BIR Ruling [DA-148-98]

April 20, 1998 BIR RULING [DA-148-98] Joaquin Cunanan & Co. 14F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George J . Lavadia Principal Gentlemen : This refers to your letter dated February 4, 1997 requesting for confirmation of your opinion that the payments of your client, Sony Music Entertainment Philippines, Inc. (SONY RP), to Sony Music Asia, Inc. (SONY ASIA), in consideration for services to be rendered outside the Philippines, are not subject to Philippine income or withholding tax pursuant to the RP-US Tax Treaty. prcd It is represented that SONY RP is a domestic corporation duly organized and existing under the laws of the Philippines; that it is engaged in the business of development, production, origination, licensing, importation, marketing, rental, and sale (on wholesale basis only) of records, cassette tapes, compact discs, laser discs, computer software, and other audio and audio-visual carriers for entertainment and education, musical copyrights and music publishing in any media, among others; that on October 1, 1995, SONY RP entered into a Service Agreement with SONY ASIA, a non-resident corporation organized and existing under the laws of the State of Delaware, USA; that pursuant to the Agreement between the parties, SONY ASIA would provide services and assistance to SONY RP relative to the latter's production planning, procurement of raw materials, transportation, handling and labeling of products, management training programs, personnel policies, budget control and marketing strategies; that all the services are to be performed by SONY ASIA in Hong Kong except for occasional visits or consultations with SONY RP of short duration not exceeding fifteen (15) days in the aggregate for any calendar year; that in consideration for these service, SONY ASIA will be paid a service fee equivalent to five (5%) percent of SONY RP's net sales; and that SONY ASIA has no branch office or otherwise has no permanent establishment in the Philippines. In reply, please be informed that the said payments for services rendered as setforth in the Service Agreement between SONY RP and SONY ASIA are exempt from Philippine income tax, considering that the said services are to be rendered by SONY ASIA outside of the Philippines. Under Article 8 of the RP-US Tax Treaty, the taxability of business profits earned by a U.S. resident shall depend on the existence of a permanent establishment (PE) in the Philippines. A PE as defined under Article 5 of the same Tax Treaty includes, among others, "the rendering of technical services in the Philippines for a period of more than 183 days" This means that if the technical or consultancy services are rendered outside the Philippines, or even if these are rendered within the Philippines, but the rendition of which is less than 183 days during a given taxable year, the same shall not constitute a PE. As such, the income derived from said services shall be considered income from sources outside the Philippines and therefore exempt from withholding tax. Moreover, the aforementioned fee is not within the contemplation of "Rentals and Royalties" as enunciated under then Section 36(a)(4) of the Tax Code, as amended [now Section 42(A)(4) of the Tax Code of 1997], since there is no transfer into this country of technology, equipment or other property, where the payee has proprietary interest. Specifically, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no such transfer of technology as the service fees to be paid by SONY RP to SONY US constitute payment for the aforementioned technical support services performed in Hongkong. Thus, the fees paid to SONY ASIA shall not be considered as royalties, but constitute compensation for labor or personal service performed outside the Philippines. The fee is considered income from sources without the Philippines pursuant to the then Section 36(c)(3) of the Tax Code, as amended. [now Section 42(c)(3) of the Tax Code of 1997] cdpr In view thereof, this Office is of the opinion, and so holds, that since the services covered by the subject Service Agreement will be rendered by SONY ASIA outside the Philippines, and considering further that SONY ASIA has no PE in the Philippines, the payments made by SONY RP for said services shall not be subject to Philippine income tax and consequently to the withholding tax under the then Section 25(b)(1), in relation to then Section 50(a), both of the Tax Code, as amended. [now Section 28(B)(1), in relation to Section 57(A), both of the Tax Code of 1997] Moreover, the said fees paid by SONY RP to SONY ASIA, being an expense considered appropriate and helpful in the development of the taxpayer's business and likewise a payment which is normal in relation to the business of SONY RP, can be deducted as ordinary and necessary business expense when paid or incurred during the taxable year, from SONY RP's gross income pursuant to the Section 29(a)(1) of the Tax Code, as amended [now Section 34(A)(1) of the Tax Code of 1997]. (BIR Ruling Nos. 036-90 dated March 27, 1990; 113-96 dated October 25, 1996) 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. cdll Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)