Puyat Jacinto & Santos

August 1, 2008 BIR RULING [DA-(C-021) 101-08] Sec. 57; DA-007-06; DA-078-06 Puyat Jacinto & Santos 12th Floor, Manilabank Bldg. 6772 Ayala Avenue, Makati City Philippines Attention: Attys. Virginia B. Viray & Arnaldo M. Cario Gentlemen : This refers to your letter dated June 18, 2008 requesting on behalf of your client, Hewlett-Packard International Sarl ("HP" for brevity), for confirmation of your opinion that income payments, including penalty interest charges, received by HP from Hewlett-Packard Philippines Corporation ("HPPC" for brevity) pursuant to the Distributor Agreement dated November 1, 2005 is exempt from income and withholding taxes. The facts as represented are as follows: HP is a corporation incorporated and existing under and by virtue of the laws of Switzerland, with registered office address at 150, route du Nantd'Avril, 1217 Meyrin 2, Geneva, Switzerland. HP does not have a branch or other presence in the Philippines as certified by the Philippine Securities and Exchange Commission. HPPC, on the other hand, is a corporation duly organized and existing under Philippine laws with principal office address at the 37th Floor, Robinson Summit Center, 6783 Ayala Avenue, Makati City, Philippines 1226. Both HP and HPPC are similarly engaged in the business of manufacturing, assembling, and trading of computer and electronic components and parts, computer systems and equipment. On November 1, 2005, HP and HPPC entered into a Distributor Agreement ("Agreement" for brevity) for the sale and purchase of HP computing and imaging solution Products ("HP Products" for brevity). Under the Agreement, HP appointed HPPC as a non-exclusive distributor for all HP Products manufactured or distributed by HP. The following are the salient provisions of the Agreement: SIDEaA a. HPPC, as independent contractor, shall provide services and be responsible for selling, servicing, supporting and distributing HP Products and services; b. The risks related to the manufacture, sale, service, support and distribution of HP Products and services shall be borne by HP; c. Title and risk of loss or damage to HP Products shall pass to HPPC at HP's port of export; d. HP shall sell the HP Products to HPPC at prices contained in the Price List converted to U.S. Dollars, where applicable, less the purchasing discounts; and e. Payment shall be made in U.S. Dollars in accordance with the payment terms agreed to by the parties from time to time, including arm's length interest charges. The sale and purchase of HP Products by HPPC shall not involve any transfer of technology, know-how or other intellectual property rights. Furthermore, it shall not involve services relating to research and development or the transfer of manufacture of proprietary products. In reply, please be informed that in BIR Ruling No. DA-007-06 dated January 13, 2006, involving a request for ruling by Johnson and Johnson Pte. Ltd. ("JSS") on the tax consequences of the Commissionaire Agreement, it was ruled, among others, that since JSS does not have a permanent establishment in the Philippines and will not be subject to tax on the business profits it derives from the sale of goods to the customers in the Philippines, it follows that the payments to JSS should not be subject to any withholding tax under Section 57 of the Tax Code, including the 1% creditable tax to be withheld on income payments made by any of the top 5,000 corporations to their local supplier of goods. Furthermore, Article 7 of the RP-Switzerland tax treaty states that: CDAcIT "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 attributable to that permanent establishment." On the other hand, Article 5 of the RP-Switzerland tax treaty states as follows: "PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 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, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than six months; h) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve-month period." ADaEIH Based on the afore-quoted BIR Ruling and the provisions of the RP-Switzerland tax treaty, the business profits of HP shall be taxable in the Philippines only if it has a permanent establishment situated therein and only so much of them as are attributable to that permanent establishment. In view of the foregoing, the business profits, including the penalty interest charges, to be derived by HP in the Philippines from the sale of HP Products to HPPC are not taxable in the Philippines since HP does not have a permanent establishment in the Philippines through which its profits as such may be attributed (BIR Ruling No. DA-078-06 dated 6 March 2006). It follows also that the income payments to HP, including the penalty interest charges, are not subject to withholding tax. This ruling is being issued on the basis of the facts as represented. If upon investigation it is disclosed that the facts are different from that represented, then this ruling shall be null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service