BIR Ruling [DA-023-99]

January 15, 1999 BIR RULING [DA-023-99] Punongbayan & Araullo Ernts & Young International 6th Floor, Vernida IV Bldg. Alfaro St., Salcedo Village 1200 Makati City Attention: Atty . Vic Mamalateo Gentlemen : This refers to your letter dated January 8, 1997, on behalf of your client, European Communication Management Ltd. (ECM Ltd), requesting in effect for confirmation of your opinion that: LLphil 1. ECM Ltd. has no permanent establishment in the Philippines; 2. The professional service fees, namely, the general fee and the performance-linked remuneration to be paid by Procter and Gamble Philippines, Inc. (P&G Phils.) to ECM Ltd., are exempt from Philippine income tax because ECM Ltd. has no permanent establishment in the Philippines; 3. P&G Phils. payments for the general fee and performance-linked remuneration do not involve payments for royalties and are therefore not subject to Philippine income tax and withholding tax; 4. The technical services to be rendered by the employee/personnel of ECM Ltd., such as the computer software trainer and the production trainer in the Philippines, shall be for a period not exceeding in the aggregate 183 days within any twelve-month period. Hence, ECM Ltd. shall not be considered as having a permanent establishment by virtue of such technical services pursuant to the RP-United Kingdom Tax Treaty. Consequently, the payments to be received by ECM Ltd. for the cost of such technical services are not subject to Philippine income tax and withholding tax; 5. The payments for the cost of program material, special equipment (provided for production of programmes) and technical services (such as for production training) and/or production supervision provided by ECM Ltd. to P&G Phils. are not royalty payments and are, thus, not subject to Philippine income tax and withholding tax; 6. Gross payments to be received by ECM Ltd. for cost of program licenses and/or broadcast licenses owned by ECM Ltd. and/or third parties are considered as royalty payments which are subject to the 15% Philippine income tax to be withheld by P&G Phils. pursuant to the RP-United Kingdom Tax Treaty; a) 18.5% of the value gained by P&G Phils. as a result of a contract with a TV station and/or other third parties for a program sourced by ECM Ltd. b) 10% of the value gained by P&G Phils. as a result of a contract with a TV station and/or other third parties for any program not sourced by ECM Ltd. where ECM Ltd. has provided service. that ECM Ltd. will issue separate invoices to P&G Phils. for the cost of the following: 1. Cost of program material, special equipment provided for production of programmes and technical services (such as for production training) and/or production supervision provided by ECM Ltd.; and 2. Cost of program licenses and/or broadcast licenses. casia that contracts pertaining to the performance of activities relating to the TV barter for P&G Phils. shall be signed and concluded by ECM Ltd. in London; that invoices or the general fee, performance-linked remuneration, cost of program material, special equipment, cost of program licenses and broadcast licenses shall all likewise be issued by ECM LTD. in London; that ECM Asia, as a representative office established in the Philippines; shall be engaged only in activities permitted under Philippine laws, such as promotion of the company's products and services, information dissemination, liaising with clients and market research. In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. 1. ECM Ltd. would not be deemed to have "permanent establishment" in the Philippines as its activities are purely information dissemination, promotion and market research. The representative office would not be considered a permanent establishment in the Philippines as this term (permanent establishment) is defined in Article 5(4)(d) and (e) of the RP-United Kingdom Tax Treaty as: "4. The term "permanent establishment" shall not be deemed to include: xxx xxx xxx (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." 2. Pursuant to Article 7(1) of the RP-United Kingdom Tax Treaty, the business profits of ECM Ltd. are not taxable in this country. 3. Article 11, paragraph 3 of the same Treaty provides that "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 artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), 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 experience. Hence, your opinion that the general fee, as well as the performance-linked remuneration to be paid by P&G Phils. to ECM Ltd. does not fall under the above definition or royalties, therefore, not subject to Philippine income tax and withholding tax, is hereby confirmed. 4. Consequently payments made by P&G Phils. to ECM Ltd. for the cost of such technical services are not subject to Philippine income tax and withholding tax considering that the technical services to be rendered by the employee/personnel of ECM Ltd. does not exceed an aggregate of 183 days within any twelve-month period. 5. Pursuant to Article 11, No. 3 of the RP-United Kingdom Tax Treaty, payments for the cost of program material, special equipment (provided for production of programmes) and technical services (such as for production training) and/or production supervision are not royalty payments; thus not subject to Philippine income tax and withholding tax. 6. The cost of TV Program licenses and/or broadcast licenses to be paid by P&G Phils. to ECM Ltd. are subject to 15% Philippine income tax pursuant to Nos. 1 and 2 of Article 11 hereinquoted as follows: 1) 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; 2) Such royalties may also be taxed in the Contracting State in which they arise and according to the law of State. However, the tax so charged shall not exceed: a. 15 percent 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; b. in all other cases, 25 percent of the gross amount of the royalties. 7. With respect to the royalty payments of P&G Phils. to ECM Ltd., the same are also subject to 10% value added tax which P&G Phils. may pay and file in behalf of ECM Ltd. 8. The salaries, wages and other remuneration to be received by ECM Ltd.'s employees for technical services to be performed in the Philippines not exceeding 183 days are likewise not subject to Philippine income tax. 9. And lastly, the gross receipts for technical services to be rendered by ECM Ltd.'s employees will be subject to 10% value added tax which P&G Phils. may pay and file in behalf of the former. 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, then this ruling shall be considered null and void. (BIR Ruling No. 104-88 dated March 17, 1988) aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)