Revised Implementing Guidelines for the Administration and Allocation of the Judiciary Development Fund (JDF) under Presidential Decree No. 1949

June 3, 2015 ITAD BIR RULING NO. 191-15 Articles 7 & 5, Philippines-United Kingdom of Great Britain tax treaty BDB Law Du-Baladad and Associates 20th Floor, Chatham House Rufino Corner Valero Streets Salcedo Village, Makati City Attention: Atty. Benedicta Du-Baladad Managing Partner Gentlemen : This refers to your tax treaty relief application filed on June 13, 2012, requesting confirmation that payments received by STATPRO GROUP PLC ("STATPRO") from BPI ASSET MANAGEMENT ("BPI") are in the nature of business profits and not royalties, and thus, not subject to Philippine income tax in the absence of a permanent establishment in the Philippines 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-UK tax treaty"). Facts It is represented that STATPRO is a corporation organized and existing under the laws of the United Kingdom (UK) and is a resident thereof based on the Certification issued by the HM Revenue & Customs of UK on March 28, 2012. STATPRO is situated at 81-87 Hartfield Road, London SW19 3TJ, England. STATPRO is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on May 30, 2012. BPI, on the other hand, is a domestic corporation situated at BPI Head Office Building, Ayala Avenue corner Paseo de Roxas, Makati City, Philippines. STATPRO and BPI entered into a Software License Agreement on March 30, 2012. STATPRO shall provide Software and Services to BPI. The Software and Services are consist of the Hosted Software, the StatPro Software and the StatPro Application. Hosted Software refers to the computer and environment software used by STATPRO to provide the Hosted Service in object code form owned or distributed by STATPRO or third parties for which BPI is granted access pursuant to this Agreement in connection with the Hosted Service. The StatPro Software refers to the software modules (in executable code form only) and Documentation (both identified in the Order Form and identified as "Required"), and all schemas and meta data associated with the third party database and provided by STATPRO. The STATPRO Software includes all new Versions, Release and Service Releases but shall not include the "Hosted Software". BPI subscribed the StatPro Application to enable its Named User 1 to have access to the Hosted Services and the Documentation. Hosted services refer to the Standard Hosted Service 2 and the Enterprise Hosted Service. 3 The Standard Hosted Service provided by STATPRO shall enable Named Users of BPI to remotely connect to and use the STATPRO Application over a secure internet connection. STATPRO shall provide shared computing resources in a Private Hosted Environment on which the STATPRO Application shall be executed. The STATPRO Application interface shall provide BPI via a secure connection. As part of the Standard Hosted Service, STATPRO shall provide nightly Backups. BPI shall handle Data Uploads via the STATPRO Application through the connection direct from the Named User's personal computer. The Named Users shall be able to connect to local storage and browse for files to upload them directly into imports function from within the connection. STATPRO shall provide secure login via an encrypted connection. BPI has the following options on how to upload data to the Hosted Service: The Hosted Environment allows access to the local client disks thereby enabling Named Users to copy data between the end Named User personal computer and the Hosted Environment; or STATPRO supports secure FTP (SFTP) and this service can be used to upload data to the Hosted Service outside of any active connection. User authentication to the SFTP service can be via strong user name and password or via exchange of secure certificates. Following the initial data upload, the STATPRO Application can then be configured by STATPRO and BPI to automatically import new data into the STATPRO Application ready for analysis and/or automatic report generation. Following implementation Services any adjustments to these automation processes will incur Fees, which shall be agreed in writing between the Parties. STATPRO provides an ETL (Extract Transform Load) utility "STATPRO ETL" as part of the Hosted Service to assist BPI with creating the necessary import files to interface with the STATPRO Software. BPI can request that STATPRO initiate a project and propose Fees for the necessary consulting services associated. It is further represented that no payment has been made on the purchased products by BPI to STATPRO, based on the Affidavit issued by the President of BPI on September 28, 2012. It is finally represented that the payments subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the President of BPI on April 17, 2012. Ruling In reply, please be informed that Revenue Memorandum Circular (RMC) No. 44-2005 treats 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 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. 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" Based on the foregoing provisions of the RMC, 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. The transfer of software may be classified as transfer of copyright rights or transfer of copyrighted articles. There is transfer of copyright rights if the person acquires any of the rights enumerated under paragraph (a) of Section 5 and payments made in consideration thereof constitute as royalty. However, if what is being transferred is solely a copyrighted articles, then payments made thereof constitute business income. In the instant case, BPI does not acquire any of the rights enumerated under paragraph (a) of Section 5 of RMC 44-2005 that would constitute the payments as royalty. STATPRO grants BPI a non-exclusive, non-transferable, revocable license, for the Term and Site(s), to allow Named Users to use the Software for the purpose of accessing the Services, and the Documentation for the purpose of using the StatPro Application, solely to enable BPI to use the Services. Hence, what is being transferred to BPI is solely copyrighted articles and the transaction does not involve any transfer of know-how. Therefore, payments made thereof constitute as business income. The taxation of service fees to be paid by BPI to STATPRO depends if STATPRO has a permanent establishment in the Philippines to which these fees are attributable, under paragraph 1, Article 7 of the Philippines-UK tax treaty, to wit: "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 UK shall be taxable only in UK unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the UK 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 STATPRO for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines to which said fees may be attributable. In relation thereto, Article 5 of the same tax treaty also 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' shall include especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, oil well, quarry or other place of extraction of natural resources; g) an installation or structure used for the exploration of natural resources; h) 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. xxx xxx xxx" It is clear from the aforequoted provision that a corporation which is a resident of UK may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation in the Philippines, through its employees or other personnel, exceed a period or periods aggregating more than 183 days within any twelve-month period. Inasmuch as it is represented that the employees of STATPRO will not stay in the Philippines for a period or periods not more than 183 within any twelve-month period in the course of rendition of the subject services to BPI, it is deemed not to have a permanent establishment in the Philippines. As such, the income derived by STATPRO from the services it will render to BPI shall not be subject to Philippine income tax and, consequently, withholding tax. However, under Section 108 (A) of the Tax Code, the service fees in question, being payments for the supply of services in the Philippines, are subject to value-added tax ("VAT"), thus: "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: 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%) . . ." "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 the 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. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business. " Relative thereto, BPI shall withhold VAT on the payments at the rate of 12 percent before remitting them to STATPRO. BPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If BPI is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for BPI's claim of input tax on the payments; otherwise, it may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. This ruling is being 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The Named User refers to any named individual who has been given permission to use a Service by both BPI and STATPRO. 2. Standard Hosted Service the hosting of STATPRO Software as designated by STATPRO managed on shared computing resources in a Private Hosted Environment at a STATPRO Data Centre delivered to BPI under the Agreement and enabling Named Users to remotely connect to and use the STATPRO Application using a secure Internet connection. 3. Enterprise Hosted Service the hosting of STATPRO Software on STATPRO managed dedicated computing resources in a Private Hosted Environment at a STATPRO Data Centre delivered to BPI under the Agreement and enabling Named Users to remotely connect to and use the STATPRO Application using a secure Internet connection.