal ecosystems; that the service fee for the FISH Project for the base contract period (Years 1 to 5) is US$8,860,476.00 (composed of project cost at US$8,242,303.00 and fixed fee at US$618,173.00); and that if the option to extend the contract period (Years 6 to 7) is exercised, the service fee for the FISH Project for the option period is US$3,266,488.00 (composed of project cost at US$3,038,556.00, fixed fee at US$106,349.00, and possible performance/award fee at US$121,542.00). That pursuant to the above-mentioned Awards/Contracts, the USAID will reimburse Tetra Tech for project-related costs and pay it a fixed fee for its services; and that Tetra Tech Philippine Branch will invoice the USAID for the projects costs and fixed fees in United States dollars, and the USAID will remit the payments directly to Tetra Tech in the United States. RULING In reply, please be informed that under Section 108(A) of the National Internal Revenue Code of 1997 (Tax Code), the service fees to be paid by the USAID to Tetra Tech (composed of project costs, fixed fees, and possible performance/award fees), being payments for the performance of services in the Philippines, are generally subject to VAT: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A)

Under Section 105 of the Tax Code, because the VAT is an indirect tax, it may be shifted or passed on by Tetra Tech to the USAID: "SEC. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services . . ."

Additionally, Sections 109(q) and 108(B)(3) of the Tax Code provide: "SEC. 109. Exempt Transactions. — The following shall be exempt from the value-added tax: xxx (q)

xxx

Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590; 2(55) "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — xxx

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(B)

Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx (3)

xxx

Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate."

Under the above-cited provisions, the transaction between Tetra Tech and the USAID may be treated either as an exempt transaction or as one subject to zero percent (0%) VAT rate. In an exempt transaction. Tetra Tech will not subject to VAT (output tax) the service fees paid to it by the USAID and it is not allowed any tax credit on VAT (input tax) it previously paid. Tetra Tech will not bill any output tax to the USAID because the said transaction is not subject to VAT. On the other hand, Tetra Tech, if it is a VAT-registered purchaser of VAT-exempt goods/properties or services, it is not entitled to any input tax on its purchases despite the issuance of a VAT invoice or receipt. (Section 4.103-1, Revenue Regulations 7-95) 3(56) On the other hand, in a zero-rated transaction, which is a taxable transaction for VAT purposes, the transaction which Tetra Tech has with the USAID, assuming Tetra Tech is a VAT-registered person, will not result in any output tax. However, the input tax on Tetra Tech's purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. (Section 4.102-2, Ibid.) 4(57) Further, in an effectively zero-rated transaction, which refers to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements, a prior application by Tetra Tech with the appropriate offices of the Bureau of Internal Revenue for effective zero-rating is required. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. (Section 4.107-1, Ibid.) 5(58) Relative thereto, based on paragraph 1, Article IV of the Economic and Technical Cooperation Agreement between the Government of the United States of America and the Government of the Republic of the Philippines (Agreement) (which was signed on of April 27, 1951 and entered into force on May 21, 1951), for purposes of according privileges and immunities to the Special Technical and Economic Mission and its personnel of comparable diplomatic rank, the Philippine government shall, upon appropriate notification by the Ambassador of the United States in the Philippines, consider the Special Technical and Economic Mission and its personnel as part of Diplomatic Mission of the United States in the Philippines, to wit: "Article IV Missions 1.

The Government of the Philippines agrees to receive a Special Technical and Economic Mission which will discharge the responsibilities of the Government of the United States of America in the Philippines under this Agreement and the Government of the Philippines will, upon appropriate notification from the Ambassador of the United States of America in the Philippines, consider this Mission and its personnel as part of the Diplomatic Mission of the United States of America for the purpose of enjoying privileges and immunities accorded to that Mission and its personnel of comparable rank. Such Mission shall include but not be limited to experts whose services are made available to implement Article II of this Agreement."

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The special Technical and Economic Mission will discharge the responsibilities of the United States government to the Philippine government under the Agreement of providing economic and technical assistance in the Philippines, and it is not limited to experts who provide services to implement Article II of the Agreement, quoted hereunder: "Article II Undertakings In order to further the objectives of economic and social well being and preserve free institutions for the Philippine people and to achieve the maximum benefits through the employment of assistance received from the Government of the United States of America, and the Government of the Philippines will use its best efforts to: 1.

Adopt and enforce measures necessary to ensure the efficient and practical use of all resources available to it, including among other means; (a) such measures as may be necessary to insure that the commodities or services furnished under this Agreement, including commodities or services obtained from the funds deposited in the Special Account under Section 1 of the Annex to this Agreement, are used only for purposes agreed upon by the two Governments, and (b) the observation and review of the use of such commodities and services through an effective follow-up system established in agreement with the Government of the United States of America with precautions to prevent the diversion of these commodities into illegal or irregular channels of trade. cTADCH

Initiate and further implement social, economic and technical programs based upon the recommendations of the Economic Survey Mission and such other measures as will strengthen democratic and free institutions in the Philippines."

On the matter of privileges and immunities, the Philippine government, being a signatory to the Vienna Convention on Diplomatic Relations of April 18, 1961, accord to diplomatic missions in the Philippines and their personnel those privileges and immunities set forth in the Vienna Convention. In terms of taxation privileges, Articles 23 and 34 of the Convention mention: "Article 23 1.

The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.

The exemption from taxation referred to in this Article shall not apply to such dues and taxes payable under the law of the receiving State by persons contracting with the sending State or the head of the mission." "Article 34

A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:

(a)

indirect taxes of a kind which are normally incorporated in the price of goods or services;

(b)

dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission;

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(c)

estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39;

(d)

dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;

(e)

charges levied for specific services rendered;

(f)

registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23."

As far as VAT exemption is concerned, under Article 23, the sending State (represented by the embassy) and the head of the mission are exempt from all dues and taxes relating to their premises only. Under Article 34, diplomatic agents are generally exempt from all dues and taxes, except those enumerated in Items (a) to (f) of the article like VAT since it is an indirect tax normally incorporated in the price of goods or services (Section 105, Tax Code). Nonetheless, although selectively, the VAT exemption privilege of diplomatic missions in the Philippines and their personnel is made to rest on the principle of reciprocity. In BIR Ruling No. 246-92 dated September 3, 1992, the precursor ruling that cited reciprocity as a basis for the grant of VAT exemption to diplomatic missions in the Philippines and their personnel, this Bureau ruled that the French Embassy's purchase of a motor vehicle is exempt from VAT and from ad valorem tax on the basis of reciprocity, if the French Embassy can submit to the Commissioner of Internal Revenue (or his duly authorized representative) a copy of a special legislation or an international agreement that shows that the French government allows similar tax exemption to the Philippine Embassy in France and its personnel on their purchase of goods and services in France. The same requirement is invoked in the predecessor ruling, BIR Ruling No. 206-93 dated May 11, 1993, where this Bureau ruled that the British Embassy's purchase of a motor vehicle is exempt from VAT and ad valorem tax on the basis of reciprocity. Based on the British Embassy's letter to the Commissioner of Internal Revenue dated April 7, 1993, the British government allows similar tax exemption to the Philippine Embassy in the United Kingdom and its personnel on their purchase of goods and services in the United Kingdom. From then on, the determination of the existence of a special legislation or an international agreement that allows similar tax exemption to Philippine Embassies abroad and their personnel now lies with the Office of Protocol and State Visits of the Department of Foreign Affairs (DFA) who furnishes this Bureau, from to time, of an updated list of diplomatic missions in the Philippines which may enjoy VAT exemption on the basis of reciprocity. As far as the USAID is concerned, inasmuch as it discharges the responsibilities of the United States government to the Philippine government under the 1951 Economic and Technical Cooperation Agreement on the provision of economic and technical assistance in the Philippines, the USAID constitutes as part of the Special Technical and Economic Mission mentioned in the Agreement. As it is, the USAID is an agency of the United States government and is a part of and working dependently with the United States Embassy in the Philippines. Hence, pursuant to Article IV of the Agreement, the Philippine government will accord to the USAID and its personnel of comparable diplomatic rank those privileges and immunities presently enjoyed by the United States Embassy in the Philippines and its (Embassy's) personnel, including VAT exemption on the purchase of goods and services in the Philippines. SHTcDE

Thus, on the basis of reciprocity as has always been reiterated in all VAT exemption rulings, VECs and VEICs issued by this Bureau to the United States Embassy and its personnel, this Office extends the same exemption to the USAID and its personnel of comparable diplomatic rank. Thus, this Office is of the Copyright 2017

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opinion and so holds that the service fees to be paid by the USAID to Tetra Tech (composed of project costs, fixed fees, and possible performance/award fees) in connection with the IEMP, CRM, and FISH Projects funded by the USAID are exempt from VAT. (BIR Ruling No. DA-ITAD 16-05 dated February 24, 2005) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts deprived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied. (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one half percent (1 1/2%); or (ii) National agreement deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%). The Phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippine for others for a fee, remuneration or consideration . . ." The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. Section 109(q) was amended and renumbered by Republic Act 9337 to read as: "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following shall be exempt from the value-added tax. xxx

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3. 4. 5.

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" Now Section 4.109-1 of Revenue Regulations 16-2005, the accompanying regulations of Republic Act 9337. Now Section 4.108-5 of Revenue Regulations 16-2005. Now Section 4.108-6 of Revenue Regulations 16-2005.

August 25, 2006

DA ITAD BIR RULING NO. 097-06 Section 28 (B) (5) (b) — NIRC of 1997; BIR Ruling No. ITAD 88-04 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Philippines Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated February 10, 2006, on behalf of your client Hemisphere Leo Burnett, Inc. (HLBI), requesting confirmation of your opinion that the dividends to be paid to Leo Burnet Worldwide, Inc. (LBWI) by HLBI are subject to income tax at the rate of fifteen percent (15%) pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (NIRC of 1997). It is represented that LBWI is a nonresident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office at Corporation Trust Center, 1209 Orange Center, Wilmington, County of New Castle, USA; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 5, 2005; that HLBI is corporation organized and existing under the laws of the Philippines with principal office at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is further represented that LBWI holds Fifteen Thousand (15,000) common shares which represents 30% of the outstanding capital stock of HLBI as of January 10, 2006; that HLBI has an Copyright 2017

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authorized capital stock of One Million Pesos (PhP1,000,000.00) divided into One Hundred Thousand (100,000) common shares with a par value of Ten Pesos (PhP10.00) per share; that on December 22, 2005, the Board of Directors of HLBI resolved and approved the declaration of cash dividends in the total amount of One Hundred Million Pesos (PhP100,000,000.00), to be distributed among stockholders of record as of December 31, 2004, pro rata to their respective shareholdings in HLBI as of December 31, 2004, payable as soon as possible and not later than April 28, 2006; and that the issue/s or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28(B)(5)(b) of the NIRC of 1997, as amended, provides: Section 28. Rates of Income Tax on Foreign Corporations. — xxx

xxx

(B) Tax Nonresident Foreign Corporations. — xxx (5)

xxx

Tax on Certain Incomes Received by a Nonresident Foreign Corporation. — xxx

xxx

(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippine equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;" AICEDc

xxx

xxx"

Pursuant to Section 28(B)(5)(b), dividends to be paid by HLBI to LBWI, are subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow LBWI a 20 percent deemed paid tax credit against its USA income tax due on such dividends. The Supreme Court (SC), on two separate occasions, had ruled on the applicability of the 15 percent income tax on dividends under then Section 24(b)(1), which was similarly worded as Section 28(B)(5)(b) as aforequoted, first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) and second, in Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation (G.R. No. 66838, December 2, 1991). In the first SC decision, Wander Philippines, Inc. (Wander) a domestic corporation, remitted dividends to Glaro S. A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income Copyright 2017

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tax. Given this, the SC ruled that the subject dividends were subject to 15 percent income tax by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required (minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends. In the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G Philippines), a domestic corporation, remitted dividends to Procter and Gamble Company, Inc. (P&G USA), a nonresident foreign corporation domiciled in the USA. But unlike in the Wander case where the Swiss law exempts dividends derived by its residents from sources outside Switzerland, in this case, the applicable US law (Section 902, US Tax Code) provides that dividends derived by P&G USA from sources outside the US are allowed US tax credits equivalent to the sum of the Philippine income tax actually paid on the dividend remittances to P&G USA and the deemed paid tax credit proportionate to the corporate income tax actually paid by P&G Philippines. The SC declared that Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24(b)(1), NIRC. Further, in deciding on the issue of whether the reduced 15% tax rate is applicable based on Section 24(b)(1) of the NIRC, the SC went on to say that ". . . Section 24(b)(1), NIRC, does not in fact require that the deemed paid tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24(b)(1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax dues from [P&G-USA for] taxes deemed to have been paid in the Philippines. . .". Given this, the SC pronounced that the subject dividends were subject to the reduce income tax rate of 15%. Therefore, in conformity with the aforementioned Supreme Court decision on the Procter & Gamble case, your opinion that the dividends to be remitted by your company to LBWI are subject to the preferential tax rate of 15 percent pursuant to the provisions of the NIRC of 1997, as amended, is hereby confirmed, subject to compliance with the requirements set forth under Revenue Memorandum Circular No. 80-91 as follows: (1) an authenticated certification issued by the USA tax authority showing the actual amount credited by the USA Internal Revenue Service against the income tax due from LBWI on the dividends received from HLBI; (2) an authenticated copy of the income tax return of LBWI for the taxable year when the dividends were received; (3) an authenticated document issued by the USA tax authority showing that it credited 20% of the tax deemed paid in the Philippine. Failure to submit these documents within a reasonable time would result in the imposition of deficiency assessment for the twenty (20) percentage points differential. (BIR Ruling No. ITAD-88-04 dated August 20, 2004) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. SCIacA

Very truly yours, Commissioner of Internal Revenue By:

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August 22, 2006

DA ITAD BIR RULING NO. 096-06 Article 11, Philippines-Germany tax treaty; BIR Ruling No. ITAD-5-99 Laya Mananghaya & Co. Certified Public Accountants & Management Consultants 22/F, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Francisco C. Tagao Head, Tax & Corporate Services Manuel P. Salvador III Director, Tax & Corporate Services Gentlemen : This refers to your letter dated January 23, 2006, on behalf of your client TSPIC Corporation (TSPIC), requesting confirmation that the interest payments by TSPIC to ATMEL Germany GmbH (ATMEL) are subject to a 15% preferential tax rate pursuant to the Philippines-Germany tax treaty. It is represented that ATMEL, with office address at Theresienstrasse 2, 74072 Heilbronn, Germany, is a resident of the Federal Republic of Germany within the meaning of Article 11 of the Philippines-Germany tax treaty; that it is not registered either as a corporation or as a partnership in Philippines per certification issued by the Securities and Exchange Commission dated September 13, 2005; that TSPIC is a corporation registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 04-60 with office address at Vishay Bldg., Bagsakan Road, FTI Complex, Taguig, Metro Manila. TAECSD

It is further represented that on July 1, 2005, TSPIC and ATMEL entered into an Intercompany Term Loan Agreement (Agreement) whereby ATMEL agreed to lend TSPIC the amount of One Million Six Hundred Seventy Three Thousand Forty One and 09/100 US Dollars (US$1,673,041.09) as long-term loan, with an interest rate on the principal balance of the loan equal to USD Libor 3,69 (6 months) +1% rate in effect on the date of the said loan for interest payment in 2005, and interest payment for the succeeding years (year 2006 onwards) will be based on USD Libor (1 year) +1%; that the interest rate from year 2006 onwards shall be adjusted annually based on USD Libor rate at the beginning of the first banking day of January, and will take effect beginning the first day of each year; and that the termination Copyright 2017

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date of the Agreement will be on December 31, 2010. In reply, please be informed that Article 11 of the Philippines-Germany tax treaty provides as follows: "Article 11 INTEREST 1.

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed: a)

b) 5.

10 per cent if such interest is paid (i)

in connection with the sale on credit of any industrial, commercial or scientific equipment, or

(ii)

on any loan of whatever kind granted by a bank, or

(iii)

in respect of public issues of bonds, debentures or similar obligations,

15 per cent of the gross amount of such interest in all other cases.

The term 'interest' as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived."

Based on the aforequoted provisions, interest income by a corporation which is a resident of Germany may be taxed in the Philippines at 10% if it is paid in connection with the sale on credit of any industrial, commercial or scientific equipment; or if the loan is granted by a bank; or in respect of public issues of bonds, debentures or similar obligation; and 15% in all other cases. In view thereof, this Office is of the opinion and so holds that the interest payments to be remitted pursuant to their Agreement shall be subject to the preferential tax rate of 15% based on the gross amount of the interest pursuant to Article 11(2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD-5-99 dated June 16, 1999) Moreover, the Intercompany Term Loan Agreement between TSPIC and ATMEL is subject to the documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243 1(59), at a rate of One peso (P1.00) on each Two Hundred Pesos (P200) or a fractional part thereof, of the issue price of such loan agreement. 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. acHITE

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Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Republic Act No. 9243 — An Act Rationalizing the Provisions on The Documentary Stamp Tax of the National Internal Revenue Code of 1997, as amended and for Other Purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004).

August 22, 2006

DA ITAD BIR RULING NO. 095-06 Section 28(B)(5)(b) — NIRC of 1997; BIR Ruling No. ITAD 88-04 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Philippines Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated February 3, 2006, on behalf of your client Starcom Mediavest Group Philippines, Inc. (Starcom-Philippines), requesting confirmation of your opinion that the dividends to be paid to Starcom-Philippines to Starcom Mediavest Group, Inc. (Starcom-USA) are subject to fifteen percent (15%) income tax pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (NIRC of 1997). It is represented that Starcom-USA is a nonresident foreign corporation duly organized and existing Copyright 2017

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under the laws of the State of Delaware of the United States of America (USA) with principal office at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, USA as shown in its Certificate of Incorporation certified by Harriet Smith Windsor, Secretary of State, Delaware; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 5, 2005; that Starcom-Philippines is a domestic corporation with principal office at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is further represented that Starcom-USA holds Three Hundred Seventy Six Thousand One Hundred Twenty Four (376,124) common shares of Starcom-Philippines, which constitutes thirty percent (30%) of the outstanding capital stock of the latter; that Starcom-Philippines has an authorized capital stock of Five Million Pesos (PhP5,000,000.00) divided into Five Million (5,000,000) common shares with a par value of One Peso (PhP1.00) per share; and that on December 22, 2005, the Board of Directors of Starcom-Philippines resolved and approved the declaration of cash dividends in the total amount of Sixty Million Pesos (PhP60,000,000.00), to be distributed among stockholders of record as of December 31, 2004, pro rata to their respective shareholdings in as of December 31, 2004, payable as soon as possible and not later than April 28, 2006. In reply, please be informed that Section 28(B)(5)(b) of the NIRC of 1997, as amended, provides: Section 28.

Rates of Income Tax on Foreign Corporations. — xxx

xxx

(B) Tax Nonresident Foreign Corporations. — xxx (5)

xxx

Tax on Certain Incomes Received by a Nonresident Foreign Corporation. — xxx

xxx

xxx"

Pursuant to Section 28(B)(5)(b), dividends to be paid by Starcom-Philippines to Starcom-USA, are subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow Starcom-USA a 20 percent deemed paid tax credit against its USA income tax due on such dividends. The Supreme Court (SC), on two separate occasions, had ruled on the applicability of the 15 percent income tax on dividends under then Section 24(b)(1) which was similarly worded as Section 28(B)(5)(b), first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Copyright 2017

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Appeals (G.R. No. L,-68375, April 15, 1988) and second, in Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation (G.R. No. 66838, December 2, 1991). In the first SC decision, Wander Philippines, Inc. (Wander) a domestic corporation, remitted dividends to Glaro S. A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income tax. Given this, the SC ruled that the subject dividends were subject to 15 percent income tax by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required (minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends. In the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G Philippines), a domestic corporation, remitted dividends to Procter and Gamble Company, Inc. (P&G USA), a nonresident foreign corporation domiciled in the USA. But unlike in the Wander case where the Swiss law exempts dividends derived by its residents from sources outside Switzerland, in this case, the applicable US law (Section 902, US Tax Code) provides that dividends derived by P&G USA from sources outside the US are allowed US tax credits equivalent to the sum of the Philippine income tax actually paid on the dividend remittances to P&G USA and the deemed paid tax credit proportionate to the corporate income tax actually paid by P&G Philippines. The SC declared that Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24(b)(1), NIRC. Further, in deciding on the issue of whether the reduced 15% tax rate is applicable based on Section 24(b)(1) of the NIRC, the SC went on to say that ". . . Section 24(b)(1), NIRC, does not in fact require that the deemed paid tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24(b)(1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax dues from [P&G-USA for] taxes deemed to have been paid in the Philippines. . .". Given this, the SC pronounced that the subject dividends were subject to the reduce income tax rate of 15%. Therefore, in conformity with the aforementioned Supreme Court decision on the Procter & Gamble case, your opinion that the dividends to be remitted by your company to Starcom-USA are subject to the preferential tax rate of 15 percent pursuant to the provisions of the NIRC of 1997, as amended, is hereby confirmed, subject to compliance with the requirements set forth under Revenue Memorandum Circular No. 80-91 as follows: (1) an authenticated certification issued by the USA tax authority showing the actual amount credited by the USA Internal Revenue Service against the income tax due from Starcom-USA on the dividends received from Starcom-Philippines; (2) an authenticated Copy of the income tax return of Starcom-USA for the taxable year when the dividends were received; (3) an authenticated document issued by the USA tax authority showing that it credited 20% of the tax deemed paid in the Philippines. Failure to submit these documents within a reasonable time would result in the imposition of deficiency assessment for the twenty (20) percentage points differential. (BIR Ruling No. ITAD-88-04 dated August 20, 2004) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. HcTDSA

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By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 22, 2006

DA ITAD BIR RULING NO. 094-06 Arts. 5 & 7, Philippines-India Tax Treaty; Revenue Memorandum Circular No. 44-2005; BIR Ruling No DA-ITAD 42-06 Bank of Makati, Inc. 44 Sen. Gil Puyat Avenue Brgy. San Isidro, Makati City Attention: Ponciano S. Carreon, Jr. Controller Gentlemen : This refers to your letter dated April 10, 2006 applying for tax treaty relief for payments made by Bank of Makati, Inc. (BMI) to Nucleus Software Exports Limited (Nucleus) based on the provisions of the Philippines-India tax treaty and Revenue Memorandum Circular No. 44-2005. From the documents submitted, it is represented that Nucleus is a nonresident foreign corporation and a resident of India for tax purposes as certified by the Indian Income Tax Authorities; that Nucleus registered office is located at 33-35 Thyagraj Nagar Market, New Delhi, India; that Nucleus is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on March 14, 2006; that BMI is a domestic corporation with office address at 44 Sen. Gil Puyat Avenue, Makati City. It is further represented that on December 29, 2005, BMI and Nucleus entered into a License Agreement (Agreement) whereby Nucleus grants BMI a perpetual, non-exclusive, non-transferable license to use its proprietary computer programs and associated materials listed under Exhibit A of the Agreement, solely for BMI's own internal processing and computing needs and for no other purpose; that Copyright 2017

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BMI shall be entitled to use the software product in a productive mode only at installed site; that the license is for the use of the object code (including updates provided or otherwise generally available to Nucleus customers at no additional cost) and all related documentation, commencing upon its delivery to BMI; that the Agreement also provides that BMI shall not use, copy, translate, print or display the software products, in whole or in part, other than as expressly authorized; that BMI agrees not to reverse engineer, assemble or recompile any software product or portion thereof, which Nucleus has not provided in human-readable source code form; that BMI also agrees not to use the software products to provide service bureau, time-sharing, or other computer services to third parties; that BMI shall use the software products solely on computers owned or leased by it and for processing of data only for itself; that BMI shall not directly or indirectly permit any other person or entity to have access or use of the software products; that the software products contain or are based at least in part on software that is the valuable property of Nucleus and contain copyright, patent and trade secrets of Nucleus; that Nucleus shall continue to retain all title, copyright, patent and other propriety rights to such software and all copies thereof and end user and that BMI agrees to include on any backup or archival copies notices of any interests that appear therein; that no title to the software, or any intellectual property therein, is transferred to the end user; that BMI agrees not to sell, assign or otherwise transfer the products or the license granted hereunder, or sublicense the products to any third party except as otherwise provided in the Agreement; and that BMI paid the amount of US$500,000 to Nucleus for the purchase of the software products; and that the Agreement shall commence as of the Effective date and continue thereafter unless terminated as provided under the Agreement. In reply please be informed as follows: Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(60)) covers software payments made as of November 18, 2003 and until September 7, 2005 and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software: The term 'royalties' as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term 'use' as contained herein shall include the reselling or distribution of software. Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus, payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(61)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the Copyright 2017

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rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a.

The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; CDTSEI

ii.

The right to prepare derivative computer programs based upon the copyrighted software;

iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright.

Transfer of copyrighted articles. A copyrighted article incorporating a software includes a copy of a software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any other medium. If a person acquires a copy of a software but does not acquire any of the rights described above (or only aquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. xxx

xxx

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under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005, Section 5b thereof, will apply in this case which states that "If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income." Thus, payments (license fees) by BMI to Nucleus, being business income (or business profits), will be subject to income tax in the Philippines only if it is attributable to a permanent establishment which Nucleus has in the Philippines, under paragraph 1, Article 7 in relation to Article 5, both of the Philippines-India tax treaty, to wit: CcEHaI

"Article 7 BUSINESS PROFITS 1.

Business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to the permanent establishment. xxx

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT

For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

The term 'permanent establishment' includes especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

a place of exploration of natural resources;

a building site or construction project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than six months;

a warehouse, in relation to a person providing storage facilities for others.

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xxx

xxx"

Based on the foregoing, in order for Nucleus to be considered to have a permanent establishment to which said business profits may be attributed, it must satisfy the following conditions 3(62): -

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

Since Nucleus, based on the documents submitted, does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, Nucleus does not have a permanent establishment to which its business profits may be attributed to. CHDTEA

This is further bolstered by the fact that it is neither registered as a corporation nor as a partnership in the Philippines. Accordingly, for as long as Nucleus is deemed not to have a permanent establishment in the Philippines to which it may attribute any profits it earned from the sale of the software to BMI, said profits are not subject to Philippine income tax at 35% of the gross amount thereof under Section 28(B)(1) of the National Internal Revenue Code (NIRC) of 1997, as amended. 4(63) (BIR Ruling No. DA ITAD 42-06 dated April 11, 2006) However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the NIRC. Accordingly, BMI, being the direct importer of the downloadable software, is subject to VAT and is required to withhold VAT from its payments to BMI. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that BMI shall be responsible for the withholding of the VAT on the license fee before remitting it to Nucleus. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, BMI shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, BMI may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, BMI may include as part of the cost of the services provided to it by Nucleus the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, upon Nucleus request, BMI is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Nucleus and the fourth copy for BMI as its file copy. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall Copyright 2017

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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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3. 4.

Classification of Payments for Software for Income Tax Purposes. Taxation of Payments for Software. Organization for Economic Cooperation and Development (OECD), 2005 edition, paragraph 2, pages 85-91. Republic Act No. 9337 — An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, As Amended, And For Other Purposes.

August 22, 2006

DA ITAD BIR RULING NO. 093-06 Articles 5 (Permanent Establishment), 7 (Business Profits) Philippines-United States of America tax treaty; BIR Ruling No. 14-06 Regalado Bautista & Menzon Law Offices Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City Attention: Atty. Edith Abana-Bautista Copyright 2017

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Atty. Rhodora Corcuera-Menzon Gentlemen : This refers to your letter dated June 29, 2006 requesting a ruling on the tax implication of the purchase of software by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Averant, Incorporated (Averant) pursuant to Article 8 in relation to Article 5 of the Philippines-United States of America (US) tax treaty. It is represented that Averant is a nonresident foreign corporation organized and existing under the laws of the United States of America with principal address at 1050 Marina Village Parkway #201 Alameda, CA 94501; that Averant is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated May 26, 2006 issued by the Securities and Exchange Commission (SEC); that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software development involving imaging, communications and related technologies. It is further represented that Canon-Philippines purchased a software product (Solidify-Maintenance) from Averant in the amount of $8,000.00 under Averant, Inc. Software License Agreement (Agreement); that Averant grants to Canon-Philippines a nonexclusive, non-transferable right to use the software on one computer system or on a network computer system, using only the number of nodes for which Canon-Philippines has a license and for which Canon-Philippines has the security key(s) or authorization code(s) provided by Averant or its agents; that all software must be used within the country for which the systems were licensed and must be located at a single site (within a one kilometer radius); that in addition, all authorized person(s) who access and use the software must be within the country for which the systems were licensed and must be located at a single site (within a three kilometer radius from the location of the software); that Canon-Philippines shall not copy the software, in whole or in part, except as necessary to archive such software in accordance with the terms and conditions contained herein; that all copies of the software will be subject to all of the terms and conditions of the Agreement; that whenever Canon-Philippines is permitted to copy all or any part of the software, all titles, trademark symbols, copyright symbols and legends and other proprietary markings must be reproduced; that Canon-Philippines may not copy any part of the documentation, nor modify, adopt, translate into any language, or create derivative works based on the documentation without the prior written consent of Averant; that Canon-Philippines shall not sublicense, transfer or assign this Agreement or any of the rights or licenses granted under the Agreement without the prior written consent of Averant; and that the term of the Agreement shall be for one year and shall be delivered through electronic keys. CSIcHA

In reply please be informed as follows: Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(64)) covers software payments made as of November 18, 2003 and until the effectivity of the second Circular and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software: The term 'royalties' as generally used means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including Copyright 2017

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cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term 'use' as contained herein shall include the reselling or distribution of software. Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(65)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a.

Transfer of copyright rights. (emphasis supplied) A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i.

The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;

ii.

The right to prepare derivative computer programs based upon the copyrighted software;

iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright.

Transfer of copyrighted articles. (emphasis supplied) A copyrighted article incorporating a software includes a copy of the software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in

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the main memory or hard drive of a computer, or in any other medium. If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. CSDTac

"xxx

xxx

xxx"

The substantial difference between the two Circulars is their characterization of payment from the purchase of a copyrighted article incorporating a software, like the license fee for the Licensed Software where the licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and not readily the right to market or exploit the Licensed Software. Under the first Circular, the license fee is treated as royalties and taxable as such, while under the second Circular, the license fee is treated as business income (or business profits) and taxable as such, as described above. The fact that what is being transferred to Canon-Philippines is only a copyrighted article incorporated in a software and there was no transfer of ownership thereto including, pertinent rights protected under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005, Section 5b thereof, will apply in this case which states That. "If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income." Thus, payments made by Canon-Philippines to Averant, being business income (or business profits), is subject to income tax in the Philippines only if it is attributable to a permanent establishment which Averant has in the Philippines, under paragraph 1, Article 8 in relation to Article 5 of the Philippines-US tax treaty, to. wit: "Article 8 BUSINESS PROFITS 1.

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT 1.

For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business.

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The term 'fixed place of business' includes but is not limited to: a)

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse;

A mine, quarry, or other place of extraction of natural resources;

A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and

xxx

xxx."

Based on the foregoing, in order for Averant to be considered to have a permanent establishment to which said business profit may be attributed, it must satisfy the following conditions 3(66): -

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

Since it appears, based on the SEC Certificate that Averant is not registered either as a corporation or as a partnership in the Philippines, that Averant does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, Averant is deemed as not having permanent establishment to which said business profit may be attributed. Thus, for as long as Averant is deemed not to have a permanent establishment in the Philippines to which its profits may be attributable, income from its sale of software, such as that made to Canon-Philippines in the instant case, shall be exempt from income tax and consequently withholding tax. Copyright 2017

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However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the NIRC, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% VAT from its payments before it telegraphically transfers it to the account of the Averant. With regard to the procedure for withholding and paying the VAT, pursuant to Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, Canon-Philippines shall be responsible for the withholding of the 10 percent/(12 percent effective February 1, 2006) VAT on the license fee before remitting it to Averant. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Canon-Philippines may include as part of the cost of the services provided to it by Averant the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Averant and the fourth copy for Canon-Philippines as its file copy. acEHSI

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

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August 15, 2006

DA ITAD BIR RULING NO. 092-06 Sections 108 (B) (3) & 106 (A) (2) (c) of the National Internal Revenue Code of 1997; Articles 5 & 7, Paragraph 1(a) of the GADC between GOP and GOA ITAD Ruling No. 10-05 Philippines-Australia Human Resource Development Facility 3F JMT Bldg. Ortigas Center, Pasig City Gentlemen : This refers to your Note Verbale No. 175/06 File No. MN94/00110 dated May 12, 2006, endorsed to this Office by the Department of Foreign Affairs (DFA), requesting for tax-free local purchase of a motor vehicle, for the official use of the Philippines-Australia Human Resource Development Facility (PAHRDF), specifically described as follows: Type of use: Organization: Make: Engine and Chassis Nos.:

Official use Philippines-Australia Human Resource Development Facility One (1) 2006 Toyota Innova 2.0 G Gas A/T ITR-6240333 TGN40-5006614

In reply, please be informed that Section 106 (A)(2)(c) 1(67) and Section 108(B)(3) of the National Internal Revenue Code of 1997 (NIRC), as amended, provide, viz: "Section 106.

Value-added Tax on Sale of Goods or Properties. —

xxx

The following sales by VAT-registered persons shall be subject to zero percent (0%)

rate: xxx

xxx

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. xxx "Section 108. Copyright 2017

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xxx

xxx"

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xxx

xxx"

(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx

xxx

xxx"

In connection thereto, Article 5, paragraphs 1 and 2 of the General Agreement on Development Cooperation (GADC) between the Government of the Republic of the Philippines (GRP) and the Government of Australia (GOA) dated October 28, 1994 and entered into force on March 12, 1998 provides, viz: "Article 5 Subsidiary arrangements 1. In support of the objectives of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. HcTIDC

2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (Emphasis supplied) (a)

the name and duration of the activity;

(b)

a description of the activity and statement of its objectives;

(c)

the nominated implementing agencies in both countries;

(d)

potential benefits of the activity; xxx

xxx

xxx"

Moreover, Article 7, paragraph 1(a) of the above-mentioned GADC between GRP and GOA, pertinently provides as follows: "Article 7 Project supplies and professional and technical material and services 1. In respect of project supplies and professional and technical material and services whether to be imported from outside or procured within the Philippines, the Government of the Republic of the Philippines shall: (a) for direct supplies of domestic goods and services, subject them to zero rate for purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties. VAT Copyright 2017

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and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for inspection fees, storage charges and all other levies, fees and charges; xxx

xxx

xxx"

Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements with specific reference thereto. Article 7 of the GADC states that GRP shall subject to zero percent rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services for the execution of development activities under the GADC, while it shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). Moreover, paragraph 3 of the same Article 7 provides for the disposal of vehicles acquired for the activities executed under the GADC. In relation thereto, a Subsidiary Arrangement (SA) between the GRP and the GOA relating to the Philippines Australia Human Resource Development Facility (PAHRDF) was concluded pursuant to and subject to the provisions of the GADC on August 20, 2004. Such being the case, this Office is of the opinion and so holds that since the Subsidiary Arrangement relating to PAHRDF is in accordance with the GADC between the GRP and GOA, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of PAHRDF are subject to zero percent rate for purposes of VAT in respect of supplies, and professional and technical material and services provided by the GOA, while direct importations of goods are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003) In view of the foregoing, the local purchase of PAHRDF of one (1) 2006 Toyota Innova 2.0 Gas A/T, herein described and for its official use is subject to VAT at zero percent rate pursuant to Sections 108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC. As regards the seller of goods and services to PAHRDF, the sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions. [Sec 4.100.3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the PAHRDF. To enable local sellers to refund the amount of the tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to PAHRDF is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000) Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to PAHRDF is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, with the Large Taxpayer's Audit and Investigation Division II (LTAID II), if VAT-registered seller is a Copyright 2017

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large taxpayer, or with the Audit Information, Tax Exemption and Incentives Division (AITEID) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without prior approved application for effective zero-rating, the transaction which may otherwise be treated as zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Secs. 4.102-2, 4.103-1 and 4.107-1(d), Revenue Regulations No. 7-95) This ruling is issued on the basis of 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 party is concerned. SHcDAI

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

August 14, 2006

DA ITAD BIR RULING NO. 091-06 Articles 5 (Permanent Establishment), 8 (Business Profits) Philippines-United States of America tax treaty; Revenue Memorandum Circular No. 44-05; BIR Ruling No. 14-06; BIR Ruling No. DA-ITAD 05-06 Regalado Bautista & Menzon Law Offices Copyright 2017

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Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City Attention: Atty. Edith Abana-Bautista Atty. Rhodora J. Corcuera-Menzon Gentlemen : This refers to your letter dated April 20, 2006 requesting a ruling on the tax implication on the purchase of Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Atrenta, Inc. (Atrenta) of the following software products namely: 1.

SpyGlass Builder-Custom rule creation for VHDL/Verilog using Objects and C/C++);

SpyGlass Builder Maintenance; and

SpyGlass Predictive Analyzer Maintenance-VHDL

specified in a written purchase order (PO). It is represented that Atrenta is a nonresident foreign corporation, organized and existing under the laws of Delaware, with principal office at 2001 Gateway Place, Suite 440W, San Jose, California 95510 as shown in the Certificate of Status Foreign Corporation issued by Mr. Bruce Mepherson, Secretary of State of California on March 30, 2006; that Atrenta is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated November 23, 2005 issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software development involving imaging, communications and related technologies; that Canon-Philippines develops hardware designs for consumers and office products and in doing so it uses RTL (register transfer logic); that to write RTL source code, a hardware description language (HDL) is used; that one HDL used is Very High Speed Integrated Circuit (VHSIC) Hardware Description Language or VHDL; that one of the key processes of the hardware design is lint-checking; that lint-checking is used to analyze and debug RTL code syntax synthesizability, unsupported constructs, and port mismatches. It is further represented that Canon-Philippines purchased a SpyGlass Builder-Custom rule creation for VHDL/Verilog using Objects and C/C++, SpyGlass Builder Maintenance and the SpyGlass Predictive Analyzer Maintenance — VHDL under a Software License Agreement (Agreement); that these software programs are sophisticated integrated circuit design solutions which identify critical design issues; that the Spyglass Predictive Analyzer is a powerful extendible tool for analyzing HDL; that the SpyGlass Predictive analyzer works with SpyGlass Builder; that the SpyGlass Builder allows user to develop their own set of register transfer logic (RTL) rules for lint-checking; that Canon-Philippines had already acquired a perpetual license for SpyGlass Predictive Analyzer; that under the Agreement between Atrenta and Canon-Philippines, the former grants to the latter a non-exclusive, non-transferable limited license, without right to sublicense, to: (a)

copy and install software on the designated server (s) at the designated location and use such installed software and the software keys, including use on licensee's local or wide area

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network; to develop the licensee products, provided that the number of seats using the software is no greater than the total number granted under the Agreement; (b)

make a reasonable number of copies of the documentation solely for licensee's internal development purposes; and

(c)

authorize the use of the software for the licensee's business activities by licensee's subsidiaries and affiliates;

that under such Agreement, Canon-Philippines will not permit any third party to: •

install or use the Software on computer systems, servers or at locations not authorized in accordance with this Agreement;

•

use the Software other than as authorized under this Agreement;

•

resell, lease, sublicense, assign, transfer, distribute or otherwise grant any rights in the Software to any other party, including for any commercial time-sharing, rental, outsourcing or service-bureau use;

•

copy the Software except as authorized in this Agreement; or

•

disclose to any other party, the capabilities, performance, capacity or any deficiencies in the software;

•

modify, adapt, translate, reverse engineer, disassemble, decompile or otherwise attempt to derive source code from any of the materials provided by Atrenta to Licensee hereunder.

That ownership of all the right, title and interest in and to the Atrenta trademarks and service marks and the software, documentation, in whole and in part, shall remain the exclusive property of Atrenta and its licensor; that Atrenta shall provide Canon-Philippines with: 1.

basic technical support in accordance with Atrenta's support policy set forth in Exhibit C;

error verification, analysis and correction to the extent possible by telephone; and

any Updates and Upgrades to the Software.

That under the Agreement, Atrenta shall provide Canon-Philippines with: (i) basic technical support in accordance with Atrenta's support policy, (ii) error verification, analysis and correction to the extent possible by telephone, and (iii) any Updates and Upgrades to the Software; that in order to be eligible for Support Services, Canon-Philippines must provide to Atrenta a technically qualified single point of contact for dealing with technical support; that in consideration of the licenses and rights granted in this Agreement for the initial term and any renewal term, and the support services provided thereunder, Canon-Philippines shall pay Atrenta the annual Subscription Fee. It is also represented that, in addition, Canon-Philippines availed of separate support and maintenance services of Atrenta under a Atrenta Support and Maintenance Agreement; that under the said agreement, Atrenta will provide the following support and maintenance services: 1) Copyright 2017

Error Correction;

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Support. Atrenta will make a member of its SMS staff available, in accordance with the terms of the service plan;

Field Support. Upon request and subject to resource availability, Atrenta will provide field SMS at any Licensee field site(s) at Atrenta's then currently hourly field SMS rates, together with reimbursement of applicable travel, per diem and related expenditures, at Atrenta's cost.

And that the fees for the initial term of the support and maintenance services are outlined in the purchase order. In reply please be informed as follows: Concerning software payments, the Bureau of Internal Revenue has issued two Revenue Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC 77-2003 1(68)) covers software payments made as of November 18, 2003 and until September 7, 2005 and generally treats software payments as royalties, thus: "Definition of Royalties Includes Payments for the Use of Software: The term 'royalties' as generally used means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The term 'use' as contained herein shall include the reselling or distribution of software. Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus, payments in consideration for the use of, or the right to use, a copy or a copyrighted article relating to software are generally royalties."

On the other hand, the second Circular (RMC 44-2005 2(69)) covers payments made as of September 8, 2005 and onwards and substantially amends the first Circular by treating software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a.

Transfer of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i.

The right to make copies of the software for purpose of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;

ii.

The right to prepare derivative computer programs based upon the copyrighted software:

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iii.

The right to make a public performance of the software;

iv.

The right to publicly display the computer program; or

Any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright.

xxx

After Sales Service. Contracts for the use of software are often accompanied with the provision of services (e.g., installation, maintenance, and customization of the software) by personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and distributor. Payments as consideration for after-sales service in a mixed contract are not royalties alone, but will include income from services. The appropriate course to take with such a contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated payments according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. Thus, the part of the payments representing the use of the software will be treated as royalties and taxable as such and the other part of the payments representing the provision of services will be treated as income from services and taxable as such. (Emphasis supplied)

The substantial difference between the two Circulars is their characterization of payment from the purchase of a copyrighted article incorporating a software, like the fee for the licensed software where the licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and not readily the right to market or exploit the licensed software. Under the first Circular, the license fee is treated as royalty and taxable as such, while under the second Circular, the license fee is treated as business income (or business profits) and taxable as such, as described above. Since under the Agreement, Atrenta merely grants to Canon-Philippines a non-exclusive, non-transferable license to use the software but not to resell, lease, sublicense, assign, transfer, distribute Copyright 2017

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or otherwise grant any rights in the Software to any other party, including for any commercial time-sharing, rental, outsourcing or service-bureau use, the software, the payments of Canon-Philippines for such non-exclusive, non-transferable license to use the software, to Atrenta shall be considered as business profits. In addition to the foregoing, it should be noted that under the same Software License Agreement, Atrenta will also provide Canon-Philippines the necessary maintenance services. Accordingly, based on the aforequoted Section 5(c) of the RMC No. 44-2005, the subject Software License Agreement should generally be characterized by breaking down the same into the portion which represents the use of the software and the portion which pertains to the provision of services. But if, as stated above, and as in this case, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then the treatment applicable to the principal part should generally be applied to the whole amount of the consideration. Thus, the whole amount of the Subscription Fees to be paid by Canon-Philippines to Atrenta for the Software License Agreement, which includes support services, are to be considered as business profits. As business profits, the Subscription Fees paid by Canon-Philippines to Atrenta will be subject to income tax in the Philippines only if is attributable to a permanent establishment which Atrenta has in the Philippines, under paragraph 1, Article 8 in relation to Article 5 of the Philippines-United States tax treaty, to wit: "Article 8 BUSINESS PROFITS 1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. xxx

xxx

xxx"

"Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business.

The term 'fixed place of business' includes but is not limited to:

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

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A workshop;

A warehouse;

A mine, quarry, or other place of extraction of natural resources;

xxx

xxx"

Based on the foregoing, in order for Atrenta to be considered to have a permanent establishment to which said business profits may be attributed, it must satisfy the following conditions 3(70): -

the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment;

this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence;

Since Atrenta, based on the documents submitted, does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, Atrenta does not have a permanent establishment to which its business profits may be attributed to. This is further bolstered by the fact that it is neither registered as a corporation nor as a partnership in the Philippines. Such being the case, since Atrenta does not have a permanent establishment to which it may attribute any profits earned from the sales of the software and services to Canon-Philippines, then said profits are not subject to Philippine income tax under Section 28(B)(1) of the National Internal Revenue Code (NIRC) of 1997. 4(71) Further, as regards the services to be rendered by Atrenta to Canon-Philippines under the Atrenta Support and Maintenance Agreement, it should be emphasized that Atrenta is deemed not to have a permanent establishment for as long as, in the course of the rendition of subject services, its employees do not stay in the Philippines for a period or periods aggregating more them 183 days for the same or connected project (and not in a given taxable year). Where the total number of days of stay in the Philippines by personnel rendering subject services do not exceed 183 days, the income derived by Atrenta from services rendered to Canon-Philippines shall not be subject to Philippine income tax and, Copyright 2017

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consequently, to withholding tax. (BIR Ruling No. DA-ITAD 5-06 dated January 24, 2006) However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the NIRC, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% VAT from its payments before it telegraphically transfers it to the account of the Atrenta. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Canon-Philippines shall be responsible for the withholding of the 10/12 percent VAT on the license fee before remitting it to Atrenta. In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer. Canon-Philippines may include as part of the cost of the services provided to it by Atrenta the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Atrenta and the fourth copy for Canon-Philippines as its file copy. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3. 4.

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August 14, 2006

DA ITAD BIR RULING NO. 090-06 Secs 106 & 109 of the National Internal Revenue Code of 1997; Article VI, Articles of Agreement of the International Finance Corporation ITAD Ruling No. 164-03 International Finance Corporation 11th Floor, Tower One Ayala Triangle, Ayala Avenue. Makati City, 1226 Attention: Mr. Vipul Bhagat Chief of Mission & Country Manager Philippines & Thailand, International Finance Corporation Gentlemen : This has reference to your letter dated March 2, 2006, indorsed to this Office by the Department of Finance (DOF) and with favorable recommendation from the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the purchase of (2) locally-produced motor vehicles, for the official use of the International Finance Corporation-Technical Assistance Facility, PEP-Philippines in Manila and Davao, specifically described as follows: Manila Type of Use: Official Use Organization: International Finance Corporation Make: Toyota Innova G AT 2.0 Model: 2006 Color: Night Mist Engine No.: ITR-6205382 Frame No.: TGN40-5005736

Davao Type of Use: Organization: Make: Model: Color: Engine No.: Frame No.:

Official Use International Finance Corporation Toyota Innova G AT 2.0 2006 Night Mist ITR-6207571 TGN40-5005738

It is represented that the International Finance Corporation (IFC) is a member of the World Bank Group; that it is a fully accredited diplomatic organization with the Department of Foreign Affairs; and that it is immune from taxation in accordance with Section 9(a), Article VI of the Articles of Agreement of the International Finance Corporation. In reply, please be informed of Section 109 of the National Internal Revenue Code of 1997 (NIRC), Copyright 2017

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as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, which provides, as follows: "SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx

xxx

(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"

Relative thereto, Section 9 (a), Article VI of the Articles of Agreement of the International Finance Corporation provides that: "Article VI Status, Immunities and Privileges xxx Section 9.

xxx

Immunities from Taxation

(a) The Corporation, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty."(Emphasis supplied)

In view of all the foregoing, the IFC shall be exempt from all taxes, including VAT. Hence, this Office is of the opinion and so holds that the local purchases of two (2) units of 2006 Toyota Innova G AT 2.0 for the official use of the International Finance Corporation - Technical Assistance Facility, PEP-Philippines in Manila and in Davao are exempt from VAT imposed under Section 106(A) of the NIRC, as amended by Section 4, Republic Act. No. 9337. (ITAD Ruling No. 164-03 dated November 7, 2003) It is hereby understood that this exemption applies only to vehicles purchased under the name of the International Finance Corporation, for their official use. 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,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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August 11, 2006

DA ITAD BIR RULING NO. 089-06 Sec. 106 & 108 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-102-05 Embassy of Japan 2627 Roxas Boulevard Pasay City, Manila Attention: Mr. Akira Sugiyama Minister-Counsellor Gentlemen : This has reference to your Note Verbale No. 304-06 dated July 6, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a refund of value-added tax (VAT) on the local purchase of a motor vehicle, for the personal use of Mr. Akira Sugiyama, Minister-Counsellor of the Embassy of Japan, specifically described as follows: Type of Use: Make: Model Year: Chassis Number: Engine Number:

Personal Toyota Camry 2.4E A/T 2006 ACV30-9002157 2AZ-2124174

xxx

xxx"

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purchases by that Embassy and its diplomatic agents of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to the Embassy of Japan and its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Camry 2.4E A/T, for the personal use of Mr. Akira Sugiyama of the Embassy of Japan is exempt from VAT. (BIR Ruling No. DA-ITAD-102-05 dated September 19, 2005) This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of determining whether Mr. Akira Sugiyama of the Embassy of Japan is entitled to VAT exemption on the basis of reciprocity. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be endorsed to the proper office for processing and investigation. DHacTC

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

August 2006

DA ITAD BIR RULING NO. 088-06 Secs. 108, 109 & 149 of the National Internal Revenue Code of 1997; Article 34 of the Vienna Convention; BIR Ruling No. ITAD-34-99 Embassy of the United States of America Roxas Boulevard Copyright 2017

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Manila Attention: Mr. Brian Rinaldi Deputy Chief, Navy Programs of the Embassy (JUSMAG) Gentlemen : This has reference to your Note Verbale No. 06-1515 dated June 30, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a tax-free purchase of one (1) locally assembled motor vehicle described hereunder, for the personal use of Mr. Brian Rinaldi, Deputy Chief, Navy Programs (JUSMAG) of the Embassy of the United States of America: Make: Model Year: Color: VIN No.: Engine No.:

Ford Focus 1.8L AT (without skirts) 2006 Platinum PE163L0351AM00045 BD000079

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemptions to the Embassy of the United States of America or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs that your Government allows similar exemption to Philippine Embassy and/or its personnel on their purchases of goods and services in your country. Hence, the herein local purchase of one (1) unit of Ford Focus 1.8L AT for the personal use of Mr. Brian Rinaldi, Deputy Chief, Navy Programs (JUSMAG) of the Embassy of the United States of America is exempt from VAT and ad valorem taxes. (BIR Ruling No. DA-ITAD-34-99 dated October 18, 1999) cADaIH

Very truly yours,

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Assistant Commissioner Legal Service Bureau of Internal Revenue

August 7, 2006

DA ITAD BIR RULING NO. 087-06 Philippines-Denmark tax treaty; Article 5 & 7; BIR Ruling No. DA-ITAD-64-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Joel L. Tan-Torres Partner, Tax Services Gentlemen : This refers to your letter dated May 19, 2006, on behalf of your client, ANHYDRO A/S (ANHYDRO), requesting confirmation that the payments made by Alaska Milk Corporation (AMC), pursuant to a machinery/equipment supply contract, are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Denmark tax treaty. It is represented that ANHYDRO is a nonresident foreign corporation duly organized and existing under laws of Denmark, with registered Office at Oestmarken 7, DK-2860 Soeborg — Copenhagen, Denmark; that ANHYDRO is not registered either as a corporation or as a partnership in the Philippines per certification issued by Securities and Exchange Commission dated May 9, 2006. IATSHE

It is further represented that on December 8, 2005, ANHYDRO confirmed to supply AMC, a domestic corporation with office address at 6th Floor, Corinthian Plaza, 121 Paseo de Roxas, Makati City, a complete Instant Filled Milk Powder Processing Plant as per quotation no. PHI 0167-H/jih dated November 16, 2005 consisting of an ANHYDRO Spray Drying Plant Type SBD 81, IFB 47, EFB 49 and APV Recombined Milk Processing Plant specially designed for production of 2 tons per hour of Instant Filled Milk Powder amounting to Five Million Eighty Nine Thousand Eighty Six US Dollars (US$5,089,086) including technical documentation, installation and commissioning, delivered Cost, Insurance and Freight (CIF Manila Port), including necessary packing under the machinery/equipment supply contract; that per letter by Clause Madeen, Project Manager and Bent Kurastair, Commercial Copyright 2017

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Controller of ANHYDRO, dated July 11, 2006, it was confirmed that the actual number of days to be spent in the installation and additional supervisory assistance by ANHYDRO under the machinery/equipment supply contract will not exceed 183 days. In reply, please be informed that Article 7 and, in relation thereto, Article 5 of the Philippines-Denmark tax treaty provides: "Article 7 Business Profits 1.

that permanent establishment; or

sales within that other Contracting State of goods or merchandise of the same or similar kind as those sold through that permanent establishment. xxx

xxx

"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.

The term 'permanent establishment' includes especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

f) a mine, an oil or gas well, a quarry or any other place of preliminary surveys, exploration or extraction of natural resources; g) a building site, a construction, assembly or installation project or supervisory activities within the country in connection therewith, but only where such site, project or activities continue for a period of more than 183 days (emphasis supplied); cCDAHE

h) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any twelve month period; Copyright 2017

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i) a drilling rig if its activities are carried on for a period or periods exceeding 365 days in any 18 month period. xxx

xxx

xxx"

Paragraph (g) of the foregoing provisions provides expressly that a building site, a construction, assembly or installation project or supervisory activities in connection therewith constitutes a permanent establishment only if it lasts more than 183 days. In other words, if the duration of a contract, until its completion, in connection with an installation project or supervisory activities, exceeds 183 days, it will constitute carrying on of business in the Philippines through a permanent establishment by the enterprise engaging in such activities. "The term 'building site or construction or installation project' includes not only the construction of buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings, roads, bridges or canals, the laying of pipe-lines and excavating and dredging. Additionally, the term 'installation project' is not restricted to an installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in an existing building or outdoors." (Paragraph 16, Commentary on Article 5, OECD Model Tax Convention of 2005) (Emphasis ours) In determining when ANHYDRO commenced the installation of the plant the OECD notes: "A site exist from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established, e.g. if he installs a planning office for the construction. In general, it continues to exist until the work is completed or permanently abandoned. A site should not be regarded as ceasing to exist when work is temporarily discontinued. Seasonal or other temporary interruptions include interruptions due to bad weather. . . ." (Paragraph 19, Commentary on Article 5, OECD Model Tax Convention of 2005) Thus, by analogy, ANHYDRO commenced the installation of the plant when it begins its work. including the preparatory work, in the Philippines. The installation activity continues to exist until the installation is completed or permanently abandoned. Based on the foregoing and on your representation that ANHYDRO will not perform the installation activity in the Philippines for more than 183 days, this Office is of the opinion and so holds that the installation fees (including the additional supervisory assistance fees) to be paid to ANHYDRO by AMC are not subject to Philippine income tax. Finally, the fees paid by AMC for the services to be rendered by ANHYDRO in the Philippines are subject to the value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997 1. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that AMC shall be responsible for the withholding of the VAT on the service fees before remitting them to ANHYDRO. In remitting to the Bureau of Internal Revenue the VAT withheld on the service fees, AMC shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld.). If a VAT-registered taxpayer, AMC may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, AMC may include as part of the cost of the services Copyright 2017

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furnished to it by ANHYDRO the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or as an asset, whichever is applicable. In addition, AMC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to ANHYDRO upon its request, and the fourth copy to be retained by AMC as its file copy. (BIR ITAD Ruling No. DA-ITAD-147-05 dated November 29, 2005) This ruling is issued based on 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. CSHDTE

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Republic Act No. 9337 (An Act Amending Section 27, 28, (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108(A), which now reads: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 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 . . ." The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the. Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

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August 4, 2006

DA ITAD BIR RULING NO. 086-06 Articles 5 & 7, Philippines-United Kingdom tax treaty Sec. 108, National Internal Revenue Code of 1997; BIR Ruling No. ITAD-167-00 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati, Philippines Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated April 27, 2006, requesting confirmation that the payments for services by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt Benckiser Corporate Services Limited (RBCL), are not subject to Philippine income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (Philippines-United Kingdom tax treaty). From the documents submitted it is represented that RBCL is a corporation organized and existing under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, Berkshire, SL1 3UH, UK as supported by the Residence Certificate issued by HM Revenue & Customs on February 13, 2006; that RBCL is not registered to do business in the Philippines as supported by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 26, 2006; that RBCL is a corporation organized and existing under the laws of the Philippines with principal office at Unit 2601 The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City, Metro Manila. It is further represented that on January 1, 2005, RBCL and RBPI entered into a Services Agreement whereby RBPI, as recipient, engages RBCL, as provider, to render services which cover all head office services, which include, but are not limited to, the following specific services: Area EVPs — Overseeing the commercial operations of RBPI;

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— Monitoring and assessing the investment needs of RBPI; — Managing the launch of new products in the Philippines on behalf of RBPI. Management Organisation — Managing the global brand categories on behalf of RBPI; — Carrying out product innovation on behalf of RBPI; — Overseeing the supply function on behalf of RBPI; — Carrying out HR and IS functions on behalf of RBPI. Competitive Intelligence

SaCDTA

— Providing a corporate view of key competitors and industry players to RBPI; and — Producing reports by country and product for use by RBPI. Supply — (Only for Manufacturers) — Negotiating contracts for raw materials and packaging for RBPI; — Seeking out cheaper sources of supply for RBPI; — Optimising inventory levels for RBPI; and — Introducing and establishing best practices for RBPI in matters relating to supply. Chief Financial Officer — Carrying out commercial reviews of RBPI's operations Corporate Treasury — Raising funds for RBPI; — Negotiating facilities for RBPI with financial institutions; — Managing foreign exchange risk, interest rate risk, credit risk and liquidity risk on behalf of RBPI. Group Tax — Ensuring RBPI's tax returns are completed on time; — Reviewing RBPI's tax returns; — Developing best practice for tax compliance for RBPI; and — Providing specialist tax advice for RBPI. Copyright 2017

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Insurance — Negotiating, managing and monitoring insurance policies for RBPI; Internal Audit — Reviewing and appraising the effectiveness of control systems for RBPI; — Identifying efficiency improvements for RBPI; and — Assisting in ad-hoc projects as required by RBPI. Information Systems — Improving the effectiveness and efficiencies of Group IT products and services for RBPI; — Providing an IT helpdesk for RBPI; — Negotiating, purchasing and evaluating Group IT products and services for RBPI; — Advising on, developing and managing IT projects for RBPI; — Coordinating and managing global IT vendors on behalf of RBPI. Legal — Advising on new business opportunities and reviewing related agreements for RBPI; — Negotiating contracts and advising on contract law on behalf of RBPI; — Advising on competition law; — Managing and administering trademarks and patents for RBPI; — Carrying out patent searches for RBPI. New Initiatives and the Internet — Researching and identifying new products or business ventures to exploit the internet on behalf of RBPI; — Monitoring competitor activity for RBPI. Media Buying — Negotiating media purchases and liaising and co-ordinating all media relations on behalf of RBPI; Corporate Sales — Developing training programmes for RBPI's sales staff Human Relations Copyright 2017

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— Designing, specifying and implementing employment contracts, human resource policies and procedures for RBPI; — Performing the payroll function for companies and expats as required by RBPI; — Performing the payroll function for companies and expats as required by RBPI; — Assisting in the design of career development models for RBPI; — Facilitating and advising in respect of overseas secondments on behalf of RBPI; and

ESCDHA

— Developing, assisting with, and providing support for, training of the Recipient's world-wide employees. Professional Services — Providing marketing assistance in the form of paying fees to certain dishwasher manufacturers for the supply of dishwashing goods. Documents show that activities which constitute shareholder or control services are excluded from the coverage of the Service Agreement; it is further asserted that RBCL will perform the corporate services at its own business premises in the United Kingdom; that, however, should the provision of the corporate services require RBCL's employee to travel to the Philippines, such employee will stay in the Philippines only for a few days of not exceeding 3 days in a month and the employees' aggregate stay in the Philippines will not exceed 183 days within any twelve month period; that in consideration for the services, RBPI agrees and undertakes to pay service fees to RBCL plus a mark-up ranging from 4% to 8% depending on the type of service performed; and that the Service Agreement shall be effective as of January 1, 2005 and for a period of at least two years unless terminated in accordance with provisions thereof. In reply, please be informed that Article 7(1) and, in relation thereto, Article 5 of the Philippines-United Kingdom tax treaty provide: "Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is directly or indirectly attributable to that permanent establishment." "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. Copyright 2017

The term "permanent establishment" shall include especially:

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a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, oil well, quarry or other place of extraction of natural resources;

an installation or structure used for the exploration of natural resources;

a building site or construction or assembly project which exists for more than 183 days.

3. An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a) it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or b) it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. (Emphasis supplied) xxx

xxx

xxx"

Based on the foregoing, the service fee of RBPI to RBCL under the Service Agreement shall not be subject to Philippine income tax if RBCL, being a resident of the United Kingdom, does not have a fixed place of business in the Philippines; or if it has such a fixed place, said fee is not directly or indirectly attributable to such fixed place. However, should employees of RBCL be required to render services in the Philippines and such furnishing of services exceeds in the aggregate 183 days within any twelve-month period, such shall be deemed to constitute as a permanent establishment of RBCL in the Philippines. Accordingly, such service fee shall be subject to Philippine income tax. From the representations herein, it can be ascertained that RBCL does not have a fixed place of business in the Philippines and the duration of stay in the Philippines by its personnel in the rendition of services under the subject Services Agreement shall not be more than 183 days in any twelve-month period. In view thereof, the payment for services by RBPI to RBCL shall not be subject to Philippine income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-United Kingdom tax treaty. (BIR Ruling No. ITAD-167-00) IHcSCA

However, as provided in Section 108 of the National Internal Revenue Code of 1997, the fee for such services rendered in the Philippines is subject to value-added tax (VAT): "SEC. 108 1. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, Copyright 2017

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including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee . . ." (Emphasis supplied)

With regard to the procedures for withholding and paying the VAT, RBPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to RBCL. In remitting the VAT withheld, RBPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for RBCL and the fourth copy for RBPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

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(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%).1 xxx 2.

xxx

August 4, 2006

DA ITAD BIR RULING NO. 085-06 Art. 11 RP-UK Tax Treaty; Sec. 108 National Internal Revenue Code of 1997; Sec. 4.108-3(a) Revenue Rulings No. 16-2005; BIR Ruling ITAD No. 32-00, 25-99 BIR Ruling No. 096-95, 101-84, 046-80 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati, Philippines Attention: Ms. Priscilla B. Valer Gentlemen : This is in reference to your letter dated April 27, 2006, requesting confirmation of your opinion that the royalties paid by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt & Colman (Overseas) Limited (R&C), would be subjected to the preferential tax rate of 25% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (RP-UK Tax Treaty). From the documents submitted it is represented that R&C is a corporation organized and existing under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, SL13UH, UK as supported by the Residence Certificate issued by HM Revenue & Customs on February 13, 2006, and confirmed by the Philippine Embassy on February 24, 2006; that R&C is not registered either as a corporation or partnership in the Philippines as supported by the Certification of Non-Registration of Copyright 2017

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Corporation/Partnership issued by the Securities and Exchange Commission on April 26, 2006; that RBPI is a corporation organized and existing under the laws of the Philippines with principal office at Unit 2601 The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City, Metro Manila; that R&C and RBPI entered into a License Agreement whereby R&C, as licensor, granted RBPI, as licensee, the right to use the Intellectual Property Rights, defined in the License Agreement to mean the Trademarks (including service marks), Patents, Design and Model Rights, Know-How and all current and future copyrights and rights to databases relating to the design, production, distribution, marketing and sale of the household, health, and personal care products developed and prepared for launch by the R&C and subsequently launched and marketed by RBPI; that in consideration, RBPI shall pay R&C a royalty in the amount of: (i) 4% if the relevant trademark is not owned by RBPI and (ii) 3% of the net revenues of the products if the relevant trademark is owned by RBPI; and that the License Agreement: shall commence on the Commencement Date specified therein and shall continue for an indefinite period of time, unless terminated earlier in accordance with the terms thereof. In reply, please be informed that Article 11 of the RP-UK Tax Treaty provides: "Article 11 ROYALTIES

Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State.

Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a)

15 per cent of the gross amount of the royalties, where the royalties are paid:

(i)

by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or

(ii)

in respect of cinematograph films or tapes for television or radio broadcasting.

in all other cases, 25 per cent of the gross amount of the royalties.

The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Articles 7 or 13, as the case may be, shall apply.

Royalties shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the

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person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the obligation to pay the royalties was incurred and the royalties are borne by that permanent establishment or fixed base, then the royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 6.

Where, owing to the special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention."

This means that in order for R&C to claim the 25% preferential tax rate, the following requisites must be proven to concur: 1.

R&C is a resident of the United Kingdom;

R&C is not carrying on trade or business in the Philippines through a permanent establishment situated in the Philippines;

RBPI is not registered with the Philippine Board of Investments and engaged in preferred areas of activity; EaSCAH

R&C is not receiving royalty payments in respect of cinematograph films or tapes for television or radio broadcasting.

From the facts as you have represented above it can be ascertained that R&C possesses all the requisites necessary to qualify for the 25% preferential tax rate provided under Article 11 12(b) of the RP-UK Tax Treaty. It is important to note that as provided in Section 108 of the National Internal Revenue Code of 1997, as amended, the royalty payments to be remitted by RBPI will still subject to the twelve percent (12%) Value-added Tax (VAT): "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to . . . percent . . . of gross receipts derived from the sale or exchange of services. . . The phrase 'sale or exchange of services' means . . . and . . . shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx (3)

xxx

The supply of scientific, technical, industrial or commercial knowledge or information; xxx

xxx

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In connection with this, attention should also be taken of Sec. 4.108-3(a) of Revenue Regulations No. 16-2005 dated September 1, 2005, which provides: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner in the manner prescribed in Sec. 4. 114-2(b) hereof."

In. view of the foregoing, this Office is of the opinion and so holds that the royalties paid by RBPI to R&C under the License Agreement are subject to Philippine income tax at 25% of the gross amount of the royalties, pursuant to the RP-UK tax treaty, and to VAT at 12% of the gross amount thereof. With regard to the procedures for withholding and paying the VAT, RBPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to R&C. In remitting the VAT withheld, RBPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for R&C and the fourth copy for RBPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. DCASIT

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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July 28, 2006

DA ITAD BIR RULING NO. 084-06 Articles 5 & 7 Philippines-Switzerland Tax Treaty; ITAD Ruling No. 24-04 V.C. Mamalateo And Associates Unit 6C, 20 Lansberge Place 170 T. Morato Avenue, Quezon City Attention: Carmencita P. Victorino Partner Gentlemen : This refers to your letter dated May 12, 2006, on behalf of your client, Electrowatt-Ekono Ltd. ("EEL" for brevity), requesting for a ruling that: CAaDTH

EEL does not have a permanent establishment in the Philippines pursuant to Article 5(2)(h) of the Philippines-Switzerland tax treaty; and

Since EEL does not have a permanent establishment in the Philippines under the tax treaty, the compensation paid by United Pulp and Paper Co., Inc. ("UPPC" for brevity), a domestic corporation, to EEL, as consideration for engineering works and services under the Engineering Services Contract for the Coal Fired Boiler Plant dated April 30, 2004 and the Amendment to the Engineering Service Contract dated November 30, 2004, is exempt from Philippine income tax and consequently from the withholding income tax pursuant to Article 7(1) in relation to Article 5(2)(h), both of the Philippines-Switzerland tax treaty.

It is represented that EEL is a nonresident foreign corporation organized and existing under the laws of Switzerland with principal office at Hardturmstrasse 161, Postfach 8037 Zurich, Switzerland as shown in the Certificate of Residence dated April 25, 2006; that EEL is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on June 23, 2006; that, on the other hand, UPPC is a corporation organized and existing under the laws of the Philippines with principal office at 5th Floor, Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City. It is further represented that on April 30, 2004, EEL and UPPC entered into an Engineering and Supervision Services Contract for Coal Fired Boiler Plant ("Contract" or brevity) to construct a new circulating fluidized bed boiler at its compound at Calumpit, Bulacan; that under the Contract, EEL shall provide UPPC documentation and drawings for the Balance of Plant (BOP) engineering, machinery design, drawing services and Plant civil engineering and shall render supervisory services for the erection, installation, commissioning, start up and performance test of the said plant for a consideration of USD One Million Two Hundred Seventy Six Thousand Five Hundred Ninety Four (US$ 1,276,594.00); that on April 26, 2005 (Amended Contract), EEL and UPPC agreed to amend the following Articles of the Copyright 2017

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Engineering and Supervision Services Contract for Coal Fired Boiler Plant: 1.

The Definitions under Article 1 of the Contract;

The Obligations of the Engineer under Article 3 of the Contract;

UPPC's obligations under Article 4 of the Contract;

The Contract Price under Article 5 of the Contract; and

The Terms of Payment under Article 6, and Article 25 respectively of the Contract;

That the highlights of the foregoing amendments are as follows: 1.

Amendment No. 1. to the Engineering and Supervision Services Contract: (effective November 30, 2004) a)

The Contract is renamed as Engineering Services Contract;

The provisions of the Supervisory Services under Article 3 (Obligations of the Engineer) of the amended contract are deleted;

The definition of the term "Supervisor" is deleted; and

The Contract Price is reduced to USD One Million Forty Four Thousand Two Hundred (US$1,044,200.00)

It is also represented, based on a July 11, 2006 notarized Sworn Statement of Aurasa Jinawath, Vice President/Finance & Treasurer of the UPPC, that EEL did not perform any construction, erection, commissioning, start-up and performance test of the Plant under the Original and Amended Contract dated April 31, 2004 and April 26, 2005 respectively; that a local company did the construction, erection, commissioning, start-up and performance test of the subject Plant; that EEL did not perform any supervision services under (i.e. including prior to, during or after the amendment thereof) the said Contract for the erection, installation, commissioning, start up and performance test of the said plant; that pursuant to Section 3.2(1) of both the original and Amended Contract EEL rendered only the following services to UPPC: "(1) Provision of the documentation, drawings and other necessary data of the BOP engineering, material list, machinery design, Plant civil design and drawing services, in the form of Technical Documents, so as to enable to successful erection, operation and maintenance of BOP as well as Plant construction."

that EEL did not perform any supervision services under the Amended Contract dated April 26, 2005. Moreover, it is represented that the two (2) employees of EEL, Mr. Peter Heizelmann and Mr. Andreas Bacholen, who rendered engineering works under the above mentioned original and amended Contracts, stayed in the Philippines for a total of forty-nine (49) days and twenty-three (23) days, respectively, as shown in the certification dated June 15, 2006 issued by UPPC's Vice-President for Finance and Treasurer, Aurasa Jinawath. In reply, please be informed that Article 7 of the Philippines-Switzerland tax treaty provides, viz:

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"Article 7 BUSINESS PROFITS 1.

The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx."

In relation thereto, Article 5 of the same tax treaty defines permanent establishment, as follows: "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 the enterprise is wholly or partly carried on. aCcHEI

The term 'permanent establishment' includes especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than six months;

the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve-month period. xxx

xxx

xxx."

Based on the foregoing provisions, if a corporation which is a resident of Switzerland carries on business in the Philippines through a permanent establishment situated therein, the profits of the said Swiss corporation shall be subject to Philippine income tax but only so much of them as is attributable to the permanent establishment. For this purpose, a corporation may be deemed to have a Permanent Establishment in the Philippines if it furnishes services, including consultancy services through its Copyright 2017

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employees, where such rendition of services continues (for the same or connected project) within the Philippines for a period or periods aggregating more than 6 months within any 12-month period. In other words, if the duration of a contract until its completion in connection with furnishing services including consultancy services exceeds more than six (6) months, an enterprise is already deemed carrying on business in the Philippines through a permanent establishment. Inasmuch as it has been represented that the EEL did not perform any supervisory services in the erection, installation, commissioning, start up and performance test of the said plant and the engineering works performed in the Philippines did not exceed 6 months or 183 days in any twelve-month period, EEL considered as not having a permanent establishment in the Philippines. And is, therefore, not subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the same Code. (BIR Ruling No. DA-ITAD 24-04 dated March 11, 2004) Moreover, Section 108 of the Tax Code of 1997, as cited below, provides: "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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 . . ."

The aforementioned provisions state that the sale or exchange of services which are subject to VAT include only those services that are performed in the Philippines. Accordingly, since the engineering works are performed in the Philippines, the fees to be paid by UPPC to EEL in consideration thereof are subject to the 10% VAT 1. 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,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Effective January 1, 2006 the rate is increased to 12%, pursuant to Republic Act No. 9337 (An Act Amending Section 27, 28, (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purpose)

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July 28, 2006

DA ITAD BIR RULING NO. 083-06 Arts. 5 & 7, Philippines-United Kingdom of Great Britain and Northern Ireland; BIR Ruling No. DA-ITAD 125-03 Laya Mananghaya & Co. Certified Public Accountants and Management Consultants 22F Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Ma. Georgina J. Soberano Principal, Tax & Corporate Services Jonas L. Lasala Assistant Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated April 7, 2006 requesting confirmation of the following: 1.

The consultant's fee received by De La Rue International (DLRI), formerly Thomas De La Rue Limited, under its Contract for Consultancy Services for the Implementation of the Master Plan for the Rehabilitation and Upgrading to a World Class Facility of the Security Plant Complex, Bangko Sentral ng Pilipinas, Quezon City, Packages 3 & 4 (Contract) with the Bangko Sentral ng Pilipinas (BSP) is exempt from income tax pursuant to the Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty (Philippines-UK tax treaty); and EACTSH

Only the payments for services actually rendered by DLRI in the Philippines are subject to the final withholding value-added tax (VAT).

It is represented that DLRI is a nonresident foreign corporation organized and existing under the laws of the United Kingdom with principal office at De La Rue House, Jay Close, Viables, Basingstoke, Hampshire RG22 4BS, England and a resident of the United Kingdom for taxation purposes within the meaning of Article 4 of the Philippines-UK tax treaty, as evidenced by the Certificate of Residence dated February 7, 2006 under Ref 660/26600 53840 7393 issued by the Inspector of Taxes of Bristol Large Business Service (CT) HM Revenue & Customs; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission on March 15, 2006; that BSP is a government-owned instrumentality organized and existing by authority of Republic Act No. 7653, otherwise known as the Copyright 2017

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New Central Bank Act with principal office address at Mabini corner Ocampo Street, Malate, Manila. It is further represented that on May 26, 2004, DLRI and BSP entered into a Contract wherein DLRI and BSP agreed that DLRI shall provide consultancy services for the latter; that the consultancy services to be rendered by DLRI shall be for the implementation of the modules of packages 3 & 4 of the SPC Master Plan; that these modules covered by the Contract pertain to the existing Security Systems, Banknote Operations, Mint and Refining Operations, and General Services of the BSP; that the consultancy services shall involve the review and appraisal of said systems as well as the production of written reports or recommendation; that: to facilitate the review, DLRI representatives shall visit the Philippines on varying periods depending on the modules being serviced; that the "terms of Reference" attached to the Contract provides for the duration of visits of DLRI representatives in the Philippines for each module as follows: Module A, Security System Module B, Banknote Operations Module C, Mint and Refining Operations Module D, General Services

3 weeks 3 weeks 1-2 weeks 1 week

that for and in consideration of the consultancy services provided, BSP will pay DLRI the total amount of £372,600.00 (P39.123 million) as approved by Monetary Board Resolution No. 399 dated March 25, 2004; and that DLRI will start work on the last module not later than twelve (12) months after issuance of Notice to Proceed and that DLRI will complete the last module not later than eighteen (18) months from the said date. In reply, please be informed that Article 7 of the Philippines-UK tax treaty provides, viz: "Article 7 BUSINESS PROFITS 1.

The profits of an enterprise of a Contracting State shall be taxable only in that 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 the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. xxx

xxx

xxx."

Based on the foregoing, the profits of an enterprise which is a resident of the United Kingdom shall be taxable only in the United Kingdom unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise which is a resident of the United Kingdom carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the consultancy fees received by DLRI for the 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 Philippines-UK tax treaty provides: "Article 5 Copyright 2017

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PERMANENT ESTABLISHMENT 1.

For the purposes of this Convention, the term `permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on. xxx

xxx

An enterprise of a Contracting State shall likewise be deemed to have a permanent establishment in the other Contracting State if: a)

it carries on supervisory activities within that other Contracting State for more than 183 days in connection with a building site, or a construction or assembly project which is being undertaken, in that other Contracting State; or

it furnishes services, including consultancy services, in that other Contracting State through its employees or other personnel (other than agents of an independent status within the meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any twelve-month period. IDSETA

xxx

xxx."

Inasmuch as it has been represented that the duration of stay of the personnel of DLRI in the Philippines for the purpose of performing the consultancy services is less than an aggregate of 183 days within any twelve-month period, as certified by the BSP in its letter dated March 9, 2006, DLRI is deemed not to have a permanent establishment in the Philippines. (BIR Ruling DA-ITAD No. 125-03 dated August 11, 2003) Hence. the income derived by DLRI from the consultancy services rendered to BSP shall not be subject to Philippine income tax and, consequently, to withholding tax. Moreover, while the compensation for services rendered outside the Philippines is not subject to the VAT, the fees paid for that portion of services of DLRI which are rendered in the Philippines are, however, subject to value-added tax (VAT) at the rate of 10% from May 26, 2004 and 12% 1 from February 1, 2006 onwards pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, BSP, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to DLRI. In remitting the VAT withheld, BSP shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from BSP if it is a VAT-registered taxpayer. In case it is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, BSP is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for DLRI and the fourth copy for its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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.

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Per Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 119, 121, 148, 151, 236, 237 And 288 of the National Internal Revenue Code of 1997, as amended, And For Other Purposes.)

July 28, 2006

DA ITAD BIR RULING NO. 082-06 Art. 12, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 20-04 Fernandez Aguja Law Firm CPA-LAWYERS Suite 5F JL Bldg., Don Jose Avila cor. Don Gil Garcia Streets, Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your letter dated June 26, 2006 requesting for confirmation that the payments of Philippines Epson Optical, Inc. (EPSON-Phil.) to Pentax Corporation (PENTAX-Japan) under the Lease Agreement (Agreement) are subject to the preferential tax rate of 25% pursuant to Article 12 of the Philippines-Japan tax treaty and that the said payments are not subject to the value-added tax (VAT) under Section 109(K) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997). It is represented that PENTAX-Japan is a nonresident foreign corporation organized and existing under the laws of Japan as evidenced by The Certificate of All of the Present Matters of Pentax Copyright 2017

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Corporation and with principal office address at 2-36-9, Maeno-cho, Itabashi-ku, Tokyo 174-8639, Japan; that it is engaged in the business of manufacture and sale of cameras, optical machines and instruments and precision machines and instruments; measurement machines and instruments, equipment and material for medical use, products made of fine ceramics, lenses, rims and other products relating to glasses, computer-controlled automatic design and manufacturing systems, software, data processing machines and instruments and communication machines and instruments; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certificate of Non-Registration dated June 6, 2006 issued by the Securities and Exchange Commission; on the other hand, EPSON-Phil. is a domestic corporation with principal office address located at Special Export Processing Zone, Gateway Business Park, Javalera General Trias, Cavite; that it is a PEZA-registered enterprise with Certificate of Registration No. 05-11; that its business activity as an Ecozone Export Enterprise consists in the manufacture of optical lenses and other optical related goods. AISHcD

It is further represented that on April 1, 2005. PENTAX-Japan and EPSON-Phil. executed an Agreement whereby the former shall lease to the latter certain intangible assets (production/software equipment) for a fee of US$9,500 per month for a period of one (1) year (and may be extended by either party based on the notice to extend the Agreement in writing); and that on January 31, 2006, the parties amended the said Agreement extending its enforceability until March 31, 2006. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides: "Article 12 1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

However, such royalties may also be taxed in the Contracting State in which their arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. xxx

xxx

Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred areas of investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties.

The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. EcDSHT

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xxx

xxx."

Based on the foregoing, the royalty payments will be taxed at the preferential tax rate of 10 per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred pioneer area of investment, 15 per cent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, and in all other cases, 25 per cent (25%) of the gross amount of the royalties. The rental payments made by EPSON-Phil. to PENTAX-Japan for the lease of the assets (production/software equipment) are considered payments for the "use of or the right to use industrial, commercial or scientific experience" as defined under paragraph 4 of Article 12 of the Philippines-Japan tax treaty. Such being the case, this Office is of the opinion and so holds that since EPSON-Phil. is not a BOI-registered enterprise engaged in preferred pioneer areas of investment, and, the subject royalty payments are not paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, the said royalty payments by EPSON-Phil. to PENTAX-Japan under the said Agreement shall be subject to tax at the rate not exceeding 25% of the gross amount of the royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 20-04 dated March 8, 2004) As regards the imposition of the VAT on the lease of properties (assets) of PENTAX-Japan, please be informed further that Section 108 of the Tax Code of 1997 1 provides as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. (Emphasis supplied) xxx

xxx

xxx"

Thus, in general, the VAT is imposed on lease of properties (assets) by PENTAX-Japan in the Philippines. On every payment of rental fees, EPSON-Phil. is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: ITECSH

"Special laws may certainly exempt transactions from the VAT 3. However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transaction it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 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. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an ecozone. xxx

xxx

xxx"

Based on the foregoing, transactions exempt from. VAT by reason of PD 66 and RA 7916 and effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment of rental fees by EPSON-Phil., being a PEZA-registered enterprise, to PENTAX under the Agreement should be, as it is hereby confirmed to be, exempt from VAT. 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.

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Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

July 25, 2006

DA ITAD BIR RULING NO. 081-06 Philippines-Japan Tax Treaty, Article 10; BIR Ruling No. 156-81 Follosco Morallos & Herce Suite 1506, 15th Floor, 88 Corporate Center 141 Valero Street corner Sedeño Street Salcedo Village, 1227 Makati City Attention: Ms. Rachel P. Follosco Legal Counsel Gentlemen : This refers to your letter dated August 12, 2005, on behalf of your client, Kyoshin (Philippines) Corporation ("KPC"), requesting confirmation of your opinion that Kyoshin Co. Ltd. ("KCL"), is entitled to the ten percent (10%) preferential tax rate on its dividend income from KPC, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. HCacTI

It is represented that KCL is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office at 7-go, 16-ban, Enokicho, Suita-Shi, Osaka Pref., Japan and with Copyright 2017

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Corporate No. 1209-01-001673 as certified by the Registrar, Kita-Osaka Branch, Osaka Legal Bureau; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated August 2, 2005 issued by the Securities and Exchange Commission; that KPC is a corporation organized and existing under the laws of the Philippines and a wholly owned subsidiary of KCL, with principal address located at 108 Innovation Drive corner Reliance Drive, Carmelray Industrial Park 1, Canlubang, Laguna; that as of June 15, 2005, KCL is a stockholder of KPC and owns One Hundred Six Thousand Five Hundred Ninety Five (106,595) shares of KPC, with a par value of One Hundred Pesos (P100.00) per share, equivalent to a total amount of Ten Million Six Hundred Fifty Nine Thousand Five Hundred Pesos (P 10,659,500.00) representing 100% of the outstanding and issued shares of KPC as evidenced by the Secretary Certificate issued by KPC's Corporate Secretary dated October 17, 2005; that in a Special Meeting of the Board of Directors of KPC, the Board declared cash dividends amounting to Five Million Seven Hundred Twenty Thousand Pesos (P 5,720,000.00) from its unrestricted retained earnings in favor of its stockholders of record as of December 31, 2005 and payable on or before December 31, 2005; that since KPC is a wholly owned subsidiary of KCL, the entire Five Million Seven Hundred Twenty Thousand Pesos (P 5,720,000) will accrue in its favor: and that the dividends accruing in favor of the five (5) directors of KPC who own one (1) share each shall likewise be payable to KCL being the beneficial owner of the five (5) nominal shares recorded in the names of the nominee directors of KPC. In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides: "Article 10 1.

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

25 per cent of the gross amount of the dividends in all other cases.

The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx 4.

xxx

xxx"

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company to a Japanese company at a rate not exceeding ten percent (10%) if the latter holds directly at least twenty-five percent (25%) either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends. Considering that KCL directly holds 100% of KPC's shares of stock as of June 15, 2005, which is six (6) months immediately preceding the date of payment of the dividends, this Office is of the opinion and hereby holds that the dividend payments of KPC to KCL are subject to the ten percent (10%) preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. 156-81 dated July 12, 1981) This ruling is issued based on 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

July 25, 2006

DA-ITAD BIR RULING NO. 080-06 Article 12 of the Philippines-United States of America tax treaty; BIR Ruling No. DA-ITAD-084-00 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: L.P. Ferrer Partner, Tax Services Copyright 2017

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Gentlemen : This refers to your letter dated October 24, 2005, received by this Office on February 2, 2006, on behalf of your client GOLDEN ARCHES DEVELOPMENT CORPORATION (GADC), requesting confirmation that the interest on loans paid by GADC to MCDONALD'S RESTAURANT OPERATIONS, INC. (MRO), is subject to the preferential final withholding tax rate of 15% pursuant to Article 12(2) of the Philippines-United States of America tax treaty. It is represented that MRO is a corporation organized and existing under the laws of the United States of America with principal address at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19801; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated November 10, 2005; that GADC is a corporation organized and existing under the laws of the Philippines with principal address at 17th Floor, Citibank Center Building, Paseo de Roxas Avenue, Makati City. It is further represented that on March 17, 2005, GADC and MRO executed a Loan Agreement (Agreement) whereby GADC was granted a loan by MRO in the amount of Twelve Million Dollars ($12,000,000.00) with interest at ten percent (10%) per annum payable in Philippine Peso equivalent thereof; that the loan is evidenced by a Promissory Note issued by GADC in favor of MRO attached to the Agreement; and that the transaction subject of the instant request for a ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. In reply, please be informed that Article 12 of the Philippines-United States of America tax treaty provides as follows: "Article 12 Interest 1.

Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States.

Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. xxx

xxx

xxx"

Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. TSIDaH

xxx

The term 'interest' as used in this Convention means income from debt-claims of every

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kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales." xxx

xxx

xxx"

Since MRO is not engaged in business in the Philippines through a permanent establishment situated therein, your opinion that interest earned by MRO from the loan it extended to GADC shall be plainly considered as interest income subject to 15% withholding tax pursuant to Article 12(2) of the Philippines-United States of America tax treaty is hereby confirmed. (BIR Ruling No. DA-ITAD-084-00 dated August 1, 2000) Moreover, the Loan Agreement executed between GADC and MRO is subject to documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243 1, at a rate of (P1.00) for each Two Hundred Pesos (P200) or a functional part thereof, of the issue price of any such loan contract. 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 herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

Republic Act No. 9243 — An Act Rationalizing The Provisions On The Documentary Stamp Tax Of The National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20, 2004 per Revenue Regulations No. 13-2004)

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July 19, 2006

DA ITAD BIR RULING NO. 079-06 Arts. 5 & 7, Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD 128-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 1200 Makati City Attention: Maria Victoria C. Españo Tax Partner Gentlemen : This refers to your letter dated February 6, 2006 on behalf of your client, Koshin Philippines Corporation (Koshin), seeking for confirmation of your opinion that the service fees paid by Koshin to KJ Corporation (KJ) under the Support Service Agreement are not subject to income tax and value-added tax pursuant to the provision of the Philippines-Japan tax treaty and the National Internal Revenue Code (Tax Code of 1997). It is represented that KJ is a nonresident foreign corporation and is a taxable person in Japan with address at 609-C KSP West Belg, 3-2-1 Sakado, Takatsu-ku, Kawasaki, Kanagawa, Japan, as shown in the Certificate of Status of Taxable Person issued by the District Director of Kawasaki-kita Tax Office; that KJ is not registered either as a corporation or as a partnership in the Philippines as shown in the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission Cebu Extension Office on January 6, 2006; that Koshin is a corporation duly organized and existing under the laws of the Philippines with principal address located at Mactan Economic Zone II, Lapu-Lapu City, Cebu; that Koshin is engaged in the manufacture of various thin film optical elements and modular fiber-optic devices for electronic, medical, optical, photographic, communications, and general industrial application. HSaCcE

It is further represented that on October 1, 2005, Koshin and KJ entered into a Support Service Agreement (SSA) whereby KJ commits the following services to Koshin: 1.

Promotion and marketing of the products of Koshin to customers in Japan and other countries;

Assistance for Koshin in the procurement of raw materials and supplies in Japan with regard to quality and specifications;

Review of the financial and other aspects of Koshin's operation; and

Provision for training services;

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intellectual property rights; that KJ shall perform the aforementioned services in Japan and in cases where it would be necessary for KJ to send its employees in the Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed six (6) months; that as a consideration for the said services, Koshin will pay KJ a fixed monthly fee, as indicated in the SSA; and that the SSA shall be effective for a twelve month term commencing on October 01, 2005 subject to renewal for another twelve-month term, unless one of the parties serves a written notice of non-renewal to the other party not later than one (1) month prior to the expiration of the current term. In reply, please be informed of Article 7 of the Philippines-Japan tax treaty quoted as follows: "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. xxx

xxx

xxx"

Based on the above, 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 that is attributable to that permanent establishment. Applying this to the instant case, the service fees received by KJ for services rendered in the Philippines under the SSA 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. ASIDTa

The term 'fixed place of business' includes especially: 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 Copyright 2017

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Inasmuch as it has been represented that the services will generally be performed by KJ outside the Philippines and that its employees will not stay in the Philippines for a period or periods aggregating more than six months within any taxable year in the course of their rendition of services to Koshin, KJ may be considered as not having a permanent establishment in the Philippines. In other words, KJ is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than six months within any taxable year in the course of their rendition of services to Koshin. (BIR Ruling No. DA-ITAD 128-05 dated November 10, 2005) In such a case, the income derived by KJ from services rendered to Koshin shall not be subject to Philippine income tax and, as such, shall likewise be exempt from withholding tax. As regards the imposition of the VAT on the rendition of services of KJ, please be informed further that Section 108 of the Tax Code of 1997 1 provides as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, in general, the VAT is imposed on services rendered by KJ in the Philippines. On every payment of service fees, Koshin is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.11.0-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. CSAaDE

However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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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: . . ., 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 regular 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. 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. DSacAE

xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the payment of services fees by Koshin, being a PEZA-registered enterprise, to KJ under the above SSA should be, as it is hereby confirmed to be, exempt from VAT. 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:

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1. 2. 3.

July 12, 2006

DA ITAD BIR RULING NO. 078-06 Arts. 5 & 7, Philippines-Netherlands tax treaty; BIR Ruling No. DA-ITAD 134-02 Punongbayan & Araullo 20th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter, on behalf of your clients Hemisphere Leo Burnett, Inc. (Hemisphere), Arc Worldwide Philippines Co., Inc. (Arc Worldwide) and Starcom Mediavest Group Philippines, Inc. (Starcom), requesting confirmation of your opinion that the advisory service fees paid to Publicis Worldwide BV (PWW) under their respective Advisory Service Contracts are in the nature of business profits under Article 7 of the Philippines-Netherlands tax treaty, and are therefore, exempt from Philippine income tax and ten percent (10%) value-added tax (VAT). cCaSHA

It is represented that PWW is a nonresident foreign corporation organized and existing under the laws of The Netherlands with principal office at 1183 DJ Amstelveen, Prof. W.H. Keesomlaan 12, The Netherlands as evidenced by an authenticated copy of its Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission on December 5, 2005; that Hemisphere, Arc Worldwide and Starcom are domestic corporations with principal office address at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City, 25/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City and 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City, respectively. It is further represented that PWW entered into three separate Advisory Service Contracts with Copyright 2017

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Hemisphere, Arc Worldwide and Starcom, respectively; that under the said contracts, PWW will provide services to Hemisphere, Arc Worldwide and Starcom consisting in, but not limited to, the following: I.

II.

Advice in Commercial & Creative Development (Quality & Product) •

Advise on the development of worldwide advertising strategies.

•

Represent the Beneficiary in appropriate international business and trade association.

•

Advise on the methods of approaching new clients and the means and methods of developing big national budgets.

•

Acquisition of new clients and participation in "Pitches".

•

Advise on the availability of new products and services on the advertising market. Advise as to their introduction and their development in the local market. These services or products can be used either by the Beneficiary or made available to its clients. Such advice will include, but will not be limited to: a)

Having Expert Staff make contact with potential clients and explaining the scope and nature of the services offered by the Beneficiary.

Having Expert Staff prepare potential clients' written proposals covering the objectives (what they cover and include) and expected benefits of the Beneficiary's services.

•

Advise regarding the planning, design layout and content of advertising material, promotion programs, sales promotion, etc.

•

Advise to insure the presence, in all the Group's companies, of a high level of quality and excellence in campaigns.

Advise in Media and Research Assistance in this area is as follows:

III.

•

General advice in Research (methodology, approach)

•

Advise regarding national and international market surveys and any specific analysis in relation to local clients.

•

Advise regarding the drawing up of action plans and the definition of media operations.

Advise in Finance and Administration The financial and technical advice includes the following areas:

•

Drawing up financing plans.

•

Advise on available credit and assistance in procuring funds.

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IV.

•

Advise on treasury management.

•

Statistical evaluations and cost comparisons.

•

Advise on setting guidelines for accounting, cost accounting, management accounting, auditing procedures and financial management.

•

Initiating and monitoring yearly business plans and budget.

•

Cash flow planning and reduction of foreign exchange exposure.

•

Providing management systems including short and long range financial planning.

•

Tax and legal advice and assistance.

•

Advise with respect to the Publicis Group worldwide insurance management service.

•

Procurement of insurance plan and payment of insurance costs.

•

Advise on the selection of software systems and the installation of these systems.

•

Advise on computer engineering and technology.

•

Advise on telecommunications procurement and services.

•

Advise on Human resource management issues.

•

Advise on the training of personnel, personnel evaluation, and remuneration and profit-sharing plans.

•

Advise on administrative organization.

Advise on Other Issues •

Advise on the development of the commercial strategy of the Beneficiary.

•

Advise on the global knowledge database.

•

Advise on the selection of key staff member.

•

Advise oil strategies for pursuing new business and key growth strategies. Help select aid manage growth of new markets.

•

Advise on accounting and cost control. Advise on efforts to maintain profitability of units. TAaHIE

that the abovementioned services are and will be performed primarily outside the Philippines, and in the event that the presence of PWW's personnel are required in the Philippines, their stay will not exceed an aggregate period of 183 days within any twelve-month period; and that the three contracts are made effective as of January 1, 2003 and shall remain in force and effect until terminated for any reason by either Party. Copyright 2017

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In reply, please be informed that Article 7 of the Philippines-Netherlands tax treaty provides, viz: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. xxx

xxx

xxx."

Based on the above provision, the profits of an enterprise which is a resident of The Netherlands shall be taxable only in The Netherlands unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the enterprise which is a resident of The Netherlands carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by PWW for the 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 Philippines-Netherlands tax treaty provides: "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2.

The term 'permanent establishment' includes especially: a)

a place of management;

a branch;

an office;

a factory;

a workshop;

f) resources;

a mine, quarry, or other place of exploration or extraction of natural

g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period more than 183 days; and h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in Copyright 2017

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the aggregate 183 days within any twelve-month period. xxx

xxx

xxx."

Inasmuch as it is represented that the Advisory Service Contracts shall continue until terminated by either of the respective parties, the whole of such Contract, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate 183 days within any twelve-month period. In other words, the 183-day period shall be counted based on the total number of days the services are rendered in the Philippines upon effectivity of the subject Contract within any twelve-month period. Accordingly, for as long as the employees or agents of PWW do not stay in the Philippines for a period or periods aggregating 183 days within any twelve-month period in the course of their rendition of services to Hemisphere. Arc Worldwide and Starcom under their respective Contracts, then PWW is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed. Therefore, such service fees derived by PWW for the rendition of service under the Advisory Service Contracts are exempt from Philippine income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 132-02 dated October 9, 2003) Moreover, while the payments for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for Hemisphere, Arc Worldwide and Starcom within the Philippines are, however, subject to 10% (12% effective February 1, 2006, under Republic Act No. 9337) 1(72) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Hemisphere, Arc Worldwide and Starcom, being the resident withholding agents and payors in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to PWW. In remitting the VAT withheld, Hemisphere, Arc Worldwide and Starcom shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due, respectively, from Hemisphere, Arc Worldwide and Starcom if they are VAT-registered taxpayers. In case they are non-VAT registered taxpayers, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, they are required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for PWW and the fourth copy for them as their respective file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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:

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Legal Service Bureau of Internal Revenue Footnotes 1.

July 5, 2006

DA ITAD BIR RULING NO. 077-06 Arts. 12, Philippines-United States tax treaty; BIR Ruling No. DA-ITAD-187-03 Puyat Jacinto & Santos Law 12/F Manilabank Building 6772 Ayala Avenue 1226 Makati City Attention: Atty. Virginia B. Viray Atty. Divina Gracia Cabildo-Yap Gentlemen : This refers to your letter dated November 29, 2005 on behalf of your client, Morgan Stanley Emerging Markets Inc. (MSEMI), requesting confirmation of your opinion that the interests on a loan advanced by MSEMI to Philippine Asset Investment (SPV-AMC) Inc. (PAII) shall be subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 12(2) of the Philippines-United States of America (US) tax treaty. It is represented that MSEMI is a nonresident foreign corporation duly organized and existing under the laws of the State of Delaware, USA with principal address at 1585 Broadway, New York, USA; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission (SEC) dated November 29, 2005; that, on the other hand, PAII is a corporation duly organized and existing under the laws of the Philippines per Certificate of Incorporation and Company Registration No. CS200412996 issued by the SEC dated August 20, 2004; that PAII is organized as a Special Purpose Vehicle (SPV) pursuant to Republic Act No. 9182, otherwise known as SPV Act of 2002, to engage in the business of investing in or acquiring Non Copyright 2017

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Performing Assets (NPAs) of Financial Institutions (FIs). It is further represented that on January 3, 2005, MSEMI and PAII entered into a Loan Agreement where an amount of US$2,920,000.00 equivalent to Php164,045,600.00 was advanced by MSEMI to PAII to be used by PAII to finance its purchase of NPAs; that the loan has a term of 25 years, with a basic interest of 8% per annum, subject to adjustment every anniversary date of the advance based on the change in the Philippines' 365-day treasury bill rate; that in addition to the basic interest, PAII shall pay a turnover 1 interest of 1% of its turnover exceeding Php56,000,000.00 in the financial 2 year preceding the date of payment; that both basic and turnover interest rates in each financial year shall not exceed the T-Bill rate plus 1% at date of drawdown of the outstanding principal balance of the advance, the rate of which is subject to adjustment every anniversary date of the advance based on the change in the Philippines' 365-day treasury bill rate; and that MSEMI may, at the end of 25 years from the date of advance, elect to convert all of the outstanding principal balance of the advance into shares of PAII, with each Php1,000.00 in the principal amount shall be converted into one (1) share. In reply, please be informed that Article 12 of the Philippines-US tax treaty provides as follows: "Article 12 INTEREST 1. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15 percent of the gross amount of such interest. 3. Interest derived by a resident of one of the Contracting States from sources within the other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest. 4.

Notwithstanding paragraphs 1, 2, and 3, interest derived by —

(a) One of the Contracting States, or an instrumentality thereof (including the Central Bank of the Philippines, the Federal Reserve Banks of the United States, the Export-Import Bank of the United States, the Overseas Private Investment Corporation of the United States, and such other institutions of either Contracting State as the competent authorities of both Contracting States may determine by mutual agreement), or b) A resident of one of the Contracting States with respect to debt obligations guaranteed or insured by that Contracting State or an instrumentality thereof. shall be exempt from tax by the other Contracting State. 5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein and the debt claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. Copyright 2017

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xxx

7. The term "interest" as used in this Convention means income from debt-claims of every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation law of the Contracting State in which the income arises, including interest on deferred payment sales. xxx

xxx

xxx"

Based on the foregoing, interest arising from the Philippines and paid to a resident of the US which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding ten percent (10%) of the gross amount of interest with respect to public issues of bonded indebtedness; or exempt from income tax if the interest is derived, guaranteed or insured by the US government or an instrumentality thereof or by other institutions as may be mutually agreed upon by the competent authorities of the Philippines and the US. In all other cases, a tax rate not exceeding fifteen percent (15%) of the gross amount of interest shall apply. Such being the case, this Office is of the opinion and so holds that since MSEMI is not engaged in business in the Philippines through a permanent establishment situated therein, and the interest is neither with respect to public issues of bonded indebtedness nor derived, guaranteed or insured by the US government or an instrumentality thereof, the interest income to be paid by PAII to MSEMI, whether falling under the purview of basic or turnover interest, shall be subject to a preferential tax rate of 15% pursuant to Article 12(2) of the Philippines-US tax treaty. (BIR Ruling No. ITAD-187-03 dated December 1, 2003) Moreover, the subject Loan Agreement shall be subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997 (Tax Code), as amended. The same Tax Code also provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for and in respect of the transactions so had or accomplished, by the person making, signing, issuing, accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the parties to the contract and leaves the tax to be paid indifferently by either of the parties, and accordingly, the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one reason or another, the said tax is not paid, either party to the contract may be made liable to the tax. In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the Loan Agreement must be paid and the corresponding return thereon be filed by either PAII or MSEMI in accordance with the provisions of the Revenue Regulations No. 9-200 (Mode of Payment and/or Remittance of the Documentary Stamp Tax (DST) under Certain Conditions) and the Tax Code, as amended. This ruling is issued on the basis on 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.

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2.

Turnover means gross revenue of PAII before deduction of expenses, including revenue arising from PAII's principal activities as well as any items of revenue and gains that arise incidentally Financial Year means December 1 to November 30 or such period for which PAII publishes its financial statements

June 23, 2006

DA ITAD BIR RULING NO. 076-06 Article 13 (Royalties) Philippines-United States of America tax treaty; BIR Ruling No. DA-ITAD 111-03 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated November 18, 2005 requesting confirmation that royalties to be paid Copyright 2017

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by Warner Music Philippines, Inc. (Warner Philippines) to WEA International, Inc. (WEA International) pursuant to a License Agreement are subject to fifteen percent (15%) income tax under Article 13 (Royalties) of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (Philippines-United States of America tax treaty). It is represented that WEA International is a corporation organized and existing under the laws of the United States of America, with address at 1 Commerce Center, Suite 714, 12th and Orange Street, Wilmington, Delaware 19801, United States of America, as confirmed by its Certificate of Incorporation filed at the Office of the Secretary of State of the State of Delaware on February 21, 1975 and by the subject License Agreement; that WEA International is not registered as a corporation or as a partnership in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated April 11, 2005 issued by the Securities and Exchange Commission; and that, on the other hand, Warner Philippines is a corporation organized and existing under the laws of the Philippines, with address at 4th Floor, Ma. Daniel Building, 470 M.H. del Pilar corner San Andres Streets, Malate, Manila, Philippines, as confirmed by its Articles of Incorporation and By-Laws filed at the Securities and Exchange Commission on October 29, 1999 and be the subject License Agreement. It is further represented that WEA International has the right to license the right to sell and/or to manufacture and sell in countries other than the United States, records 1 containing the sound performances embodied upon or in recording devices such as metal masters and/or master recording tapes (herein called "Masters" within the Licensed Catalogues 2; that, on the other hand, Warner Philippines is engaged and will continue during the term of the License Agreement to be actively engaged in the manufacture and sale of records in the Philippines (herein called the "Licensed Territory"), and desires to obtain certain rights to sell and/or manufacture and sell records in the Licensed Territory reproducing the sound performances embodied upon or in the Masters within the Licensed Catalogues; that on December 1, 1992, WEA International and Warner Philippines entered into a License Agreement whereby WEA International granted Warner Philippines the following rights subject to certain restrictions, terms and conditions of the License Agreement: (a)

the right to use in the Licensed Territory each and every master recording in the Licensed Catalogues (such Masters being thereinafter referred to as the "available Masters") except such master recordings as are committed or restricted with respect to the Licensed Territory at the time of their acquisition and except such master recordings as are subject to contractual commitments in the Licensed Territory prior to the effective date of the License Agreement (for so long as such commitments remain in effect) for the purpose of manufacturing and selling records therefrom during the term of the License Agreement in the Licensed Territory only; ADHCSE

(b)

the right (to the extent WEA International has such right) to use in the Licensed Territory the name, likeness and biography of each artist whose performance is embodied in the said master recording only for advertising and trade purposes in connection with the sales of records thereunder; it being expressly understood and agreed that no such use shall be in the nature of an endorsement, commercial tie-in or association other than with reference to records by such artist manufactured and/or sold by Warner Philippines thereunder. Warner Philippines shall abide by any restrictions imposed upon WEA International with respect to such use of which WEA International has notified Warner Philippines;

(c)

the right to grant licenses for the public performance and/or broadcasting in the Licensed

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Territory of recordings in the Licensed Catalogue, subject to the right of copyright proprietors; and (d)

during the term of the License Agreement, WEA International shall not grant rights to third parties which derogate from or are inconsistent with the rights therein granted to Warner Philippines.

that in consideration of the foregoing, Warner Philippines shall pay WEA International royalties (in United States dollars) computed as follows: (a)

Master Use Royalty. In consideration of the rights granted to manufacture and sell records derived from available Masters, Warner Philippines shall pay WEA International a Master use royalty in respect of one hundred percent (100%) of all records sold thereunder, calculated at the rate of twenty-six percent (26%) of the Royalty Base ("retail list price" or "suggested retail price" per record in the country of sale); and

(b)

Performance Royalties. To the extent permitted by applicable law, Warner Philippines shall pay WEA International an amount equal to fifty percent (50%) of the fees, if any, received or credited to Warner Philippines by reason of the public performance and/or broadcasting of the records in the Licensed Catalogues.

and that the License Agreement, which became effective on December 1, 1992 for an initial period of one (1) year, shall be renewed automatically thereafter indefinitely unless otherwise terminated. In reply, please be informed that as regards income tax, the royalties for the musical copyrights to be paid by Warner Philippines to WEA International are subject to the preferential tax rate under Article 13 of the Philippines-United States tax treaty, to wit.: "Article 13 ROYALTIES 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2.

However, the tax imposed by that other Contracting State shall not exceed —

In the case of the United States, 15 percent of the gross amount of the royalties, and

In the case of the Philippines, the least of: (i)

25 percent of the gross amount of the royalties,

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 3. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, Copyright 2017

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including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. aEDCSI

xxx

xxx"

Paragraph 2(b)(iii) above provides that royalties arising in the Philippines and derived by a resident of the United States shall be subject to the lowest rate of Philippine income tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State (commonly known as the most-favored-nation tax treatment of royalties). In relation thereto, the Supreme Court, in Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25, 1999), has cited two conditions for royalties arising in the Philippines and derived by a resident of another country (in this case, the United States) to be subject to a most-favored-nation tax treatment. First, the royalties in question derived by a resident of the other country (the United States) must be of the same kind as those derived by a resident of the third country which are subject to the most-favored-nation tax treatment under the existing tax treaty between the Philippines and the third country. Second, the mechanism employed by the other country (the United States) in mitigating the effects of double taxation of foreign-sounded income derived by its residents must be the same with that employed by the third country, which can be determined by taking into account and comparing the respective articles on Elimination of Double Taxation of the other country (the United States) and the third country under their respective tax treaties with the Philippines. In looking for a third country which grants a most-favored-nation tax treatment on royalties, you cited the Netherlands and, accordingly, the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Netherlands tax treaty), which entered into force on September 20, 1991 and whose provisions on taxes apply on income derived or which accrued beginning January 1, 1992. As to the first condition for the most-favored-nation tax treatment, it is noteworthy that payments for copyright of literary, artistic or scientific work (to which royalties for the musical copyrights to be paid by Warner Philippines to WEA International are assimilated), which are considered royalties under paragraph 3, Article 13 of the Philippines-United States tax treaty, are likewise considered as such under paragraph 4, Article 12 of the Philippines-Netherlands tax treaty, to wit: "Article 12 ROYALTIES 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that Copyright 2017

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State; and b)

15 per cent of the gross amount of the royalties in all other cases.

3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for radio or television broadcasting, any patent, trademark, a sign or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for the information concerning industrial, commercial or scientific experience. xxx

xxx

xxx"

As to the second condition for the most-favored-nation tax treatment, it is also noteworthy that the United States and the Netherlands employ the same mechanism in mitigating the effects of double taxation of foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under their respective articles on Elimination of Double Taxation of their tax treaties with the Philippines, to wit: United States: "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to time United States tax on income from sources within the Philippines or on income from sources outside United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes. HTAEIS

xxx

xxx"

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1. The Netherlands, when imposing tax on its residents, may include in the basis upon which such taxes are imposed the items of income which, according to the provisions of this Convention, may be taxed in the Philippines. 2. Without prejudice to the application of the provisions concerning the compensation of losses in the unilateral regulations for the avoidance of double taxation, where a resident of the Netherlands derives items of income which according to Article 6, Article 7, paragraph 6 of Article 10, paragraph 6 of Article 11, paragraph 5 of Article 12, paragraphs 1 and 2 of Article 13, Article 14, paragraph 1 of Article 15, paragraphs 1 and 3 of Article 16, paragraph 2 of Article 18 and Article 19 of this Convention may be taxed in the Philippines and are included in the basis referred to in paragraph 1, the Netherlands shall exempt such items of income by allowing a proportionate reduction of its tax. This reduction shall not, however, exceed that part of the Netherlands tax as computed before the reduction is given, which is otherwise due on the said items of income. 3. Further, the Netherlands shall allow a deduction from the Netherlands tax so computed for the items of income which according to paragraph 2 of Article 8, paragraph 2 of Article 10, paragraph 2 of Article 11, paragraph 2 of Article 12 and Article 17 of this Convention may be taxed in the Philippines to the extent that these items are included in the basis referred to in paragraph 1. The amount of this deduction shall be equal to the tax paid in the Philippines on these items of income, but shall not exceed that part of the Netherlands tax which is otherwise due on the said items of income. 4. For the purposes of paragraph 3, where the Philippine tax actually paid on interest and royalties arising in the Philippines is lower than 15 per cent, then, the tax paid in the Philippines on these items of income shall be deemed to be 15 per cent. xxx

xxx

xxx"

Under the ordinary credit method, the United States and the Netherlands (as countries of residence) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is attributable to the income taxed in the Philippines (the country of source or country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the United States and of the Netherlands on a particular income, the taxpayer would not receive full credit for the income tax imposed by the Philippines on such income. Under the article on Elimination of Double Taxation of the Philippines-Netherlands tax treaty, the Netherlands applies the ordinary credit method to profits from the operation of ships and aircraft in international traffic, and dividends, interest and royalties to the extent they are not effectively connected to a permanent establishment or a fixed base, and income of artistes and athletes (paragraph 3, Article 22 of the tax treaty). (In addition, if the Philippine income tax on interest and royalties is lower than 15%, for example, 10% for interest and royalties paid under special circumstances, the Netherlands shall deem that the income tax on such interest and royalties is paid at 15%, the difference between 15% and the lower rate being the allowable tax sparing credit (paragraph 4, Ibid.). The tax sparing credit provision does not apply to royalties for musical copyrights like the subject royalties to be paid by Warner Philippines to WEA International because such royalties are subject to the rate of 15% and not lower than that.) On the other hand, the Netherlands applies the exemption method to all other types of income whereby the Netherlands exempts such income from Netherlands income tax (paragraph 2, Ibid.)

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In fine, because the two conditions for the most-favored-nation tax treatment on royalties are both satisfied, this Office is of the opinion and so holds that the royalties for the musical copyrights to be paid by Warner Philippines to WEA International are subject to the preferential income tax rate of 15% based on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to paragraph 2(b), Article 12 of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 111-03 dated July 29, 2003) The subject royalties cannot be subject to the lower rate of 10% under paragraph 2(a), Article 12 of the Philippines-Netherlands tax treaty because Warner Philippines, the company paying the royalties, is not a registered enterprise engaged in preferred areas of activities in the Philippines (for example, if the enterprise is registered with the Board of Investments). cDTACE

Finally, as regards value-added tax (VAT), the royalties for the musical copyrights to be paid by Warner Philippines to WEA International are subject to VAT under Section 108(A) of the National Internal Revenue Code of 1997 (Tax Code), to wit: "SEC 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties . . . The phrase 'sale or exchange of services shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx

xxx

xxx" 3

With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Warner Philippines shall be responsible for the withholding of the VAT on the royalties before remitting them to WEA International. In remitting the Bureau of Internal Revenue the VAT withheld on the royalties, Warner Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Warner Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Warner Philippines may include as part of the cost of the musical copyrights licensed to it by WEA International the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition, Warner Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for WEA International and the fourth copy for Warner Philippines as its file copy. 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.

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service Bureau of Internal Revenue Footnotes 1.

Records shall refer only to disc type phonegraph records of the type now in use in the Licensed Territory covered thereby, and analog prerecorded magnetic sound tapes in reel-to-reel, cartridge and cassette configurations and compact discs, but said term does not include any device combining sound and sight or any other form or type of sound recording whatsoever except as specifically set forth above. Licensed Catalogues shall refer to cash and every Master which is presently owned, or which may hereafter be produced or otherwise acquired by (i) Warner Bros. Records, Inc., (ii) Elektra Entertainment, a division of Warner Communications, Inc., or (iii) Atlantic Recording corporation or their respective successors and or subsidiaries engaged in the record business in the United States of America, or (iv) WEA International with respect to which WEA International has the unilateral right or disposition in the Licensed Territory and which is released in the United States of America or the country of origin. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108(A) to read as: "SEC 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). . . . The phrase 'sale or exchange of services shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx

xxx

xxx"

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June 23, 2006

DA ITAD BIR RULING NO. 075-06 RP-US Article 14 Tax Code of 1997; BIR Ruling No. ITAD 104-02 SPI Technologies, Inc. SPI Building, Pascor Drive Sto. Niño, Parañaque City Philippines Attention: Redentor R. Gabinete Director for Taxation Gentlemen : This refers to your application for relief from double taxation dated June 2, 5, 7 and 21, 2006, requesting confirmation of your opinion that the gains to be realized by SPI Tech., L.P. (formerly known as THLPV Acquisition, L.P.) (SPI Tech) from the acquisition of its shares in SPI Technologies, Inc. (formerly known as SPI Acquisition Co. Inc.) (SPI) by ePLDT, Inc. (ePLDT) are exempt from capital gains tax pursuant to the Philippine-United States of America tax treaty (RP-US tax treaty). It is represented that SPI Tech is a corporation duly organized and existing under the laws of Delaware, USA, with office located at 2711 Centerville Road, Suite 400, Wilmington, DE 19808 County of New Castle Delaware, USA; that it is not registered as either a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 17, 2006; that SPI is a corporation organized and existing under the laws of the Philippines with principal office address at SPI Building, Pascor Drive, Sto. Niño, Parañaque, Philippines; that on July 23, 2004 the Securities and Exchange Commission approved the amended articles of incorporation of SPI in order to show an increase in its authorized capital stock from an amount of P11,260,000.00 to P75,330,000.00 divided into 112,600 and 2,511 shares, respectively and the change in the par value of the shares from P100.00 to P30,000.00; that out of 2,511 shares of stock of SPI, SPI Tech owns 2,480 (as evidenced by its Stock Certificate No. 13) shares with a par value of P30,000.00 per share; that ePLDT is a wholly owned subsidiary of the publicly listed Philippine Long Distance Company (PLDT); that as of December 31, 2005, the Balance Sheet of SPI shows that its Property and Equipment amounts to $1,363,458 (Net of Accumulated Depreciation) while its total assets amounts to $101,720,489 thereby showing that SPI's real properties interest in the Philippines does not comprise more than 50% of its total assets but approximately one percent and 34/100 percent (1.34%) of its total asset. Copyright 2017

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It is further represented that on May 23, 2006, a Letter of Intent (LOI) was executed by ePLDT which sets forth ePLDT's proposal to "acquire all of the shares of SPI from SPI Tech including all shares, options, warrants, convertible and equity-linked securities of SPI issued and outstanding as of the date of that Acquisition is contemplated (the 'Closing'), as would be set forth in a definitive share purchase agreement executed by the parties (the 'Share Purchase Agreement')"; and that on May 24, 2006, SPI Tech agreed to such proposal. In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows, viz: "Article 14 "CAPITAL GAINS 1. Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base may be taxed in the other State. However gains derived by a resident of a Contracting State from the alienation of ships; aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. 2. Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident."

Furthermore, the Reservation Clause of the same treaty provides, in part, as follows: "Article I Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consists principally of a real property interest located in the country. Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term 'real property interest' is to have the meaning it has under the law of the country in which the underlying real property is located."

It is clear from the aforequoted provisions that any capital gains which may be derived by SPI Tech from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US Tax Treaty shall be taxable only in the State where the alienator is a resident. However, it is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). In the instant case, the value of the real property interest of SPI located in the Philippines as appearing in its audited financial statements for the calendar year December 31, 2005 is less than 50% of the value of its total assets. Thus, this Office is of the opinion and so holds that the gains that may be Copyright 2017

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derived by SPI Tech from the proposed sale of its shares in SPI to ePLDT shall be taxable only in United States of America as paragraph 1 of the Article 14 (Reservation Clause of Article I) clearly states that "any capital gains from the alienation of any property, other than those mentioned in paragraph 1 Article 14 of the Philippines-United States of America tax treaty shall be taxable only in the Contracting State of which the alienator is a resident". cHDEaC

In sum, inasmuch as the assets of SPI do not consist principally of real property interest located in the Philippines, your opinion that the gains from the sale of shares of stock by SPI Tech to ePLDT are not subject to capital gains tax is hereby confirmed. This ruling shall be without force and effect unless and until an actual agreement or contract, which stipulations are found to be consistent with the representations made herein, has been entered into by the parties involved. Thus, upon the execution of the Share Purchase Agreement as agreed upon pursuant to the May 23, 2006 Letter of Intent signed by both ePLDT and SPI Tech, the same must be presented to the International Tax Affairs Division of this Bureau within 15 days from its due execution for verification whether the representations made herein upon which this ruling is based are consistent with the actual facts of the transaction; and for the issuances of a corresponding certification based upon a duly accomplished BIR Form No. 1928 [Application for Relief from Double Taxation (Gains from Sale or Transfer of Shares of Stock in Philippine Corporation)] confirming that the aforementioned sale is not subject to capital gains tax pursuant to Revenue Memorandum Order No. 30-2002 but such transfer of shares shall be subject to Documentary Stamp Tax under Section 175 of the National Internal Revenue Code of 1997, as amended by Republic Act 9243, which became effective on March 20, 2004. The application (BIR Form No. 1928) which shall be submitted to this Office must be accompanied by complete documents required as enumerated at the back of the Form, and accompanied by a proof of payment of documentary stamp taxes and the filing fee of P5,000. 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.

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 22, 2006

DA ITAD BIR RULING NO. 074-06

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Article 5 & 7 of the Philippines-Singapore tax treaty; BIR Ruling No. 088-86 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: R.C. Vinzon Tax Services Gentlemen : This refers to your letter dated March 2, 2005, on behalf of your client, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL), requesting confirmation of your opinion that the fees paid by SEPHIL to Samsung Asia Pte. Ltd. (SAPL) for consultancy services are not subject to Philippine income tax pursuant to Articles 5(2)(j), 7(1) and 12(3) of the Philippines-Singapore tax treaty. It is represented that SAPL is a corporation duly organized and existing under the laws of Singapore with principal at 83 Clemenceau Avenue, #08-01 UE Square, Singapore 239920; that it engaged in the business of research, development, manufacture, procurement, sale and distribution of electrical and electric components, appliances, apparatus, equipment, workstations, facsimile machines and other business equipment, software products and all related products thereto; that SAPL has a representative office in the Philippines, the activities of which are limited to gathering economic, market, and industry information, conducting market research for the market development in the Philippines, assisting Filipino distributors, buyers and end-users in the importation of materials, supplies and components from the Samsung Electro Mechanics companies abroad, conducting such other activities which consists of purely coordination work, and acting as a liaison office between the company and the Samsung Group of Companies; that SEPHIL is a PEZA-registered corporation duly organized and existing under the laws of the Philippines with principal address at Block 6, Calamba Premiere International Park, Batino, Calamba, Laguna; that it is engaged in the design, manufacture and sale of electronic products including but not limited to optical disk drive products, their components and parts. It is further represented that on January 1, 2003, SEPHIL and SAPL entered into a Consultancy Agreement where, as attested by the Certification made by SAPL dated January 12, 2006, SAPL sent employees to the Philippines to provide (a) Overall Business Consulting Services and (b) Shared Services; that in the event that SEPHIL would request SAPL to require personnel from SAPL to be seconded or assigned to SEPHIL, the aggregate stay of SAPL's personnel rendering the services in the Philippines shall not exceed 183 days in a year; that as of this date, SAPL has not yet sent any employees to the Philippines; and that as a consideration for the services rendered, SEPHIL shall pay SAPL an annual service fee, which for 2003 was in the amount of US$310,000. In reply, please be informed that Article 12(3) of the Philippines-Singapore tax treaty defines the term "royalties", as follows: HcTIDC

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3. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience."

The above tax treaty defines "royalties" to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (Royalties), © 2005, p. 181], such information alludes to the concept of "know-how". The definition of "know-how" adopted by the said Committee is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. Further, in the case of Philippine Refining Company vs. CIR, CTA case No. 2872 dated January 15, 1986, the Court of Tax Appeals had an occasion to rule on the distinction of service fees from royalties, to wit: "To distinguish between compensation for service and royalty payments, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. If the payee has none, then the payment is a compensation for personal services, if the payee has proprietary interest then the payment is royalty."

Applying the above discussions to the instant case, there is nothing in the subject Agreement that requires transfer to SEPHIL of technology, equipment or other property where SAPL has proprietary interest or that permits SAPL to impart to SEPHIL its special knowledge and experience which remain unrevealed to the public. Inasmuch as SAPL shall render these services using its customary skills, the compensation to be received therefor shall not constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of technology. In this regard, Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty provides: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. xxx

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318

Moreover, Article 5 of the same treaty provides: "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2.

The term 'permanent establishment' includes specially but is not limited to: a)

A seat of management;

A branch;

An office;

A store or other sales outlet;

A factory;

A workshop;

A warehouse, in relation to a person providing storage facilities for

A mine, quarry, or other place of extraction of natural resources;

AaHcIT

others;

i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. (Emphasis supplied) xxx

xxx

xxx"

Based on the foregoing, a corporation which is a resident of Singapore and does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a Singaporean corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees or other personnel continue for the same or a connected project within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as it is represented that the services are to be performed outside of the Philippines by SAPL except for occasional visits to render overall business consultancy services and shared services with SEPHIL, which visits shall in no case exceed 183 days during the term of the contract, then the furnishing of said services by SAPL through its employees or other personnel shall not constitute the carrying on of business through a permanent establishment in the Philippines. Such being the case, payments by SEPHIL to SAPL are considered compensation for labor or personal services performed outside the Philippines and Copyright 2017

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are therefore considered income derived from sources outside the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997. Furthermore, since the service fees are considered income derived from sources outside the Philippines, the payments made by SEPHIL to SAPL shall not be subject to Philippine income tax, and consequently also to withholding tax under Section 28(B)(1) of the Tax Code of 1997. (BIR Ruling No. 088-86 dated June 24, 1986) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 20, 2006

DA ITAD BIR RULING NO. 073-06 Sec 106 & 108 of the National Internal Revenue Code of 1997; Article 34, Vienna Convention; BIR Ruling No. DA-ITAD-16-03 Embassy of Japan 2627 Roxas Boulevard Pasay City Gentlemen : This has reference to your Note No. 221-06 dated May 15, 2005, referred to this Office by the Department of Finance (DOF) and the Office of Protocol, Department of Foreign Affairs (DFA), requesting for a tax-free purchase on a local motor vehicle for the personal use of Mr. Norito Araki, Copyright 2017

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Second Secretary of the Embassy of Japan, specifically described as follows: Make:

Honda CRV 2.0AT 2WD (5P)

Model Year:

2006

Color:

Shoreline

Engine Number:

PNKD756401391

Frame Number:

PADRD48506V401389

DEIHAa

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads. "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of goods or services; "xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108, both of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemptions to the Embassy of Japan or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in your country. Hence, the herein local purchase of one (1) Honda CRV 2.0AT 2WD (5P) for the personal use of Mr. Norito Araki, Second Secretary of the Embassy of Japan is exempt from VAT. (BIR Ruling No. DA-ITAD-16-03 dated July 16, 2003) ECaITc

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

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June 20, 2006

DA ITAD BIR RULING NO. 072-06 Sec 106 & 108 of the National Internal Revenue Code of 1997; Article 34, Vienna Convention; BIR Ruling No. DA-ITAD-16-03 Embassy of Japan 2627 Roxas Boulevard Pasay City Gentlemen : This has reference to your Note No. 222-06 dated May 15, 2005, referred to this Office by the Department of Finance (DOF) and the Office of Protocol, Department of Foreign Affairs (DFA), requesting for a tax-free purchase on a local motor vehicle for the personal use of Mr. Shinichi Kakui, First Secretary of the Embassy of Japan, specifically described as follows: Make: Model Year: Color: Engine Number: Frame Number:

Toyota Innova G DSL AT 2.5 4S 2006 199 Quick Silver 2KD-9597147 KUN40-5008812

xxx

xxx"

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exemption to Philippine Embassy personnel on their purchases of goods and services in your country.

aAHSEC

Hence, the herein local purchase of one (1) Toyota Innova G DSL AT 2.5 4S for the personal use of Mr. Shinichi Kakui of the Embassy of Japan is exempt from VAT. (BIR Ruling No. DA-ITAD-16-03 dated July 16, 2003)

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 16, 2006

DA ITAD BIR RULING NO. 071-06 Article 5&7, Philippines-Japan tax treaty; BIR Ruling No. 068-88 Punongbayan & Araullo Unit 807, 8th, Floor Ayala Life-FGU Center Mindanao Avenue Corner Biliran Road, Cebu Business Park 6000 Cebu City, Philippines Attention: Ms. Marivic C. Españo Partner, Tax Advisory and Compliance Gentlemen : This refers to your letter dated June 1, 2005, on behalf of your client, KT Sakurai Corporation (KTSC), requesting confirmation of your opinion that the service fees paid by KTSC to Kenko Co., Ltd. (KCL) under their Management Agreement are not subject to Philippine income tax and value-added tax (VAT), pursuant to the provisions of the National Internal Revenue Code of 1997 and the Philippines-Japan tax treaty. Copyright 2017

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It is represented that KCL is a nonresident foreign corporation with office address at 3-9-19 Nishiochiai, Shinjyuku-ku, Tokyo, Japan and is a taxable person in Japan with Tax Reference Number 165077 per Certification issued by the District Director of the Shinjuko Tax Office, Japan dated February 2, 2005; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 27, 2005; that KTSC is a corporation organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) with office address at Mactan Export Processing Zone I, Lapu Lapu City, Cebu. It is further represented that KTSC and KCL entered into a Management Agreement (Agreement) which is effective for a twelve month-term commencing on May 1, 2004 until April 30, 2005 subject to automatic renewal for another twelve-month term unless one of the parties serves a written notice of non-renewal to the other party not later than one (1) month prior to the expiration of` the current term; that under the said Agreement, KCL shall provide KTSC they following services outside of the Philippines: (a) advertisement and promotion of sales of the products manufactured by KTSC in the Philippines to the customers in Japan and other foreign countries; (b) formulation and implementation of a business strategy for the customers outside the Philippines; (c) conducting of operating activities associated with sales promotion in foreign countries requested by KTSC; (d) ordering and purchasing of parts of the products manufactured by KTSC and making payments for KTSC; and (e) assisting the management and funding for KTSC; that pursuant to the Agreement, the employees and personnel of KCL shall exclusively perform the services for KTSC in Japan or in other countries outside the Philippines and that should it be necessary for KCL to send its employees to the Philippines, the stay of these individuals shall not in any case exceed six (6) months; that as compensation for the services performed by KCL, KTSC shall pay Nineteen Million One Hundred Fifty Four Thousand One Hundred Seventy Yen (Y19,154,170) per year to KCL and KCL shall send an invoice to KTSC on a monthly basis for the services rendered during the quarter covered and it shall be paid by KTSC thirty (30) days from the receipt of such invoice; and that an employee of KTSC came to the Philippines to render services pursuant to the Agreement on the following dates: May 4, 2004 to May 8, 2004; and January 16, 2005 to January 20, 2005. HAECID

In reply, please be informed that Article 7(1) of the Philippines-Japan tax treaty provides, viz: "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 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."

In relation thereto, Article 5 of the said treaty provides, viz: "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

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construction or installation project through employees or other personnel — other than an agent of an independent status to whom paragraph 7 applies —, (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 aforementioned 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 the profits 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 services by such corporation, through its employees, continue within the Philippines for a period or periods aggregating more than six months in any taxable year. Considering that the furnishing of the services under the Management Agreement is to be generally performed by KCL for KTSC in Japan, and that should it be necessary for KCL to send its employees to the Philippines, the stay of these individuals shall not in any case exceed six (6) months, KCL may be deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the income derived by KCL from services rendered to KTSC under the Management Agreement is not subject to Philippine income tax for as long as KCL does not have a permanent establishment in the Philippines and that in the course of its rendition of services, none of its employees will stay in the Philippines for a period or periods aggregating more than 6 months in any taxable year. (BIR Ruling No. 068-88 dated March 3, 1988) As regards the imposition of the VAT on the rendition of services of KCL, please be informed further that Section 108 of the Tax Code of 1997 1 provides as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.— (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, in general, the VAT is imposed on services rendered by KCL in the Philippines. On every payment of service fees, KTSC is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-9 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. CSIDTc

However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, Copyright 2017

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not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

Since the purchase of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is manage and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), 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. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory — except specifically declared areas — to an ecozone. xxx

xxx

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: . . . , 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. 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. xxx

xxx

xxx"

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Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3.

June 15, 2006

DA ITAD BIR RULING NO. 070-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-041-06 Embassy of Brunei Darussalam 11th Floor, BPI Building Ayala Ave. Cor. Paseo de Roxas 1226 Makati City Gentlemen : This has reference to your Note Nos. 06-0166 and No. 068/2006 dated January 26, 2006 and May Copyright 2017

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23, 2006 respectively, referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of value-added tax (VAT) and ad valorem tax on the purchase of one (1) locally-assembled motor vehicle, for the official use of the Embassy of Brunei Darussalam, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Toyota Hi-Ace Commuter 2.5 DSL M/T 2006 Green 2KD-1350354 JTFJS02P1-00004946

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads. "ARTICLE 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) services:

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption from value-added tax (VAT) and ad valorem tax on its purchases of locally-assembled motor vehicles. In other words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles shall be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem tax under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant VAT exemption to the Embassy of Brunei Darussalam and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government allows similar exemption to Philippine Embassy and/or its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Toyota Hi-Ace Commuter 2.5 DSL M/T for the official use of the Embassy of Brunei Darussalam is exempt from ad valorem and value-added taxes. 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. TEAcCD

Very truly yours,

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Bureau of Internal Revenue

June 14, 2006

DA ITAD BIR RULING NO. 069-06 Section 108, NIRC of 1997; Articles 5, 7 & 12, Philippines-Japan tax treaty; Sec. 108, NIRC of 1997; BIR Ruling No. 13-06 Sycip Gorres Velayo & Co. 6F Ayala Life-FGU Center Mindanao Avenue corner Biliran Road Cebu Business Park, Cebu City 6000 Cebu Attention: Rita A.S. Fernandez Tax Services Gentlemen : This refers to your application for relief from double taxation dated September 15, 2004, on behalf of your client, Taiyo Yuden (Philippines), Inc. (TYPI), requesting confirmation of your opinion that the gross amount of service fee remittances made by TYPI to Taiyo Yuden Co., Ltd. (Japan) (TYCL) are not royalties as defined under Section 42(A)(4) of the National Internal Revenue Code (Tax Code) of 1997, but are fees which constitute compensation for services performed outside the Philippines and are not subject to Philippine income tax, pursuant to Articles 5 and 7 of the Philippines-Japan tax treaty; nor to the ten percent (10%) value-added tax (VAT). It is represented that TYCL is a nonresident foreign corporation organized and existing under the laws of Japan with principal address at 16-20, Ueno 6-chome, Taito-ku, Tokyo, Japan; that TYCL has registered a representative office in the Philippines located at Makati City; that the representative office is registered as such for the following purposes: (1) to act as a liaison office and deal directly with clients, (2) to undertake information dissemination and promotion of the company's products, (3) to study and investigate export feasibility, (4) to cope with customers complaints and coordinate after sales service, (5) to coordinate warranty claims, (6) to conduct market research for its production and market expansion, and (7) to act as a communication link between clients and the company's head office; that as a representative office, it has not derived income from sources within the Philippines as evidenced by its Annual Income Tax Return and Audited Financial Statements for the fiscal years ending March 31, 2004, 2003 and 2002; that as shown in its Statement of Income and Expenses, the only income it has derived are minimal income Copyright 2017

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on interests from local bank deposits and gains from foreign exchange; that its operation is fully subsidized by its head office as shown in its Balance Sheet under the account "Advances from JTY" 1; that it does not participate in any manner in the management of any subsidiary that TYCL has in the Philippines; that since TYCL has a registered representative office in the Philippines, a Securities and Exchange Commission Negative Certification could not be obtained; and that the registration of a representative office in the Philippines would not prejudice the application for tax treaty relief since the representative office does not create a permanent establishment because it does not derive any income from the Philippines other than the passive income of interests on bank deposits; that per certification of Registration No. 2005-101 dated March 17, 2005, TYPI is registered with the then Export Processing Zone Authority (EPZA), now Philippine Economic Zone Authority (PEZA), as a Zone Export Enterprise under Registration Certificate No. 89-04 dated January 12, 1989; that it is further certified that TYPI's registered activities (except for the manufacture of ferrite chip beads inductors, etc., and the manufacture of surface-mounted choke coil) are entitled to the 5% Special Tax on Gross income under Section 24 of Republic Act (RA) No. 7916, 2 as amended by R.A. 8748 3 and in accordance with Rules XXV, Section 4 of its Implementing Rules and Regulations, and such 5% Special Tax on Gross Income applies upon expiry of TYPI's Income Tax Holiday entitlement. It is further represented that on September 1, 2004, a Service Agreement (Agreement) was executed by and between TYPI and TYCL, whereby it is stated that the former desires and the latter agrees to render certain support services for various product lines, service assistance during "suppliers' audit" conducted by TYPI's major customers, and various other services to be performed by TYCL in connection with TYPI's operations which shall neither involve a grant of license for the use of TYCL's proprietary rights nor will involve transfer of technological know-how and other intellectual property rights; that the support services are specifically in the nature of the following: (1) consultation and advisory services on its general management and administration including business planning and coordination, (2) assistance in procurement of raw materials and components sourced in Japan as well as sourcing of other product requirements, (3) advice on sales and marketing policies, strategies, marketing development, packaging design including provision of sample box products, (4) consultation and advisory services on operations and preventive maintenance of various product lines machinery and equipment, (5) provision of specialist production support in circumstances where TYPI's own technical resources are inadequate and need supplementing, (6) provision of internal audit services covering full scope of TYPI's operation, and (7) assistance during suppliers' audit conduct by TYPI's major customers; that TYCL shall perform the above services in Japan except for occasional visits or consultations required by TYPI in the Philippines which visits shall only be for short durations and in no case shall exceed an aggregate period of three (3) months in any calendar year; that in consideration for the above support services, TYPI shall pay TYCL the actual cost of services incurred, which includes, among others, the labor cost of TYCL personnel and all other incidental expenses incurred by the latter in the performance of their designated duties including, but not limited to, transportation, hotel and accommodation, meals and allowances; and that the Agreement takes effect on April 1, 2004 and will be valid for five (5) years, to be automatically renewed each year, unless otherwise agreed upon by both parties thereto, 60 days prior to its expiration. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides, viz: "Article 12 xxx

xxx

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including cinematograph films and films or tapes for radio or television, broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx

xxx

xxx"

The above tax treaty defines ''royalties" to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (Royalties), © 2005, p. 181], such information alludes to the concept of "know-how". The definition of "know-how" adopted by the said Committee is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. Further, in the case of Philippine Refining Company vs. CIR, CTA Case No. 2872 dated January 15, 1986, the Court of Tax Appeals had an occasion to rule on the distinction of service fees from royalties, to wit: "To distinguish between compensation for service and royalty payments, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. If the payee has none, then the payment is a compensation for personal services, if the payee has proprietary interest then the payment is royalty." CIHTac

Applying the above discussions to the case at hand, it is clear in the subject Agreement that the service fees are not within the definition of "royalties" under Article 12 of the Philippines-Japan tax treaty. Specifically, nothing in the Agreement would require transfer into the Philippines of technology, equipment or other property where TYCL has proprietary interest (BIR Ruling No. 093-89) or would otherwise permit TYCL to impart to TYPI its special knowledge and experience which remain unrevealed to the public. Inasmuch as TYCL shall render these services using only its customary skills, then the compensation to be received therefor shall not constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of technology. Thus, the service fees paid to TYCL shall not be considered as royalties but shall be considered as business profits. With respect to business profits, Article 7(1) of the Philippines-Japan tax treaty provides as follows: "Article 7 1. The profits of an enterprise of 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."

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Relative thereto, paragraphs (1), (2) and (6) of Article 5 of the said treaty provides, viz: "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. 2.

The term 'permanent establishment' includes especially: (a)

a store or other sales outlet;

(b)

a branch;

(c)

an office; 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. (emphasis supplied) xxx

xxx

xxx"

If based solely on the aforequoted paragraph 6, TYCL may initially be considered as not having a permanent establishment in the Philippines, since the above Service Agreement executed by and between TYPI and TYCL provides that the occasional visits or consultations in the Philippines "shall only be for short durations and in no case shall exceed an aggregate of 3 months in any given calendar year." (BIR Ruling No. 116-96 dated November 4, 1996). On the other hand, taking into consideration the provision under paragraph 2(c), TYCL is considered as having a permanent establishment in the Philippines since it maintains therein a representative office. Such being the case, the income which are or may be derived by TYCL may be taxed in the Philippines but only so much thereof as is attributable to such representative office, pursuant to Article 7(1) of the Philippines-Japan tax treaty. (BIR Ruling No. 171-00) However, inasmuch as the purposes for which such representative office was established do not include the rendition of the services mentioned in the Service Agreement and since it is represented that the representative office of TYCL "does not participate in any manner in the management of any subsidiary TYCL has in the Philippines", no part of the income of TYCL derived from such services may be attributed to such representative office. Thus, the entire income of TYCL insofar as the rendition of the same services is concerned shall not be subject to income tax, pursuant to Article 7(1) of the Philippines-Japan tax treaty. aSTHDc

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As the regards the imposition of the VAT on the rendition of services of TYCL, please be informed further that Section 108 of the Tax Code of 1997 4 provides as follows, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. 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, . . . ." (Emphasis supplied).

Thus, the VAT should be imposed when TYCL provides the above services in the Philippines " for short durations and in no case shall exceed an aggregate of 3 months in any given calendar year". TYPI shall then be required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held that: "Special laws may certainly exempt transactions from the VAT. 3 *(73) However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

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. . . , 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. 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. xxx

xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109 (K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling 13-06 dated February 20, 2006) Such being the case, the payment of services fees by TYPI, being an EPZA-registered (now a PEZA-registered) export enterprise to TYCL, under the above Agreement, should be as it is hereby confirmed to be exempt from VAT. 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. IETCAS

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1. 2.

This account consists of expenses incurred by TYCL on behalf of its representative office in Manila for the fiscal years 1999 to 2004. AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS 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. CD Technologies Asia, Inc. and Accesslaw, Inc.

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3. 4. 3.

AN ACT AMENDING REPUBLIC ACT NO. 7916, OTHERWISE KNOWN AS THE "SPECIAL ECONOMIC ZONE ACT OF 1995." Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No. 9337]

June 9, 2006

DA ITAD BIR RULING NO. 068-06 Article 5 & 7, Philippine-Japan Tax Treaty; BIR Ruling No. DA-316-99; BIR Ruling No. 036-90 Aranas Consunji Barleta Unit 106 G/F Le Metropole Building 326 Dela Costa cor. Tordesilla St. Salcedo Village, Makati City Attention: Atty. Jesus Clint O. Aranas Gentlemen : This refers to your letter dated November 3, 2004, received by this Office on June 8, 2005, requesting confirmation of your opinion that the service fees paid by Philippine Iris Co., Inc. (IRIS-Phils) to Iris Company Limited (IRIS-Japan) under a Management Support Service Agreement are: (a) not royalty payments subject to tax on royalties under the Philippines-Japan tax treaty; and (b) exempt from income and withholding taxes, pursuant to Article 7 of the same treaty. It is represented that IRIS-Japan is a corporation organized and existing under the laws of Japan with head office at 1933, Iizuka-cho, Ota City, Gunma Prefecture, Japan as evidenced by the certified copy of Corporate Registration issued by the Minato Office, Tokyo Regional Legal Affair Bureau, Register of Deeds; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Corporation or Partnership issued by the Securities and Exchange Commission dated May 17, 2005; that IRIS-Phils is a corporation duly organized and existing under the laws of the Philippines. It is further represented that on November 6, 1998, IRIS-Japan and IRIS-Phils entered into a Management Support Service Agreement (Agreement) whereby IRIS-Japan agreed to provide offsite and Copyright 2017

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onsite services (management services) to IRIS-Phils; that the offsite services to be rendered by IRIS-Japan to IRIS-Phils include the following: a) review of IRIS-Phils' monthly financial reports and other management reports to identify the points to be improved, b) assistance to IRIS-Phils in developing its organization and creating its annual business plan, and c) provision of such other incidental advise as may be requested by IRIS-Phils to improve the latter's management in general; that all the above services shall be performed outside the Philippines, primarily in Japan, and shall not involve any transfer of technology, know-how or other intellectual property rights other than that related to the management of the company; that the Onsite Services shall be provided by IRIS-Japan to IRIS-Phils upon the written request of the latter and based on the terms mutually agreed upon by both parties; that in connection with the Onsite Services, IRIS-Japan shall send to IRIS-Phils, subject to availability of personnel, qualified administration professionals to render assistance and services to IRIS-Phils in connection with the management of IRIS-Phils for a reasonable period to be agreed upon by the parties hereto but not exceeding an aggregate period of 6 months in a given taxable year; that in consideration of the said Management Services, IRIS-Phils shall pay IRIS-Japan a monthly service fee of Four Hundred Thousand Yen in Japanese Currency (JP¥400,000) payable semi-annually, which fee shall be reviewed by the parties on a periodic basis and which may be revised subject to the mutual agreement of the parties; and that the Agreement shall be effective for a period of one (1) year starting from the 1st day of October 1998 and renewable for like periods unless sooner terminated pursuant to the provisions of the Agreement. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides: Article 12 (4) The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience."

The above tax treaty-defines "royalties" to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (Royalties), © 2005, p. 181], such information alludes to the concept of "know-how". The definition of "know-how" adopted by the said Committee is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. Further, in the case of Philippine Refining Company vs. CIR, CTA Case No. 2872 dated January 15, 1986, the Court of Tax Appeals had an occasion to rule on the distinction of service fees from royalties, to wit: "To distinguish between compensation for service and royalty payments, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. If the payee has none, then the payment is a compensation for personal services, if the payee has proprietary Copyright 2017

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interest then the payment is royalty.

HIaTDS

Applying the above discussions to the instant case, there is nothing in the subject Agreement that would require transfer into the Philippines of technology, equipment or other property where IRIS-Japan has proprietary interest or would otherwise permit IRIS-Japan to impart to IRIS-Phils their special knowledge and experience which remain unrevealed to the public. Likewise, inasmuch as IRIS-Japan shall render these services using their customary skills, then the compensation to be received therefor shall not constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of technology. (BIR Ruling No. 036-90 dated March 27, 1990) Thus, service fees under the Agreement shall be subject to Article 7 and Article 5 of the Philippines-Japan tax treaty, which provide as follows: "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." "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

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 (6) months in any taxable year. Considering that under the subject Agreement, the furnishing of services is agreed to be performed by IRIS-Japan in Japan and that should it be necessary for IRIS-Japan to send its employees to the Philippines, as in the case of the onsite services, the length of stay of said employees shall not exceed an aggregate of six (6) months in a given taxable year, IRIS-Japan is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Such being the case, the Copyright 2017

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service, income derived by IRIS-Japan from services rendered to IRIS-Phils under the subject Agreement are not subject to Philippine income tax and consequently withholding tax pursuant to Article 7 in relation to Article 5 of the Philippines-Japan tax treaty. (BIR Ruling No. 78-02 and 184-02 dated May 2, 2002 and October 17, 2002) However, the fees to be paid by IRIS-Phils to IRIS-Japan for the services actually rendered in the Philippines are subject to value-added tax (VAT) at the appropriate rate 1. Accordingly, IRIS-Phils, being the resident withholding agent and payor in control of payment shall be responsible for the final VAT on such fees before making any payment to IRIS-Japan. In remitting the VAT withheld, IRIS-Phils shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from IRIS-Phils if it is a VAT-registered taxpayer. In case IRIS-Phils is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, IRIS-Phils is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof be given to IRIS-Japan upon its request, and the fourth copy to be retained by IRIS-Phils. [Section 4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02 and 8-02/ Section 4.114-2(b), RR No. 16-05; Section 4.114, RR No. 2-98, as last amended by RR No. 28-03]. DcSEHT

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

The rate shall be 12% effective February 1, 2006 (Revenue Memorandum Circular No. 7-2006)

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June 8, 2006

DA ITAD BIR RULING NO. 067-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations Embassy of Spain/Instituto Cervantes The Cultural Center 2 Lafayette Square Unit 16E, 105 Tordesillas St. Salcedo Village, Makati City Gentlemen : This has reference to your Note No. 155 dated December 13, 2005, referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of value-added tax (VAT) on the purchase from an Asian Development Bank (ADB) personnel of one (1) locally-assembled motor vehicle, by the Embassy of Spain/Instituto Cervantes for its official use, specifically described as follows: Make: Model Year: License No.: Engine Number: Chassis Number:

Honda CRV 2.0 M/T 2001 22219 PADRD17201V303043 PEWD2-1403021

indirect taxes of a kind which are normally incorporated in the price of goods or

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to the Embassy of Spain and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 and as confirmed by the Office of Copyright 2017

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the Protocol (DFA) in its Indorsement letter dated October 17, 2005, that your Government allows similar exemption to Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, since the transferor (ADB) and the transferee (Embassy of Spain) of the subject motor vehicle are both VAT exempt entities, the sale of one (1) unit of 2001 Honda CRV 2.0 M/T by ADB to the Cultural Center of the Embassy of Spain/Instituto Cervantes for its official use continues to be exempt from VAT. cACTaI

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG Commissioner Bureau of Internal Revenue

June 7, 2006

DA ITAD BIR RULING NO. 066-06 Sec 106 & 109(K), National Internal Revenue Code of 1997, as amended; Articles 5 & 7, General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of the Philippines; BIR Ruling No. ITAD-011-05 Philippines-Australian Basic Education Assistance For Mindanao (Beam) Project c/o DepEd Region XI Torres St., Davao City Gentlemen : This has reference to the Australian Embassy's Note No. 076/06 and File No. 2002/0059 dated Copyright 2017

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March 16, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of ad valorem and value-added taxes (VAT) on the purchase of one (1) unit 2005 Mitsubishi Grandis for official use by the Philippines-Australia Basic Education Assistance for Mindanao (BEAM) Project specifically described as follows: Make:

Mitsubishi Grandis A/T

Model Year:

2005

Serial Number:

MMBLRNA405F000184

Engine Number:

4G69K - S1169

In reply, please be informed that Section 106(A)(2)(c) of the National Internal Revenue Code of 1991 as amended (NIRC) provides, viz: "Section 106.

Value-added Tax on Sale of Goods or Properties. —

xxx

xxx"

The following sales by VAT-registered persons shall be subject to zero percent (0%)

rate: xxx

xxx

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate."

In this connection, Article 5, paragraphs 1 and 2 of the General Agreement on Development Cooperation (GADC) between the Government of Australia (GOA) and the Government of the Republic of the Philippines (GRP), signed on October 28, 1994 and entered into force on March 12, 1998, provides, viz: "Article 5 Subsidiary arrangements 1. In support of the objective of this Agreement, the Government of Australia and the Government of the Republic of the Philippines, or their agencies, statutory authorities or organizations may conclude subsidiary arrangements in respect of specific activities. 2. Subsidiary arrangements shall make specific reference to this Agreement and the terms of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever possible, such subsidiary arrangements shall set out: (Emphasis supplied) DHTCaI

the name and duration of the activity;

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(b)

a description of the activity and statement of its objectives;

(c)

the nominated implementing agencies in both countries;

(d)

potential benefits of the activity; xxx

xxx

xxx"

xxx

Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply to subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7(1)(a) and (3) of the GADC state that GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic goods and services in respect of project supplies and professional and technical material and services including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). It is worthy to note that the abovementioned BEAM was created by virtue of the concluded Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government of Australia on June 27, 2001 pursuant to Article 5 of the GADC. Such being the case, this Office is of the opinion and so holds that since BEAM was created by virtue of a subsidiary arrangement pursuant to the GADC, an international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and services of BEAM are subject to VAT at zero percent rate in respect of supplies, motor vehicles and professional and technical material and services provided by the Government of Australia while direct importations of goods are exempt from VAT. (BIR Ruling No. ITAD-011-05 dated February 16, 2005) In view of the foregoing, the local purchase by BEAM of one (1) unit of 2005 Mitsubishi Grandis for official use, is subject to VAT at zero percent rate, pursuant to Sections 106(A)(2)(c) of the NIRC in Copyright 2017

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relation to Article 7 of the GADC. As regards the seller of goods and services to BEAM, the sales by a VAT-registered entity of goods and services under the above circumstances shall be treated as effectively zero-rated transactions. (Sec 4.106.5(c), Revenue Regulations No. 16-2005) In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to BEAM. To enable local sellers to refund the amount of tax inputted into the cost of goods and services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of goods or services to BEAM is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000) Treated as effectively zero-rated transaction, the VAT-registered seller of goods or services to BEAM is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, to the Large Taxpayers Audit and Investigation Division (LTAID II) if VAT-registered seller is a large taxpayer, or to the Audit Information, Tax Exemption and Incentives Division (AITIED) of this Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. Consequently, failure of the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Sections 4.106-6 of Revenue Regulations No. 16-2005) IEHTaA

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 6, 2006

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DA ITAD BIR RULING NO. 065-06 Sec. 106 & 108, Tax Code of 1997 Article 34, Vienna Convention on Diplomatic Relations; ITAD Ruling No. 065-03; BIR Ruling No. 117-99 Atty. Francisco B. Gonzalez V 429-D. Shaw Boulevard Mandaluyong City Sir: This refers to your letters, all dated September 21, 2005, endorsed by Acting Director, Mr. Ruel U. Gunabe of the Office of Protocol and State Visits, Department of Foreign Affairs, on November 18, 2005, seeking confirmation of your opinion that the rental payments arising from the lease contracts entered into by Tierra International Construction Corporation (TICC) with the following embassies: 1.

The Australian Embassy;

Her Majesty The Queen in Right of Canada;

The Royal Netherlands Embassy;

Royal Thai Embassy

are subject to zero percent (0%) value-added tax (VAT) based on the VAT Exemption Certificates issued to the above-named embassies on their official purchases of goods and services in the Philippines on the basis of reciprocity. It is represented that TICC is a domestic corporation with principal office address located at 105-B, Hen. P. Garcia St., Bangkal, Makati City; that it is engaged in real estate development and leasing of housing and condominium units; that lease contracts were entered into by the TICC (as the Lessor) with the following embassies (as the Lessees) summarized as follows: 1.

The Australian Embassy — Contract of Lease effective December 7, 2003 until December 6, 2006, renewable;

Her Majesty The Queen in Right of Canada — Contract of Lease effective June 1, 2001 to August 31, 2004; Contract of Lease dated December 17, 2004, effective December 10, 2004 to December 9, 2006;

The Royal Netherlands Embassy — Contract of Lease effective August 1, 2003 to July 31, 2007; and

Royal Thai Embassy — Contract of Lease effective March 1, 2004 until February 28, 2005; Extension of the Contract of Lease commencing on March 1, 2005 to February 28, 2006;

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2005, the above-named embassies allow tax exemption to the Philippine Embassy and its personnel on the purchase of goods and services in their respective countries. In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads.

SaCIAE

"ARTICLE 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) indirect taxes of a kind which are normally incorporated in the price of goods or services; xxx

xxx

xxx"

Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption from VAT on its leases of real properties in the Philippines. In other words, lease of real properties in the Philippines by an Embassy and/or its diplomatic agents shall, in general, be subject to the value-added tax prescribed under Section 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may recognize the VAT exempt status of the above-named embassies on their lease of real properties in the Philippines it appearing from the list submitted by the Department of Foreign Affairs as of October 17, 2005, that the respective Government of the said embassies allows similar exemption to the Philippine Embassy and/or its personnel on their lease of real properties in their respective countries. (DA-ITAD 065-03 dated April 25, 2003) Hence, in view of all the foregoing, the lease of real properties in the Philippines of the following embassies under the subject Contracts of Lease with Tierra International Construction are considered effectively zero-rated sale of services: 1)

Embassy of Australia;

Her Majesty The Queen in Right of Canada;

The Royal Netherlands Embassy; and

Royal Thai Embassy

Furthermore, since the above-mentioned embassies are in fact the purchasers of the services and, owing to their exempt status, they are relieved from the indirect burden of the VAT, their lease of real properties in the Philippines are considered effectively zero-rated sale of service. It must be understood, however, that the lessor (TICC) must secure prior approval for effective zero-rating of such sale of service. Otherwise, the transaction shall only be considered exempt from VAT pursuant to Section 4.108-6 of Revenue Regulations No. 16-2005. In other words, although the said sale of rental services is a taxable transaction for VAT purposes, the same shall not result in any output tax on the part of the lessor and the input tax on his purchase of goods, properties or services related to such effectively zero-rated sale of service shall be available as tax credit or refund. (BIR Ruling 117-99 dated December 7, 1999) 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 Copyright 2017

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herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 6, 2006

DA ITAD BIR RULING NO. 064-06 Sec 106 & 108 of the National Internal Revenue Code of 1997; Article 34, Vienna Convention Royal Norwegian Embassy 21st Floor, Petron Mega Plaza Bldg. 358 Sen. Gil Puyat Avenue Makati City Gentlemen : This has reference to your Note No. 18/06 dated May 23, 2006, referred to this Office by the Department of Finance (DOF) and the Office of Protocol, Department of Foreign Affairs (DFA), requesting for a tax-free purchase on a local motor vehicle for the official use of the Royal Norwegian Embassy, specifically described as follows:

Make:

Mitsubishi Pajero 4x4 Automatic Super Select

Model Year:

2006

Color:

Deep Blue Mica

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Engine Number:

6G75RG5826

Chassis Number:

JMYLYV77W4J000985

In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations, reads: "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of goods or services; "xxx

xxx

xxx"

Hence, the herein local purchase of one (1) Mitsubishi Pajero 4x4 Automatic Super Select for the official use of the Royal Norwegian Embassy is exempt from VAT. (ITAD-Ruling No. 10-04 dated August 2, 2000)

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 1, 2006

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DA ITAD BIR RULING NO. 063-06 Articles 5 & 8 of the Philippines-United States tax treaty; BIR Ruling No. 025-87; BIR Ruling No. ITAD-13-06 SGV & Co. 6/F Ayala Life-FGU Center Mindanao Avenue cor. Biliran Road Cebu Business Park, Cebu City Attention: Ms. Rita A.S. Fernandez Tax Services Gentlemen : This refers to your letter dated September 19, 2005, on behalf of your client, NKC Manufacturing Philippines Corporation (NKC-Phils) requesting confirmation of your opinion that the rental payments made by NKC-Phils to Nakanishi Manufacturing Corporation (NMC) for the lease of the latter's machinery are not subject to Philippine income tax and value-added tax (VAT) pursuant to the Philippines-United States of America tax treaty (Philippine-United States tax treaty). It is represented that NMC is a nonresident foreign corporation duly organized and existing under the laws of the United States of America with principal address at 1225 Voyles Rd., Winterville, Georgia 30683, USA; that it is not registered as either corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 18, 2005; that NKC-Phils is a corporation duly organized and existing under the laws of the Philippines with principal address at Lot 6-8, Block 2, Mactan Export Processing Zone II, Basak, Lapu-lapu City, Cebu; that it is duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 97-031 dated April 8, 1997 as an Ecozone Enterprise on a non-pioneer status engaged in the manufacture of parts for roller bearings, conveyor systems, sash rollers, rubber seals, metal core plates and other hearing related products; that it is currently subject to the 5% preferential tax rate under Section 24 of Republic Act (R.A.) 7916 otherwise known as the Special Economic Zone Act of 1995; that NKC-Phils and NMC entered into two (2) Contracts of lease (Agreements) dated April 1, 2005 and May 24, 2005, and involving annual rental fees of US$470,400 and US$311,360, respectively; and that under the Agreements, NMC leases to NKC-Phils Property (i.e., machinery described in the Annex of the Agreements, copy of which is attached hereto) under the following conditions with respect to the use and maintenance of the Property:

(1)

that NKC-Phils shall use the Property in good and safe custody, solely for performing the operation for which it was designated and made, and only in the conduct of its ordinary and usual business, and all the time in compliance with the laws and regulations pertaining to the Property or the operation or maintenance thereof;

(2)

that until the return of the Property NKC-Phils shall, in any cases, at its own costs and expenses furnish, repair and replace any and all parts and accessories required for aforesaid purpose and shall, whether from time to time and periodically, inspect all the Property and

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furnish all maintenance works and labor to keep in good repair, condition and working order. If and when the insurance proceeds may have been received by NMC under the Agreement, NKC-Phils shall be exempted insofar as NMC may have received, from aforesaid obligation to pay or bear costs and expenses of repair or replacement; (3)

that NKC-Phils shall, as and if required by NMC, make a contract for maintenance of the Property with a competent person or corporation as prior approved by NMC. NKC-Phils shall thereupon submit to NMC a copy of such contract; SEHACI

(4)

that NMC agrees to be liable for and to pay, satisfy and settle every claim, demand, action and liability arising from loss, damage to injury to any person or property of any character whatsoever arising out of or occasioned by or through selection, possession, leasing, renting, operation, handling, control, use, maintenance, transportation, delivery and/or return of the property and hold NMC free and harmless of any and all claims and demands which may arise from or be occasioned by any causes whatsoever of like nature.

In reply, please be informed that considering that the parties in this case (i.e. NMC and NKC-Phils) are resident corporations of the Philippines and the United States, respectively, the provisions of the Philippines-United States tax treaty should be applied. In connection thereto, paragraphs 1 and 6 of Article 8 of the said treaty provide as follows: "Article 8 BUSINESS PROFITS (1) Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. xxx

xxx

(6) The term 'business profits' means income derived from any trade or business whether carried on by an individual, corporation or any other person, or group of persons, including the rental of tangible personal (movable) property.

In relation thereto, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 PERMANENT ESTABLISHMENT (1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. (2)

The term 'fixed place of business' includes but is not limited to: (a)

A seat of management;

(b)

A branch;

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(c)

An office;

(d)

A store or other sales outlet;

(e)

A factory;

(f)

A workshop;

(g)

A warehouse;

(h)

A mine, quarry, or other place of extraction of natural resources;

(i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and (j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days."

Considering that in the present case, NMC, the foreign lessor, does not have a permanent establishment in the Philippines as contemplated in the provisions of the Philippines-United States tax treaty, the said rental fees paid by NKC-Phils to NMC pursuant to their Agreement are considered as "business profits" taxable only in the United States, where NMC is a resident and has its fixed place of business, and as such are, not subject to the 7 1/2% final withholding tax imposed under Section 25(b)(4) of the National Internal Revenue Code (Tax Code) of 1997 as amended. (BIR Ruling No. 025-87 dated January 28, 1987) As regards the imposition of the VAT on the above rental fees, please be informed further that Section 108 of the Tax Code of 1997 1 provides as follows, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . . . The phrase 'sale or exchange of services' shall likewise include: xxx

xxx

TAcSaC

xxx

(2) The lease or the use of, or the right to use any industrial, commercial or scientific equipment; xxx

xxx

Based on the foregoing, the VAT should, in general, be imposed on the said rental fees to be paid by NKC-Phils to NMC. Accordingly, NKC-Phils is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05].

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However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 3 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

Applying the special laws we have earlier discussed, respondent as all 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. AIHECa

Moreover, the exemption is both express and pervasive for the following reasons: . . . , 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. 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. xxx

xxx

xxx"

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which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling No. ITAD-13-06 dated February 20, 2006) Such being the case, the payment of the rental fees by NKC-Phils, being a PEZA-registered enterprise, to NMC, under the above Agreement, should be as it is hereby confirmed to be exempt from VAT. However, upon the importation of the subject machineries to be leased by NKC-Phils from NMC, such importation is subject to VAT. Section 107 of the Tax Code of 1997 4 which provides as follows, viz: Sec. 107.

Value-added Tax on Importation of Goods. —

(A) In General. — There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) 5 based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from custody: Provided, That where the customs duties are determined on the basis the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. (emphasis supplied) xxx

xxx

For purposes of the VAT law, the term "importer" refers to any person who brings goods into the Philippines, whether or not in the course of his trade or business [Section 4.107-1(b), Revenue Regulations No. 16-05]. In this case, NMC is deemed the importer of the machineries since it undertook to deliver the same to NKC-Phils. Thus, in accordance with the aforequoted, NMC is liable to pay the VAT on the importation. To recapitulate, this Office is of the opinion as it hereby holds that: (1)

The rental fees to be paid by NKC to NMC are considered "business profits" taxable only in the United States, and as such are not subject to the 7 1/2 % final withholding tax imposed under Section 25(b)(4) of the tax Code of 1997, as amended.

(2)

Such rental fees are exempt from VAT.

(3)

The importation of the subject machineries .are subject to VAT.

Very truly yours,

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Legal Service Bureau of Internal Revenue Footnotes 1. 2. 3. 4. 5.

Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Effective February 1, 2006, the rate shall be 12% Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K)], as amended by RA No. 9337] Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant.

June 1, 2006

DA ITAD BIR RULING NO. 062-06 Arts. 5 & 7, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 128-05; VAT Review Committee Ruling No. 005-2003 Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. George J. Lavadia Principal Gentlemen : This refers to your letter dated November 14, 2005 requesting confirmation that the service fees paid by F. Tech Philippines Manufacturing, Inc. (FTP) to F. Tech, Inc. (FTI) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the Philippines-Japan tax treaty. It is represented that FTI is a nonresident foreign corporation taxable under the laws of Japan with business address at 19 Showannma, Shoburmachi Minam-Saitamagun, Saitama Pref., Japan as evidenced by its Articles of Incorporation; that FTI is not registered either as a corporation or as a partnership Copyright 2017

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licensed to engage in business in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on November 11, 2005; that FTP, on the other hand, is a company organized and existing under the laws of the Philippines with principal office at 118 North Science Avenue, Laguna Technopark, Biñan, Laguna; that it was registered with the then Export Processing Zone Authority, now Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 94-42 dated June 17, 1994 as evidenced by the Certification issued by the Deputy Director General for Operations of PEZA on January 18, 2005; that on April 1, 2005, FTP entered into a Service Agreement (SA) with FTI; that under the said SA, FTI shall provide the following services to FTP: 1. (i)

Assistance in defining and implementing FTP business strategies and policies;

(ii)

Provision of data on international business trends;

(iii)

Assistance in improving management and administration systems and provision of solutions to problems encountered by FTP in its operations on an on-going basis;

(iv)

Assistance in implementing and improving financial and management reporting systems, operational and financial control reviews;

(v)

Assistance in foreign exchange management as well as procurement of financial support and facilities from both local and offshore sources; and

(vi)

Evaluation of capital investment and risk management.

IAEcCT

Marketing:

(i)

Review and advise on FTP's marketing and promotional plans;

(ii)

Organization and participation in promotional activities;

(iii)

Analysis of potential market, clients, competitive factors, etc.

(iv)

Preparation of advertising materials and assistance in advertising campaign;

(v)

Provision of marketing financial analysis and assistance to FTP in developing and implementing pricing and marketing strategies;

(vi)

Advise and assistance in the framework of contracts with the clients and with the regional, national and international organization; and

(vii)

Assistance in the negotiation with potential customers for possible supply agreement.

Management and administration:

Purchasing:

(i)

Assistance in the purchase of services including but not limited to central sourcing for raw material and negotiating with international suppliers to achieve competitive prices;

(ii)

Assistance in the implementation of purchasing procedures; and

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(iii)

Provision of useful information relating to market conditions and costs saving;

that the foregoing services shall in no case involve the transfer of FTI's technology, know-how or other intellectual property rights; that in general, FTI shall perform the aforementioned services in Japan; that in cases where it would be necessary for FTI to send employees to the Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed six (6) months in a year; that in consideration for the services, FTP will pay FTI in the amount of Thirty Six Million Eight Hundred Fifteen Thousand Two Hundred Ninety Five Japanese Yen (Y36,815,295.00), which may be adjusted annually as agreed upon by the parties; and that the SA shall be effective from April 1, 2005 and shall continue to be valid unless terminated according to the provisions of the SA. In reply, please be informed that Article 7(1) of the Philippines-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. xxx

xxx

xxx"

In view of the foregoing, the profits of a Japanese enterprise shall be taxable only in Japan unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Japanese enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by FTI for the 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. HSaCcE

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

Inasmuch as it is represented that the services will generally be performed by FTI outside the Philippines and that should it be necessary to send its employees to the Philippines, said employees will not stay in the Philippines for more than six months in their rendition of services to FTP, FTI may be Copyright 2017

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considered as not having a permanent establishment in the Philippines. In other words, FTI is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than six months within any taxable year in the course of their rendition of services to FTP. (BIR Ruling No. DA-ITAD 128-05 dated November 10, 2005) Thus, the income derived by FTI from services rendered to FTP shall not be subject to Philippine income tax and, consequently, to withholding tax. Finally, as a PEZA registered enterprise, FTP is subject to the "5% special tax regime, in lieu of all taxes". Hence, its payment for the services rendered by FTI are exempt from VAT, and consequently, from the creditable VAT withholding prescribed under Section 114 (C), NIRC of 1997. (VAT Review Committee Ruling No. 005-2003) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

June 1, 2006

DA ITAD BIR RULING NO. 061-06 Section 109 (q) of the Tax Code of 1997 [now Section 109 (K), as amended by RA No. 9337; BIR Ruling No. ITAD 13-06 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Attention: R.C. Vinzon Tax Services Copyright 2017

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Gentlemen : This refers to your letter dated November 23, 2005, requesting to amend DA-ITAD Ruling No. ITAD-131-05 dated November 14, 2005 so that your royalty payments to Samsung Electronics Co., Ltd. (SECL) be declared exempt from value-added tax, in view of the additional representation that Samsung Electronics Philippines Manufacturing Corporation (SEPHIL) is duly registered with Philippine Economic Zone Authority (PEZA); that it is still enjoying an extension of income tax holiday; and that it is not yet under the 5% preferential tax on gross income regime. It is represented that SECL is a nonresident foreign corporation duly organized and existing under the laws of Korea with business address at 416 Maetan 3-dong, Paldal-ku, Suwon-City Kyungki-Do, Korea 442-742; that SECL has a representative office in the Philippines, the activities of which are limited to the conduct of market survey of electronics products, household appliances and other related products, to find out the feasibility of undertaking a joint venture agreement in the Philippines, to act as communication link between its head office and the customers in the country and to conduct such other activities which are purely coordination work; that SECL has not engaged in any business activity in the Philippines; that SEPHIL is a domestic corporation duly organized and existing under Philippine laws and is duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 01-11 dated July 31, 2002, with principal office address at Block 6, Calamba Premiere International Park, Batino, Calamba, Laguna; that SEPHIL is engaged in the design manufacture and sale of electronic products including, but not limited to, optical disk drive products, their components and parts; that on January 1, 2000, SEPHIL entered into an Optical Disc Drive License Agreement (Agreement) with SECL; that under the Agreement, SECL grants to SEPHIL, during the term of the Agreement, the non-exclusive rights to use the Technical Information 1 furnished by SECL to manufacture products in the Philippines and to use, sell or otherwise dispose of the products in all countries of the world; that SEPHIL shall pay SECL royalties on Licensed Products 2 which are manufactured, used, sold, leased and disposed by SEPHIL; that the royalty on technical information and knowledge shall be paid at the rate of four percent (4%) of Net Selling Price which shall be remitted to SECL within 60 days after each calendar quarter ending with the last day of March, June, September and December; and that the Agreement shall be fully effective for one (1) year from January 1, 2002, and annually prolonged with the option that SECL and SEPHIL can renew the Agreement for another year. It is further represented further and clarified that SEPHIL was still enjoying an income tax holiday and was not yet under the 5% preferential tax on gross income regime when the request for ruling was filed; that SEPHIL's commercial operations started last November 5, 2001 and its income tax holiday is effective for four years from the start of its commercial operation; that it was granted by PEZA a one-year extension of its income tax holiday from November 1, 2005 to October 31, 2006 per Notice of ITH Extension Approval No. 06-003 issued by PEZA dated January 9, 2006; and that it is your contention that SEPHIL is still exempt from withholding and remitting the 10% VAT on its payment and remittances of royalties paid to SECL at the time it enjoys its income tax holiday. aHSTID

In reply, please be informed that, in general, under Section 108(A)[(1) and (5)] of the Tax Code, "the use of certain 'know-how' formulations and technical informations" and "the supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to the nonresident person" both fall within the definition of sale or exchange of services subject to ten percent (10%) value-added tax (VAT). Section 108 of the Tax Code of 1997 3 provides:

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"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 4 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . . . The phrase 'sale or exchange of services' shall likewise include: xxx

xxx

(1) The lease or the use of, or the right to use any industrial, commercial or scientific equipment; xxx

xxx

xxx"

Based on the foregoing, the VAT should be generally imposed on the said royalties to be paid by SEPHIL to SECL. SEPHIL is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz: "Special laws may certainly exempt transactions from the VAT. 5 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx

xxx

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. HcDaAI

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Moreover, the exemption is both express and pervasive for the following reasons: . . . , 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. 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. xxx

xxx

xxx"

Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling No. ITAD 13-06 dated February 20, 2006) In view of all the above and the additional representation that SEPHIL is a PEZA-registered enterprise under an income tax holiday, and which is not yet under the 5% preferential tax on gross income regime, this Office is of the opinion and so holds that the subject royalty payments by SEPHIL to SECL are not subject to VAT. This ruling is deemed incorporated in DA-ITAD Ruling No. 131-05 to the extent that the herein VAT exemption applies to the royalty payments of SEPHIL. This ruling issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void.

Very truly yours, Commissioner of Internal Revenue By:

"Technical Information" means all the technical knowledge, know-how, data and information which are available in the authorized file of Licensor and are used by Licensor for manufacturing products. (Section CD Technologies Asia, Inc. and Accesslaw, Inc.

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2. 3. 4. 5.

1.04, Optical Disk Drive License Agreement) "Licensed Product" means optical disc drive such as CD-ROM, CD-RW which shall be manufactured and sold by Licensee in accordance with Licensor's technical information and assistance. (Section 1.03, ibid) Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the modification as to the applicable rate when the circumstances so warrant. Effective February 1, 2006, the rate shall be 12%. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K)], as amended by RA No. 9337]

May 30, 2006

DA ITAD BIR RULING NO. 060-06 Philippines-Japan Tax Treaty, Article 10; BIR Ruling No. ITAD-89-04 Sagara Metro Plastic Industrial Corporation Barangay Paciano Rizal, Calamba, 4027, Laguna Attention: Mr. Nobuatsu Sekino, President Ms. Lilibeth Lourdes De Asis, Finance & Accounting Manager Gentlemen : This refers to your letter dated September 21, 2005 requesting relief from double taxation on royalty payments to Sagara Plastics Industrial Company, Ltd. (Sagara Plastic) by Sagara Metro Plastics Industrial Corporation (Sagara Metro), Inc. under the Philippines-Japan tax treaty. It is represented that Sagara Plastic is a nonresident foreign corporation organized and existing under the laws of Japan with business address at 1120 Hirooka Fukuroi-shi Shizuoka-Ken, Japan; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 9, 2005; that Sagara Metro is a corporation organized and existing under the laws of the Philippines with its place of business at Barangay Paciano Rizal, Calamba, Laguna; that Sagara Metro is registered with the Board of Investments (BOI) as non-pioneer under Certificate of Registration Nos. EP 2005-024 (February 16, 2005); EP 99-104 (August 11, 1999); EP 93-250 (September 9, 1993); EP 93-352 (November 16, 1993); that Sagara Metro is primarily engaged in the manufacture of industrial plastic products and tubes, including plastic components for automotive wiring harness, as well as in selling, exporting, and distributing the same in certain territories; that Sagara Copyright 2017

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Plastic is engaged in the business of manufacturing, selling and distributing various industrial plastic products and tubes, as well as related tools and dies; that Sagara Metro and Sagara Plastic entered into a License and Technical Assistance Agreement dated December 1, 2000 which was registered with the Philippine Intellectual Property Office (IPO) under Certificate of Compliance No. 5-2001-00026 on February 21, 2001, which shall be effective for a period of five (5) years commencing on January 2, 1999 up to and until January 2, 2004, and shall be renewable subject to the approval of, and registration with, the Technology Transfer Registry of the IPO and, if required, by the Bangko Sentral ng Pilipinas; that under the Agreement, Sagara Plastic agreed to furnish Sagara Metro know-how, technical information and license to make, use, and sell licensed products, including the furnishing of technical advisory services, assistance in export of products and training of Sagara Metro's personnel; that in consideration of the foregoing, Sagara Metro agrees to pay to Sagara Plastic an amount ranging from Two Percent (2%) to Five Percent (5%) of the net sales price of the products manufactured and sold plus a bonus royalty ranging from One-half percent (0.5%) to two (2%) of net foreign exchange earnings by Sagara Metro during the period of the Agreement. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so claimed shall not exceed: IAcTaC

a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting: b)

25 per cent of the gross amount of the royalties in all other cases.

3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx

xxx

Based on the aforecited, royalty payments will be taxed at the preferential tax rate of ten percent (10%), if the payor is a BOI-registered enterprise and engaged in preferred pioneer areas of investment; fifteen percent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; and in all other cases, twenty-five percent (25%) of Copyright 2017

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the gross amount of the royalties. Such being the case and since Sagara Plastic is a not a BOI-registered enterprise engaged in preferred pioneer areas of investment and that its payment of royalties to Sagara Metro are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the said royalty payments are subject to the preferential tax rate of twenty five per cent (25%) of the gross amount of royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-98-05 dated September 7, 2005) This ruling is issued based on 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

May 30, 2006

DA ITAD BIR RULING NO. 059-06 Article 15, Philippines-UK tax treaty; BIR Ruling 115-93 Tan Acut & Lopez Law Offices 23rd Floor, Philippine Stock Exchange Center East Tower, Exchange Road, Ortigas Center 1604 Pasig City Attention: Atty. Edmundo L. Tan & Atty. Maritoni Z. Liwanag Copyright 2017

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Gentlemen : This refers to your letter dated May 9, 2005 on behalf of your client, Mr. Alan Donald Stevens (Mr. Stevens), requesting confirmation that the remuneration of Mr. Stevens in acting as General Manager of the Manila representative office of InventAsia Limited is not subject to Philippine income tax, pursuant to the Republic of the Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty (Philippines-United Kingdom tax treaty). It is represented that Mr. Stevens is a citizen of the United Kingdom of Great Britain (UK), with permanent address at 13 Lea Crescent, Longlevens, Gloucester, GL2, ODW, as confirmed by the letter from Mrs. H. Galbraith, Revenue Executive of the Inland Revenue of UK dated October 21, 2005; that he is presently employed as Operations Manager by InventAsia Limited (formerly MPP-Hongkong Limited as confirmed by the Amended Securities and Exchange Commission License No. FS200408500 dated March 17, 2005), a nonresident foreign corporation duly registered and existing under the laws of Hongkong, with registered office address at 12th Floor, China Merchants Tower; Shun Tak Center 168-200 Connaught Road, Central Hong Kong; that on June 9, 2004, InventAsia Limited was granted a license to establish a representative office in Manila for the purpose of engaging in information dissemination and support as confirmed by the License to Transact Business in the Philippines issued by the Securities and Exchange Commission under Company Registration No. FS200408500 dated June 9, 2004; that on July 1, 2004 InventAsia Limited appointed Mr. Stevens to act as a General Manager of the said Manila representative office; that in acting as a General Manager of the Manila representative office, Mr. Stevens spends time in the Philippines to carry out his oversight functions; that for the period between January 1 and December 31, 2004, Mr. Stevens stayed in the Philippines for an aggregate period of less than 180 days; and that the remuneration of Mt. Steven paid for in Sterling and Hong Kong dollars, is borne by InventAsia Limited. In reply, please be informed of Article 14 of the Philippines-United Kingdom tax treaty which provides as follows: "Article 14 Dependent Personal Services 1. Subject to the provisions of Articles 15, 16, 17, 18, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph (1) of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and (c) Copyright 2017

the remuneration is not borne by a permanent establishment or a fixed

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base which the employer has in the other State.

HEcaIC

3. Notwithstanding the preceding provisions of this Article, remuneration in respect of employment as a member of the regular crew or complement or a ship or aircraft operation in international traffic by an enterprise of a Contracting State shall be taxable only in that State.

Based on the above-quoted provisions, salaries, wages and other similar remuneration received by a resident of the United Kingdom in respect of an employment performed in the Philippines shall be taxable only in the United Kingdom when all these three (3) requirements are met, viz:. (1) he is present in the Philippines for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; (2) the remuneration is paid by, or on behalf of, an employer who is not a resident of the Philippines; and (3) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the Philippines. Considering that Mr. Stevens stayed in the Philippines for an aggregate period of 99 days in the year 2004, as attested to in the sworn statement by Ms. Liza C. Lara, another employee of the Manila representative office, dated June 16, 2005, and that his remuneration is paid for by InventAsia Limited and not borne by a permanent establishment of InventAsia Limited in the Philippines, thereby meeting all the requirements stated under Article 14 of the Philippines-United Kingdom tax treaty, then, the remuneration derived by Mr. Stevens as the acting General Manager of the Manila representative office is not subject to Philippine income tax. (BIR Ruling No. 115-93 dated March 24, 1993) This ruling is issued based on 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.) JAMES H. ROLDAN Assistant Commissioner Bureau of Internal Revenue

May 31, 2006

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DA ITAD BIR RULING NO. 058-06 Article 11 of the Philippines-Singapore tax treaty; BIR Ruling No. ITAD-21-99; BIR Ruling No. DA-ITAD-78-05 Philippine Japan Active Carbon Corporation Malagamot, Panacan P.O. Box 81316 Davao City Attention: Mr. Masahiko Saeki EVP & Gen. Manager Gentlemen : This refers to your application for relief from double taxation dated August 25, 2005, seeking confirmation on. behalf of your creditor, Japan Bank for International Cooperation (JBIC), that the interest income arising from the Loan Agreement between JBIC and your company Philippine Japan Active Carbon Corporation (PJACC) is exempt from Philippine income tax pursuant to Article 11(4) of the Philippines-Japan tax treaty. It is represented that PJACC is a Board of Investments (BOI)-registered (on a non-pioneer status) corporation organized and existing under the laws of the Philippines with principal address at Malagamot, Panacan, Bunawan, P.O. Box 81316 Davao City, Philippines; that on March 31, 2005, PJACC and JBIC entered into a Loan Agreement (Agreement) wherein JBIC agrees to make available to PJACC, on and subject to the terms and conditions of the Agreement, a loan facility in Yen in aggregate amount not exceeding One Hundred and Fifty Million Yen (Y150,000,000); that the proceeds of the loan shall be applied by PJACC for the sole purpose of financing the expenditures directly necessary for the due implementation of the Project having the objective of expanding a production facility for activated carbon. In reply, please be informed that Article 11(4) of the Philippines-Japan tax treaty provides as follows: "Article 11 xxx

xxx

4. Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a Contracting State and derived by the Government of the other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any financial institution wholly owned by that Government, or by any resident of the other Contracting State with respect to debt-claims guaranteed or indirectly financed by the Government of that other Contracting State including political subdivisions and local authorities thereof, the Central Bank of that other Contracting or any financial institution wholly owned by that Government shall be exempt from tax in the first-mentioned Contracting State. For the purposes of this paragraph, the term 'financial institution wholly owned by the Government' means: Copyright 2017

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(a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic Cooperation Fund and the Japan International Cooperation Agency; (emphasis supplied) (b)

In the case of the Philippines, the Development Bank of the Philippines; and

(c) Any such financial institution the capital of which is wholly owned by the Government of either Contracting State, other than those referred to in sub paragraphs (a) and (b) above, as may be agreed from time to time between the Government of the two Contracting States." (emphasis supplied)

Moreover, Section 32(B)(7)(a) of the National Internal Revenue Code of 1997 provides, viz: "(B) Exclusion from Gross Income. — The following items shall not be included in gross income and shall be exempt from taxation under this Title: aCIHAD

"xxx

xxx

xxx"

"(7) Miscellaneous Items. — (a) Income Derived by Foreign Government — Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (emphasis supplied) "xxx

xxx

xxx"

In view of the foregoing provisions and considering that JBIC is the result of the merger of Export-Import Bank of Japan and Overseas Economic Cooperation Fund, this Office is of the opinion and hereby holds that the interest income that will be derived by JBIC, a financial institution wholly owned by the Japanese Government, from the Loan Agreement it executed with PJACC, is exempt from Philippine income tax. (BIR Ruling No. ITAD-21-99) However, the Loan Agreement entered into by and between PJACC and JBIC dated March 31, 2005 is subject to documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243 1, at a rate of (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan contract. 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 herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

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(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

May 22, 2006

DA ITAD BIR RULING NO. 057-06 Article 11 of the Philippines-Japan tax treaty; BIR Ruling No. 214-82 Enkei Philippines, Inc. Lot 17 Carmelray Industrial Canlubang, Calamba, Laguna Attention: Mr. Ryusuke Onoki Managing Director Gentlemen : This refers to your application for relief from double taxation dated November 11, 2005 seeking to avail of the preferential tax rate of 10% on the interest payments of Enkei Philippines Inc., (Enkei-Phil) to Enkei Corporation (Enkei-Japan), pursuant to Article 11 of the Philippines-Japan tax treaty. It is represented that Enkei-Japan is a corporation duly organized and existing under the laws of Japan, with principal address at Act Tower 26th Floor 111-2, Itayamachi Hamamatsu City, Shizuoka Prefecture, Japan 430-7726; that it is a resident of Japan within the meaning of the Philippines-Japan tax treaty per Residence Certificate dated February 24, 2006, issued by the District Director of Hamamatsunishi Tax Office of Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 24, 2005; that Enkei-Phil is a corporation organized and existing under the laws of the Philippines, with business address at 104 Industry Drive, Carmelray Industrial Park, Canlubang, Laguna, and is registered Copyright 2017

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with the Board of Investments, under a pioneer status under Certificate of Registration No. EP 95-119 dated July 14, 1995. It is further represented that on June 16, 2005, Enkei-Phil issued a Promissory Note in favor of Enkei-Japan for a loan in the amount of Yen Five Hundred Twenty Million (¥520,000,000.00), which shall accrue an annual interest of 1.7 % per annum to be computed based on the outstanding principal loan amount; that the payment on interests shall be made by Enkei-Phil to Enkei-Japan at the month-end of every quarter of the calendar year which shall commence at the month-end of September 2005; that Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's outstanding indebtedness through Enkei-Japan's designated account on or before June 14, 2007; that on September 30, 2005, Enkei-Phil issued another Promissory Note in favor of Enkei-Japan for a loan in the amount of Yen Six Hundred Million (Y600,000,000.00), which shall accrue an annual interest of 1.7 % per annum to be computed based on the outstanding principal loan amount; that the payment on interests shall be made by Enkei-Phil to Enkei-Japan at the month-end of every quarter of the calendar year which shall commence at the month-end of December 2005; and that Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's outstanding indebtedness through Enkei-Japan's designated account on or before September 30, 2007. In reply, please be informed that Article 11 of the Philippines-Japan tax treaty provides as follows: "Article 11 (1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. (2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; (b)

15 per cent of the gross amount of the interest in all other cases.

HETDAC

(3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest. xxx

xxx

(5) The term 'interest' as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. xxx

xxx

xxx"

Based on the aforequoted provisions, interest payments will be taxed at a preferential rate not exceeding ten percent (10%) if the interest is paid in respect of government securities, or bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment Copyright 2017

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incentives laws of the Philippines; and in all other cases, fifteen per cent (15%) of the gross amount of the interest. Such being the case and since Enkei-Phil is a pioneer enterprise engaged in preferred pioneer areas of investment under incentive laws of the Philippines, this Office is of the opinion and so holds that the interest payments to be made by Enkei-Phil to Enkei-Japan are subject to a final withholding tax rate of 10 percent of the gross amount of interest, pursuant to Article 11(3) of the Philippines-Japan tax treaty. (BIR Ruling No. 214-82 dated July 15, 1982) Moreover, the above Promissory Notes are subject to the documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243 1, at the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof of the issue price of the said Promissory Notes. 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 herein parties are concerned.

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

May 22, 2006

DA ITAD BIR RULING NO. 056-06

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Philippines-Singapore tax treaty Article 12 Bernaldo Mirador & Directo Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue corner H.V. Dela Costa St. Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated June 9, 2005, on behalf of your client, Cityneon Philippines, Inc. (CPI), requesting confirmation that the service fees paid by CPI to Cityneon International Pte. Ltd. (CIPL) in consideration for services performed by CIPL outside the Philippines are considered as income from sources outside the Philippines and are not subject to Philippine income tax, expanded withholding tax and value-added tax and that CPI shall be allowed to claim such service fees as deduction for income tax purposes. It is represented that CIPL is a nonresident foreign corporation duly organized and existing under laws of Singapore, with principal address at 84 Genting Lane, No. 05-01 Singapore 349584; that CIPL is not registered either as a corporation or as a partnership in the Philippines per certification issued by Securities and Exchange Commission dated May 24, 2005; that CIPL is engaged in the business of providing services for the conceptualization, designing and management of exhibitions and promotional as well as social events; that CIPL possesses substantial valuable knowledge of a specialized nature relating to the management and operation of CPI's business; that CIPL is willing to transfer certain "know-how", technical information, and technical services and assistance related in the management and operation of the business of CPI; that CPI is a corporation duly organized and existing under the laws of the Philippines under SEC Registration No. A1997-5352 with principal office at RMT no. 7 Main Avenue, ACSIE Compound, Severina Industrial Subdivision, Km. 16 West Service Road, South Super Highway, Parañaque City, Metro Manila. It is further represented that on May 12, 2005, CPI and CIPL entered into a Management Service Agreement, whereby, considering the nature of the business of CIPL and its valuable knowledge of specialized nature relating to the management and operation of such business and considering the financial resources and technical exclusivity of the information directly related to the performance of the said services which is being possessed by CIPL, CIPL undertook to transfer certain "know-how", technical information, and technical services and assistance related to the management and operation of the businesses of CPI; that under the Agreement, CIPL shall render services to CPI consisting of the following:

The scope of the services is either fixed or based on actual consumption or use, but in either case shall cover technical and administrative support for priority tasks, including but not limited to the fields of project development, advertising, financing, controlling and IT as applicable for the purposes of centralized coordination and consultations.

To determine operating policy, standards of service, the maintenance of assets and any other

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matters affecting the business operation of CPI. c)

To recommend, prepare, supervise and direct all phases of marketing, advertising, sales and business promotion of CPI.

To carry out all programs contemplated by the annual operating budget and to determine credit policies.

To hire, supervise and discharge all personnel of CPI including the Executive Staff and to determine employment policies including compensation and entering into any agreements with labor unions, if any.

To purchase or lease all operating supplies and operating equipment, and additions to, and replacements of, operating equipment and operating supplies. cSIADa

To hire such persons or organizations as CIPL may deem necessary to provide services, supplies and advice with respect to the operation of CPI provided that such services are previewed in the approved budget.

To enter into such contracts for the provision of supplies utilities maintenance repairs and services to the operations of CPI as CIPL shall consider necessary or appropriate for its proper operation and maintenance.

To introduce latest technical know-how on international administrative systems.

To provide such other related services.

that the term of the agreement shall be for a period of five (5) years commencing from January 1, 2005 up to December 31, 2009, renewable upon agreement by both parties; that for the duration of this agreement, Mr. Lim Poh Hock will be assigned to handle this account and that he shall visit the office of CPI not to exceed an accumulative period of twenty (20) days per year or for a maximum of one hundred twenty five (125) days; and that in consideration for the services rendered by the CIPL to CPI, CIPL shall charge CPI annual management and service fees in the amount equivalent to 2% of the total sales plus reimbursable out of pocket expenses, exclusive of 10% value-added tax. In reply, please be informed that the subject payments by CPI to CIPL under their Management Service Agreement are royalties and not business profits pursuant to Article 12 of the Philippines-Singapore tax treaty which provides, as follows: "Article 12 Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Copyright 2017

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Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; (c)

in all other cases, 25 per cent of the gross amount of the royalties.

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The treaty defines "royalties" to include "payment of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11 and 12, Commentary on Article 12 (Royalties),  2003, p. 175], such information alludes to the concept of "know-how". The definition adopted by the said Committee is, "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In a know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which can remain unrevealed to the public. (BIR Ruling DA-ITAD No. 57-05 dated June 17, 2005) Further, in the case of Philippine Refining Company vs. CIR CTA Case No. 2872 dated January 15, 1986, the Court of Tax Appeals had an occasion to rule on the distinction of service fees from royalties, to wit: "To distinguish between compensation for service and royalty payments, one must inquire on whether the payee has proprietary interest in the property giving rise to the income. If the payee has none, then the payment is a compensation for personal services, if the payee has proprietary interest then the payment is royalty."

Applying the above discussions to the instant case, the herein services of CIPL to CPI under the subject Management Service Agreement, includes the transfer into the Philippines of certain "know-how"/ technical information where CIPL has proprietary interest or which would permit CIPL to impart to CPI its substantial valuable knowledge of a specialized nature which remain unrevealed to the public. Hence, the herein payments constitute as consideration for the transfer of information concerning industrial, commercial or scientific experience. Accordingly, the payments by CPI to CIPL are within the purview of the definition of "royalties" under Article 12 of the Philippines-Singapore tax treaty, quoted as follows: "The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, any patent, trade mark, Copyright 2017

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design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience."

Considering that CPI is not a BOI-registered enterprise, and that the payments are not in respect of cinematographic films or tapes for radio or television or broadcasting, payments made by CPI to CIPL under the Management Service Agreement are subject to tax at the rate of 25 percent of the gross amount thereof. (BIR Ruling No. DA-ITAD 163-00 dated October 30, 2000) Finally, the fees paid by CPI for the services to be rendered by CIPL in the Philippines are subject to the value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997 1. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that CPI shall be responsible for the withholding of the VAT on the service fees before remitting them to CIPL. In remitting to the Bureau of Internal Revenue the VAT withheld on the service fees, CPI shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, CPI may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, CPI may include as part of the cost of the services furnished to it by CIPL the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or as an asset, whichever is applicable. In addition, CPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to CIPL upon its request, and the fourth copy to be retained by CPI as its file copy. As regards your opinion that the service fees to be paid by CPI to CIPL qualify as deductible business expense under Section 34(a)(1) of the Tax Code of 1997, as amended, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. This ruling is issued based on 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. HTCDcS

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue Footnotes 1.

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(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). 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 . . ." The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

May 15, 2006

DA ITAD BIR RULING NO. 055-06 Article 13 of the Philippines-Japan tax treaty; Section 175 of the NIRC of 1997; BIR Ruling No. 052-99 Platon Martinez Flores San Pedro & Leaño 6th & 7th Floor Tuscan Building, 114 V.A. Rufino Street (formerly Herrera) Legaspi Village, Makati City Attention: Atty. Anthony Brett M. Abenir Atty. Joey Serrano Arcilla Gentlemen : This refers to your application for relief from double taxation dated August 30, 2005, on behalf of your client, Dentsu, Inc. (Dentsu-Japan), requesting confirmation of your opinion that the sale of its shares of stock in Dentsu, Young & Rubicam-Alcantara, Inc. (DYR-Phils) to Y & R Far East Holdings, Inc. (Y&R-US) is exempt from the payment of capital gains tax, pursuant to Article 13 of the Copyright 2017

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Philippines-Japan tax treaty. It is represented that DYR-Phils is a corporation organized and existing in accordance with the laws of the Republic of the Philippines with business address at the 20th Floor, Yuchengco Tower, RCBC Plaza, Makati City; that Dentsu-Japan is a nonresident corporation organized and existing in accordance with the laws of Japan with principal place of business at 1-8-1 Higashi-shimbashi, Minato-ku, Tokyo 105-7001, Japan; that Y&R-US is also a nonresident foreign corporation organized and existing under the laws of the United States of America with business address at 285 Madison Avenue, New York 10017, USA; that Dentsu-Japan is the registered owner of 16,980 common shares without par value in the capital stock of DYR-Phils; that the said 16,980 common shares were originally issued by DYR-Phils on July 27, 1998; that on May 11, 2005, Dentsu-Japan executed and entered into a Deed of Absolute Sale of Shares with Y&R-US, wherein the former sold, transferred, conveyed and delivered to the latter 8,490 shares out of the said 16,980 common shares, for and in consideration of the amount of One Hundred Seven Thousand Three Hundred and Eight U.S. Dollars (US$107,308.00); and that per audited financial statements of DYR-Phils as of calendar year ending December 31, 2004, the properties of DYR-Phils do not consist principally of immovable property located in the Philippines. In reply, please be informed that Article 13 of the Philippines-Japan tax treaty provides as follows, viz:

HScaCT

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"(4) Gains from the alienation of shares of a company, a partnership or a trust the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that Contracting State. "(5) Gains from the alienation of any property other than those referred to in paragraphs (1), (2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident."

Based on the foregoing, the gains which will be realized by Dentsu-Japan from the transfer of its shares of stock in DYR-Phils to Y&R-US shall be taxable only in Japan. However, under paragraph 4 of the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a corporation if its entire assets consist principally of real property interest located in the Philippines. "Real Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86 which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the Regulations, it shall be understood to include real properties as understood under Philippine laws. Moreover, "Principally" means more than 50% of the entire assets in terms of value (Sec. 2 (a) and (b), Revenue Regulations No. 4-86). (BIR Ruling No. 007-96) Verification of the Financial Statements of DYR-Phils as of the date of the subject Deed of Absolute Sale disclosed that its real property interest located in the Philippines represents less than 50% of its total assets, thereby making the assets of DYR-Phils not consisting principally of real property interest located in the Philippines. Accordingly, your opinion that the gains from the sale of shares of stock by Dentsu-Japan to Y & R Far East are not subject to capital gains tax is hereby confirmed. However, the Deed of Absolute Sale executed by and between Dentsu-Japan and Y & R Far East Copyright 2017

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for the sale of the subject shares of stocks without par value shall be subject to the documentary stamp tax (DST) equivalent to twenty-Five percent of the DST paid upon the original issue of said stock (BIR Ruling No. 052-99 elated April 16, 1999) imposed under Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243, viz: "Section 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales. Deliveries or Transfer of Shares or Certificates of Stock. — On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof of the par value of such stock: Provided, That only one tax shall be collected on each sale or transfer of stock is issued, indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock". (emphasis supplied)

In relation thereto, Section 175 (i.e., prior to the amendment of Republic Act No. 9243 1) of the Tax Code of 1997, which was the law applicable on July 27, 1998, the date of the original issuance by DYR-Phils of the subject shares, provides: "Section 175.

Stamp Tax on Original Issue of Shares of Stock. —

On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: . . ."

Accordingly, the DST due on the Deed of Absolute Sale between Dentsu-Japan and Y&R-US shall be computed based on the aforequoted (old) provision in relation to the present Section 175 of the Tax Code of 1997, as amended by Republic Act No. 9243. No transfer of ownership of the subject shares shall be recorded unless the DST thereon has been duly paid in accordance with Section 201 of the same Tax Code. (Section 4, Revenue Regulations No. 13-04) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. EHaDIC

Very truly yours,

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Bureau of Internal Revenue Footnotes 1.

An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, As Amended, and For Other Purposes

May 11, 2006

DA ITAD BIR RULING NO. 054-06 Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. DA-ITAD-100-05 Embassy of the People's Republic of China 4896 Pasay Road, Dasmariñas Village Makati City Attention: Mr. Deng Xijun DCM and Political Counsellor Gentlemen : This has reference to your Note No. (06)PG-066 dated March 27, 2006 referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the personal use of Mr. Deng Xijun, DCM and Political Counsellor of the Embassy of the People's Republic of China, specifically described as follows: Make: Model Year: Color: Engine Number: Chassis Number:

Chevrolet Optra 1.6L M/T 2006 Sterling Silver F16D3-496645K KL1NF196E6H100588

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A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) services;

indirect taxes of a kind which are normally incorporated in the price of goods or

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Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption from value-added tax (VAT) and ad valorem tax on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to the Embassy of the People's Republic of China and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 and as confirmed by the Office of the Protocol (DFA) in its Indorsement letter dated October 17, 2005, that your Government allows similar exemption to Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles in your country. Hence, the local purchase of one (1) unit of 2006 Chevrolet Optra 1.6L M/T for the personal use of Mr. Deng Xijun, DCM and Political Counsellor of the Embassy of the People's Republic of China is exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-100-05 dated September 8, 2005) 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. cDCaHA

Very truly yours,

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Bureau of Internal Revenue

May 11, 2006

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DA ITAD BIR RULING NO. 053-06 Articles 3 (General Definitions) and 11 (Interest) Philippines-Netherlands tax treaty; Section 28(B)(5)(a), National Internal Revenue Code of 1997; Section 2, Introductory Provisions, Administrative Code of 1987; Section 1, Article X (Local Government), The 1987 Constitution of the Republic of the Philippines Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati Attention: Atty. Priscilla B. Valer Gentlemen : This refers to your letter dated September 21, 2005 on behalf of your client, NIB Capital Bank NV (NIB Bank), requesting confirmation that the National Power Corporation (Napocor) and the Metropolitan Waterworks and Sewerage System (MWSS) cannot be considered to fall under the term "Government" or the phase "political subdivision or local authority thereof" as the terms are used under Article 11, paragraph 3(a) of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Netherlands tax treaty). Such confirmation is sought for the purpose of determining NIB Bank's entitlement to tax credits under the tax laws of the Netherlands. It is represented that NIB Bank is a foreign corporation, organized and existing under the laws of the Netherlands, with office at 2517 KJ's-Gravenhage, Carnegieplein 4, the Netherlands, as confirmed by the Certificate dated February 4, 2005 issued by the Netherlands Tax Administration at Amsterdam; that NIB Bank is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated November 7, 2005 issued by the Securities and Exchange Commission; that, on the other hand, Napocor and MWSS are corporations organized and existing under the laws of the Philippines, created by virtue of Republic Act No. 6395 (An Act Revising the Charter of the National Power Corporation) and Republic Act No. 6234 (An Act Creating the Metropolitan Waterworks and Sewerage System and Dissolving the National Waterworks and Sewerage Authority; and for Other Purposes), respectively; that Napocor's primary objective is to undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis; that MWSS' primary objective is to ensure the proper operation and maintenance of waterworks systems to insure an uninterrupted and adequate supply and distribution of potable water for domestic and other purposes, and to ensure the proper operation and maintenance of sewerage systems which are essential public services because they are vital to public health and safety; that Napocor and MWSS have corporate lives of fifty years from and after the expiration of their present corporate existence beginning, possibly, Copyright 2017

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from September 10, 1971 for Napocor and from June 19, 1971 for MWSS, the dates the Republic Acts creating these corporations became effective; that Napocor issued Bonds 1 on December 11, 1995 amounting to Twelve Billion Japanese Yen (¥12,000,000,000), the proceeds of which to be used to finance part of the Masinloc 1 Coal-Fired Power Plan Project and that of the Northern Luzon Generation and Transmission Project; that the Bonds are serially numbered and in bearer form in the denomination of ¥100,000,000 each with coupons attached on issue; that the Bonds which have a redemption value of ¥12,000,000,000, have a bond rate of 4.65 percent per annum with interest payable semi-annually on December 11 and June 11 of every year, and with maturity date on December 11, 2015; that the interest of the Bonds are guaranteed by the Government of the Republic of the Philippines, and that the Asian Development Bank will grant a 'put option' to J.P. Morgan Trustee Ltd. for the holders of the Bonds which will entitle J.P. Morgan Trustee Ltd. to require the Asian Development Bank to purchase all of the then outstanding Bonds at a price equal to 100 percent of the aggregate principal amount of the Bonds on or after the maturity date; that the Bonds will be represented by a permanent global bond without interest coupons which is expected to be deposited with a common depository for Morgan Guaranty Trust Company of New York, Brussels Office, as operator of the Euroclear System and Cedel Bank, société anonyme, on or about December 11, 1995; and that NIB Bank is a holder of the Bonds issued by Napocor, and, previously, even of the Notes 2 issued by MWSS which NIB Bank sold on September 19, 2005. In reply, please be informed that concerning income tax, the interests to be paid by Napocor and MWSS on the Bonds and the Notes they issued to NIB

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