Superseding Ruling 096-90 Business Profits Earned by Dow Jones from Subscription Payments

October 29, 1993 BIR RULING NO. 426-93 SUPERSEDING RULING 096-90 BUSINESS PROFITS EARNED BY DOW JONES FROM SUBSCRIPTION PAYMENTS NOT SUBJ. TO INCOME TAX UNDER RP-US TAX TREATY 25 (b) (1) 000-00 426-93 Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles Fourth Floor, King's Court 2129 Pasong Tamo St., Makati Metro Manila Attention: Attys . Carlos G . Baniqued and Ben Hur R . Olivas This refers to your letter dated September 21, 1990 requesting for confirmation of your opinion to the effect that under RP-US Tax Treaty, Dow Jones Publishing Company (Asia), Inc. (Dow Jones Asia), a corporation duly organized and existing under the laws of the State of Delaware, U.S.A., is not subject to Philippine income tax and consequently to withholding tax on revenues derived from the sale to Philippine subscribers of subscription copies of the Asian Wall Street Journal which Dow Jones Asia publishes. cdtech It appears that in BIR Ruling No. 37-c-219-85-312-87 dated October 8, 1987 which is in response to your letter dated December 5, 1986 wherein you represented that your client, Dow Jones Asia is a corporation duly organized and existing under the laws of HongKong , this Office ruled that xxx xxx xxx ". . . considering that the printing and publication of the Asian Wall Street Journal is done in HongKong, the situs of the income derived by the publisher, Dow Jones Asia from the sale to Philippine subscribers of subscription copies of the newspaper is HongKong. Such being the case, said income is considered income from sources without the Philippines, since the same constitutes compensation for labor or personal services performed without the Philippines. (Sec. 37(c)(3), Tax Code) And since the publisher is a non-resident foreign corporation subject to income tax only on income from sources within the Philippines (Sec. 24(b)(1), Tax Code, said income earned by said publisher for services rendered in HongKong is not subject to income tax and consequently, not also subject to the 35% withholding tax prescribed in Section 53(e)(2) of the Tax Code, as amended." However, on May 28, 1990, this Office issued BIR Ruling No. 25(b) (1)-000-00-096-90 revoking the aforesaid BIR Ruling No. 37-c-219-85-312-87 as follows: xxx xxx xxx "In connection thereto, please be informed that after a re-study of the above ruling, this Office finds the same devoid of legal basis. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from an activity within the Philippines (Commissioner vs. British Overseas Airways Corporation (BOAC) and Court of Tax Appeals (G.R. Nos. 65775-74, April 30, 1937). Thus, the filling up of the subscription form by the Philippine subscriber to the Asian Wall Street Journal is the activity that produced the income consisting of the subscription payments. Since the subscription payments were made here and therefore came from the Philippines, the source of the income is this country. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines ( Commissioner vs . British Overseas Airways Corp . (BOAC) and CTA, supra, citing Manila Gas Corp . vs . Collector, 62 Phil . 895 ). The fact that the foreign publisher, Dow Jones Asia, printed and published the Journal in HongKong, does not determine the source of income and the situs of Philippine taxation. Said BOAC case citing Howden & Co., Ltd. vs. Collector, 13 SCRA 601, said that the test of the taxability is the "source" and the source of an income is that activity which produced the income. As heretofore stated, the activity that produced the income is the filling up of the subscription form by the Philippine subscriber, as well as the payments for subscription also in the Philippines. "In view thereof, the above ruling has to be, as it is hereby, revoked. The subscription payments for the Asian Wall Street Journal by Philippine subscribers are considered Philippine source income; hence, subject to Philippine income tax, and consequently to the 35% withholding tax prescribed by Section 25(b)(1) of the Tax Code in relation to Sections 50(a) and 51 of the same Code." In your supplemental letter dated December 5, 1991, you explained the discrepancy in your representations made to this Office. You stated that your representation in your letter dated December 5, 1986 that Dow Jones Asia is a corporation duly organized and existing under the laws of HongKong is not correct since the corporation is actually organized and existing under the laws of the State of Delaware, U.S.A. as shown by its Certificate of Incorporation duly authenticated by Philippine Vice-Consul J. Eduardo Malaya, Consular District of New York, New York, U.S.A. In reply thereto, please be informed that paragraph (1), Article 8 of the RP-US Tax Treaty provides as follows: "Article 8 "BUSINESS PROFITS "(1) Business profits of resident of one of the Contracting States shall be taxable only in that state unless the resident has a permanent establishment in the other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment." Moreover, Article 5(1) and (2) of the same Treaty provides, viz: "Article 5 "PERMANENT ESTABLISHMENT "1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. cdt "(2) The term "fixed place of business" includes but is not limited to: (a) A seat of management; (b) A branch; (c) An office; (d) A store or other sales outlets; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other places of extraction of natural resources; (i) A building site, or construction or assembly project or supervisory activities in connection therewith, provided such situs, project or activity continues for a period of more than 183 days; and (j) The furnishing of services including consultancy services, by a resident of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." Under the aforequoted provisions of the RP-US Tax Treaty, Dow Jones Asia does not have a permanent establishment in the Philippines. Accordingly, the business profits derived by it in the nature of subscription payments for the publication of "Asian Wall Street Journal" by Philippine subscribers are not subject to Philippine income tax and consequently to the withholding tax under Section 25(b)(1) in relation to Section 50(a) of the Tax Code, as amended. This supersedes BIR Ruling No. 25(b)(1)-000-00-096-90 dated May 28, 1990. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue