Philippine Seven Corporation

October 17, 2008 BIR RULING [DA-(C-101) 311-08] DA115-06 Philippine Seven Corporation 7th Floor, The Columbia Tower Ortigas Avenue Mandaluyong City Attention: Mr. Lawrence N. de Leon Comptroller Gentlemen : This refers to your letter dated August 28, 2008 stating that the Philippine Seven Corporation (PHIL 7) is a corporation duly registered with the Securities and Exchange Commission (SEC); that on the other hand, 2MM Express Services Corporation is likewise a domestic corporation with principal office address at G/F Comfoods Building, Sen. Gil Puyat Avenue, Makati City; that PHIL 7 is the holder of the Philippine Area License to operate and individually franchise 7-Eleven Stores in the Philippine Territory using the 7-Eleven Trademark, Trade Services, and 7-Eleven System, proprietary lines in accordance with 7-Eleven Image pursuant to the Area Service and License Agreement (ASLA) between 7-Eleven, Inc. (formerly The Southland Corporation) (7-Eleven) and PHIL 7 dated October 26, 1982, as amended and renewal ASLA dated December 12, 1992; that on April 27, 2006, a Store Franchise Agreement was entered into by PHIL-7 and 2MM Express Services Corporation, as the Franchisee, whereby the latter recognizes the advantages of the 7-Eleven System and desires to obtain a franchise for a 7-Eleven Store; that in connection therewith, Franchisee wants to lease the Store and Equipment and operate the Store in a manner which will enhance the 7-Eleven Image and pursuant to the 7-Eleven System, as determined from time to time by PHIL-7 and/or 7-Eleven. PHIL-7, in reliance on the representations made by FRANCHISEE, is willing to provide certain training and continuing services and grant a License and Lease, but only on the terms of this Agreement, which terms are acceptable to FRANCHISEE and are acknowledged by the parties to be material and reasonable; that the salient features of the said Agreement are as follows: 1. The Franchisee shall pay Phil-7 a Franchise fee and will make a down payment for the required investments. Franchisee shall be obligated to pay Phil-7 the amount of the unpaid balance in the Open Account. Further, Franchisee will bear the cost to construct a standard 7-Eleven Store building in accordance with the plans and specifications set and approved by Phil-7. 2. Phil-7 shall provide its then current training program for operating a franchised 7-Eleven Store to Franchisee. 3. The Store site may be provided either by the Franchisee or Phil-7. If the site is owned by the Franchisee, the site shall be leased to Phil-7. If the site is leased by the Franchisee, the lease shall be transferred or assigned to Phil-7. The site may also be currently owned or leased by Phil-7. In all cases, the lease of the store to Phil-7 shall be covered by a separate lease contract. The store site identified by Franchisee is acceptable by Phil-7 based on general location and neighborhood, traffic patterns, parking facilities, accessibility and other factors as Phil-7 may consider necessary from time to time. aASDTE Based on the foregoing representations, you now request confirmation of your opinion that 1. The royalty payments made to Phil-7 shall be considered as active income subject to the 35% corporate income tax and not passive income subject to the 20% final tax; and 2. The payments are not subject to creditable withholding tax of 2% unless the payor belongs to the top 10,000 corporations designated by the BIR. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. In BIR Ruling No. 057-00 dated November 7, 2000, later reiterated in BIR Ruling No. DA518-03 dated December 17, 2003, this Office citing Section 27 (D) (1) of the Tax Code of 1997, thus ruled that "(D) Rates of tax on certain passive incomes. (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, that interest income derived by a domestic or a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final tax at the rate of seven and one-half percent (7 1/2%) of such interest income. . . ." As expressly denoted in the caption, to be subject to the 20% final withholding tax, the royalties must be in the nature of passive income. HScAEC On the other hand, since the income derived by MKI-Phils. from the distribution of the Licensed Computer Systems to Philippine banks and the performance of support services is income generated in the active pursuit and performance of its primary purpose, this Office confirms your opinion that the same is clearly NOT passive income subject to the 20% final tax. Such being the case, the payments received by MKI-Phils. from the active conduct of trade or business is considered ordinary business income subject to the 33% for 1999 regular corporate income tax." In applying the above-cited rulings, it is undisputed that the royalties and other fees received by Phil-7 are in the nature of ordinary business income because the aforesaid income was derived or generated from activities that are in accordance with the primary purpose of Phil-7 which is operate and individually franchise 7-Eleven stores in the Philippine territory as provided in its Articles of Incorporation. SUCH BEING THE CASE, the royalty income derived by Phil-7 in the conduct of its business shall form part of its ordinary income subject to the 35% regular corporate income tax. 2. Generally, if the royalty income is considered as an active income, there is no duty to withhold on such payments as required under Section 57 of the Tax Code of 1997, as the royalty payments are not subject to creditable withholding tax since said income is not among those enumerated under the withholding tax regulations as subject to withholding tax. However, if Phil-7's client/payor is one of the top ten thousand (10,000) corporations designated by the BIR, the royalty shall be subject to the withholding tax of 2% which shall be creditable against the tax due on the taxable income of Phil-7. 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. EDHCSI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service