BIR Ruling [DA-062-99]

February 5, 1999 BIR RULING [DA-062-99] Far East Media Consultants 7735 Rosewood Street Marcelo Green Village 1700 Paraaque City Attention: Atty . Anselmo S . Mojica Legal Counsel Gentlemen : This refers to your letters dated October 29 and November 27, 1998 requesting for a ruling on whether the income derived by CNN International, as represented by its subsidiary, Turner Broadcasting Sales, Inc. (TBS), from the advertisement placed by Philippine advertisers for television advertisement aired or broadcasted in the United States of America is exempt from Philippine income tax and consequently from the 34% final withholding tax. LLjur It is represented that CNN is a non-resident foreign corporation domiciled in the U.S.A.; that it is represented by its subsidiary company, TBS, a non-resident foreign corporation domiciled at 420 Fifth Avenue, New York, 10018, U.S.A. with branch office at Hongkong; that neither CNN nor TBS has a branch or extension office in the Philippines; that CNN/TBS engaged the services of Far East Media Consultants (FEMC), a domestic company, for a limited period with the following functions: "1. To solicit advertisement from local advertiser in accordance with the Rate Card and Terms and Conditions of contract prepared and made by CNN/TBS subject to their final approval and the existence of which is likewise subject to their consultation if, in their opinion it contravenes their policy and standard.; "2. To collect advertising fees from the local advertisers and remit it to CNN/TBS net of the commission." that the solicited advertisement shall be for a certain particular hour program service which shall be performed, aired or broadcasted in CNN Television, U.S.A.; and that FEMC shall be entitled to a 10% commission of advertising revenue actually collected from local advertising client but all the expenses incurred by FEMC in the collection and solicitation performance shall be borne solely by it. In reply, please be informed that paragraph (1), Article 8 of the RP-US Tax Treaty provides 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." Moreover, Article 5 paragraphs (1) and (2) of the same Treaty provides, viz: "ARTICLE 5 "PERMANENT ESTABLISHMENT "(1) For purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting State engages in a trade or business. "(2) The term "fixed place of business" includes but not limited to: "(a) A seat of management; "(b) A branch; "(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. xxx xxx xxx." Under the aforequoted provision of the RP-US Tax Treaty, CNN does not have a permanent establishment in the Philippines. Accordingly, the business profits derived by it in the nature of advertisement fee paid by Philippine advertisers for the advertisement services rendered by CNN and which shall be performed, aired or broadcasted in CNN Television, U.S.A. are not subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) in relation to Section 57(A) both of the Tax Code of 1997. (BIR Ruling Nos. 136-98 dated September 24, 1998; UN-135-94 dated April 11, 1994; 426-93 dated October 29, 1993) However, the commissions to be received by FEMC, derived from its agreement with CNN/TBS, as the local advertising representative, shall be subject to the corporate income tax imposed under Sec. 27(A) of the Tax Code of 1997 and to the 10% VAT under Section 108 (A) of the same Code. 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. LLphil Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)