Whether the Lump Sum Fee Payable by Pacific to Pan Malaysian is Subject to Any Philippine Income Tax Pursuant to the Provisions of the Agreement for the Avoidance of Double Taxation between the Republic of the Philippines and the Government of Malaysian

November 16, 1995 BIR RULING NO. 179-95 28 (b) (6) 000-00 179-95 Pan Malaysian Pools Sdn. Bhd. 17th Floor, Menara Bousted Jalan Raja Cholan 50200 Kuala Lumpur Attention: Mr . V . E . McCluskey Chief Financial Officer Gentlemen : This refers to your letter dated October 24, 1995 stating that Pan Malaysian Pools Sdn. Bhd. (Pan Malaysian) is a company incorporated under the laws of Malaysian; that it is not registered to do business in the Philippines; that it has no permanent establishment in the Philippines; that its principal activities are the conduct, operation and management of online lottery and other gaming operations, that Pacific Online Systems Corporation (Pacific) is a company incorporated under the law of the Philippines, the primary purpose of which, among others, is to develop, design, build, use, operate, manage, market, lease (except financial leasing), and maintain equipment, appliances, peripherals and facilities for lottery and gaming, and the supply and provision of management, operational, technical and marketing expertise and other advisory and consultation services to lottery and other gaming operators, including but not limited to the Philippine Charity Sweepstakes Office; that in pursuance of its business as aforesaid, Pacific recently negotiated and initiated two (2) contracts with the Philippine Charity Sweepstakes Office (PCSO), for the leasing to PCSO of certain online lottery equipment and accessories and for maintenance and repair services of said equipment and accessories; that on October 11, 1995, an Malaysian and Pacific entered into a contract (the Agreement) whereby Pacific appointed Pan Malaysian exclusively to procure or otherwise provide certain services that Pacific deems desirable or otherwise necessary to support and/or assist it in carrying out its obligations under its contracts with the PCSO; that the salient points of the agreement are as follows: (1) an Malaysian shall procure for or otherwise provide the services unto Pacific. It is thus contemplated that Pan Malaysian may itself provide or render the services or it may engage some other entities to do so. Accordingly, Pan Malaysian is given the power and authority to: "at its sole expense, enter into and manage such contracts or arrangements with third Persons accepted to Pacific and under such terms and conditions conformable to the terms of this Agreement; provided, however, that in no case shall Pan Malaysian be relieved of any of its obligations hereunder, and that it shall ensure faithful compliance by any such third Person of the terms and conditions of this Agreement for the benefit of Pacific; (2) That services are essentially in the nature of support services, the principal objectives of which are "to assist and support Pacific in the development, conduct and operation of" the leasing, maintenance and repair of online lottery equipment and accessories. The services will include the establishment of operational procedures in the leasing of online lottery equipment and accessories and the provision of maintenance and repair services; (3) The services are generally to be performed outside of the Philippines. However, for purposes of better coordination and to provide immediate attention to areas of concern that may arise, Pan Malaysian shall ensure that a minimum of three (3) personnel shall be assigned on full time basis to Pacific, to be based at the offices of Pacific in the Philippines. Pan Malaysian shall be responsible for all costs (including salaries, allowances, and home travel costs) of such assigned personnel; (4) The term of the Agreement commences from the date of execution (i.e., 11 October 1995) and shall terminate on March 31, 1996, or earlier; (5) In consideration of its appointment, Pan Malaysian shall be paid by Pacific a lump sum amount of US $785,000.00 which shall be made by telegraphic transfer to Pan Malaysian bank account outside of the Philippines. In connection therewith, you are requesting confirmation of your opinion that "1. The lump sum fee payable by Pacific to Pan Malaysian as aforesaid is (a) not subject to any Philippine income tax, pursuant to the provisions of the Agreement for the Avoidance of Double Taxation between the Republic of the Philippines and the government of Malaysian (the "Tax Treaty", for brevity) aisadc "2. The salaries and other remuneration of personnel that may be assigned to the Philippines during the term of the Agreement is not subject to Philippine income tax, pursuant also to the provision of the Tax Treaty." In reply thereto, please be informed that Article 7 (1) of the RP-Malaysian Tax Treaty provides, viz: "Article 7 "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 on so much thereof as is attributable to "(a) that permanent establishment, or . . . " Moreover, Articles 5 (1) and (2) of the said treaty provides as follows: "Article 5 "PERMANENT ESTABLISHMENT "1. For the purpose 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" shall include 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, as quarry other place of extraction of natural resources including timber or other forest produce; cdta (g) a farm or plantation; (h) a building site or construction, installation or assemble project which existed for more than 6 months." Considering that the Pan Malaysian has no permanent establishment in the Philippines to which its business profits may be attributable, the payment by Pacific to Pan Malaysian of the lump sum amount of US $785,000.00 for services to be rendered by the latter to the former which are essentially in the nature of support Pacific in the development, conduct and operation of" the leasing, maintenance and repair of online lottery equipment and accessories are not subject to income tax. Moreover, the salaries and other remuneration of personnel that may be assigned by Pan Malaysian to Pacific are not subject to Philippine income tax since the personnel shall not be present in the Philippines for more than 183 days in any calendar year pursuant to Article 14 (2) of the RP-Malaysian Tax Treaty. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. prll Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue