BIR Ruling [DA-076-99]

February 8, 1999 BIR RULING [DA-076-99] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Mr . C . P . Noel Gentlemen : This refers to your letter dated July 14, 1998 requesting in effect for a ruling that service fees payable by IIR Exhibitions Philippines, Inc. (IE-Phil) to Institute for International Research, BV (IBV) under the Marketing Support Agreement (MSA) are not subject to Philippines taxes; that fees payable by IE-Phil to IIR Holdings Ltd. (IIR Dubai) under the Marketing and Business Development Agreement (MBDA) are also not subject to Philippine taxes; and that the license fees payable by IE-Phil to IBV under the License Agreement are subject to the 15% royalty tax pursuant to the RP-Netherlands Tax Treaty. It is It is represented that IE-Phil is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in organizing professional exhibitions which have world-wide commercial utility; that it is planning to procure the services of two nonresident corporations which are not engaged in trade or business in the Philippines: IBV, which is organized under the laws of the Netherlands; and IIR Dubai, which is organized under the laws of Dubai; that IE-Phil and IBV will enter into a Marketing Support Agreement (MSA) where the latter will provide to IE-Phil continuous sales and marketing support services outside the Philippines; that specifically, the services to be rendered by IBV under the MSA are as follows: (a) Public and Promotional Affairs (b) Consultancy services on Treasury and Legal Matters; (c) Insurance; and (d) Travel, Accommodation and Carriage; and that these services do not involve any transfer of technology; that IE-Phil will pay a service fee in an amount equivalent to the actual time charges of the employees of IBV. LLjur It is also represented that IE-Phil will enter into a License Agreement with IBV where the latter will grant the former an exclusive license to use the name, property, and improvements to the property; that in said agreement, the term "property" is defined as all or any of the copyright, designs, promotional materials, trademark, computer software, techniques, knowledge and expertise of IBV; and that in consideration of the grant of an exclusive license, IE-Phil will pay 5% of its net sales from exhibitions throughout the Philippines to IBV. Further, IE-Phil also intends to execute a Marketing and Business Development Agreement (MBDA) with IIR Dubai to avail of its services; that IE-Phil will grant IIR Dubai, as its marketing agent, the right to undertake world-wide activities in its behalf for the purpose of contacting potential customers, and to perform marketing and sales support services outside the Philippines; that in consideration of the services to be rendered by IIR Dubai under the MBDA, IE-Phil will pay an amount equal to the time charges of the employees based on the number of hours spent and devoted to the provision of such assistance and services. In reply thereto, please be informed that service fees payable by IIR Exhibitions Philippines, Inc. (IE-Phil) to Institute for International Research, BV (IBV) under the Marketing Support Agreement are not subject to Philippine taxes pursuant to Article 7 of the RP-Netherlands Tax Treaty. Article 7 of the Tax Treaty provides, viz.: "ARTICLE 7 Business Profits "1. The profits of an enterprise of one of the States shall be taxable only in that State, unless the enterprise carries to business in the other State through a permanent establishment situated therein . If an 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. 2. . . . 3. . . . 4. . . . 5. . . . 6. . . . "7. Payments received by an enterprise of one of the States as a consideration for the furnishing of technical services in the other State, including studies or surveys of a scientific, geological or technical nature, or for engineering contracts and blue prints related thereto, or for consultant or supervisory services shall be deemed to be profits of an enterprise to which the provisions of this Article shall apply." ( Emphasis ours .) 8. . . . 9. . . . With regard to the term "permanent establishment", Article 5 of the RP-Netherlands Tax Treaty provides as follows: ARTICLE 5 Permanent Establishment 1. . . . 2. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; 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 of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel which activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Inasmuch as IBV is a non-resident foreign corporation without a permanent establishment in the Philippines and its agreement with IE-Phil will involve purely services, including consultancy services, then the fees to be received by IBV will be considered business profits which are not subject to Philippine taxes pursuant to Article 7(7) of the RP-Netherlands Tax Treaty. LLphil Likewise, license fees payable by IE-Phil to IBV under the License Agreement are subject to 15% royalty tax on the gross amount under the RP-Netherlands Tax Treaty. Under par. 4 of Article 12 of the RP-Netherlands Tax Treaty, the term "royalties" means payments of any kind received as a consideration among others for information concerning industrial, commercial or scientific experience. Since the license agreement involves the grant of an exclusive license to use the copyright, designs, promotional materials, trademark, computer software, techniques, knowledge and expertise of IBV, then the payment thereof constitutes royalties. Hence, royalties payable to IBV shall be subject to the Philippine tax at the rate of 15% pursuant to Article 12 of the RP-Netherlands Tax Treaty and ten percent (10%) VAT in accordance with Section 4.102-1(b) of Revenue Regulations 7-95, which states thus: "The VAT on royalties payable to non-resident foreign corporations or owners for the sale of services and use 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 the VAT on such royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." Finally, with regard to the Marketing and Business Development Agreement between IE-Phil and IIR Holdings Ltd. (IIR Dubai), we confirm your opinion that the fees payable by IE-Phil to IIR Dubai are also not subject to Philippine taxes. To be considered as royalties, there must be a transfer into the Philippines of technology, equipment or other property, where the payee has proprietary interest . ( BIR Ruling Nos . 36-89 dated May 28, 1989 ; 93-89 dated May 2, 1989 ; & 1-90 dated January 4, 1990 ) The Court of Tax Appeals had an occasion to rule on the distinction of services fees from royalties in Philippine Refining Company (PRC) vs . Commissioner of Internal Revenue (CIR), CTA Case No . 2872 dated January 15, 1986 . In said case, PRC entered into an agreement with Unilever Limited of England (Limited) whereby the latter will provide the following services: a) Training; b) Research; c) Availability of Services and Advisory Departments Buying of Raw Materials; d) Trademarks; and e) Communication of Patents, Secret Patents, Secret Processes, etc. The CTA ruled as follows with respect to legal and advisory fees (a, b and c) which are considered services fees: " 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. An examination of the records satisfies us that far be it from a comedy of errors, "In all these undertakings, Unilever Ltd., does not have any interest or right to whatever is the result of services performed." The results of all these services, and the products manufactured by PRC to which these are integrated are owned by PRC. Unilever has no interest or right to them." ( Emphasis ours .) In the instant case, since the MBDA does not involve the transfer of technology but the rendition of marketing and sales support services where IIR Dubai will have no interest or right to whatever is the result of the services, then income payments to IIR Dubai constitute service fees. It is settled that service fees received by a non-resident foreign corporation will be taxable in the Philippines if it is income derived from sources within the Philippines. (Section 28-(B)(1) of the Tax Code) Under Section 42 (A)(3) of the same Code, it shall be treated as derived from sources within the Philippines if the services are performed within the Philippines. Since IIR Dubai will perform marketing and sales support services wholly outside the Philippines, then the fees are considered income from sources outside the Philippines and hence, not subject to Philippine income tax. ( BIR Ruling Nos . UN 212-94 dated July 8 , 1994 and 33-94 dated February 14 , 1994 ) In view thereof, this Office is of the opinion and so holds that service fees payable by IIR Exhibitions Philippines, Inc. (IE-Phil) to Institute for International Research, BV (IBV) under the Marketing Support Agreement are not subject to Philippine taxes; that fees payable by IE-Phil to IIR Holdings Ltd. under the Marketing and Business Development Agreement (MBDA) are also not subject to Philippines taxes; and that the license fees payable by IE-Phil to IBV under the License Agreement are subject to the 15% royalty tax pursuant to the RP-Netherlands Tax Treaty and to the ten per cent (10%) VAT. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)