BIR Ruling [UN-135-94]

April 11, 1994 BIR RULING [UN-135-94] Time-Life International (Phils.), Inc. 30 Juan Luna St. corner San Lorenzo Drive, San Lorenzo Village, Makati, Metro Manila Attention: Ms . Emma J . Dominguez General Manager Gentlemen : This refers to your letter dated August 19, 1991 in effect requesting for a reconsideration of BIR Ruling No. 25(b) (1)-000-00-099-90 dated May 28, 1990 addressed to Time-Life International (Phils.), Inc., P.O. Box 9176 Makati Cinema Square Mailing Center, Pasong Tamo St., Makati, Metro Manila that the filling up of the subscription form by the Philippine subscriber to the Time Magazine is the activity that produced the income consisting of the subscription payments; and that the subscription payments for the Time Magazine 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, on the ground that under the RP-US Tax Treaty, said subscription payments are not Philippine source income; hence, are not subject to Philippine income tax and consequently to the 35% withholding tax. It is represented that Time International, Inc. (TII) is a corporation organized and existing under the laws of Delaware, U.S.A. engaged in the business of buying, selling and distribution of books and publications in Asia; that Time-Life International (Phils.), Inc. (TLIP) is a corporation duly organized under the laws of the Philippines with license to engage in the business of buying, selling and distribution of books and publications in the Philippines; that TLIP is wholly owned by TII; that TLIP also distributes magazines published by companies not affiliated in anyway with TII; that consistent with its own business license, TLIP solicits and receives commission on orders for subscription to TII publications, which TLIP forwards to TII for acceptance and servicing; that the potential subscriber encloses a check or money order with the order form; that TLIP upon receipts of the check or money order with the order forms issues a receipt to the potential subscriber; that since TLIP is not authorized to accept or enter into a subscription contract with the Philippine subscriber, the subscription order is forwarded to TII's affiliate in Tokyo, Japan for acceptance or rejection; that if the subscription order is accepted, the Tokyo Branch enters the subscription into the computer and instructs the Hongkong office where the magazines are printed, to ship the subscription copies which are pre-addressed and are either delivered by TLIP through contracted independent delivery companies or through the post office; that the payment for the subscriptions from accepted subscribers are consolidated by TLIP at a Philippine bank where an accounts is maintained in TII's name; and that these amounts are then remitted to TII's office in New York. 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 a resident of one of the Contracting States shall be taxable only in the State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the residents by only on so much of them as are attributable to the permanent establishment." Moreover, Article (1) and (2) of the said 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 the one of the Contracting States engages in trade or business. "(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 outlet; (e) A factory; (f) A workshop; (g) A warehouse; (h) A mine, quarry, or other place of extraction of natural resources; (i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, 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 one 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. "(3) . . . "(4) . . . "(5) . . . "(6) . . . "(7) . . ." Under the aforequoted provisions of the RP-US Tax Treaty, TII does not have a permanent establishment in the Philippines Accordingly, the business profits derived by it in the nature of subscription payments by Philippine subscribers to the Time Magazine, a TII publication 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. (BIR Ruling No. 426-93 dated October 29, 1993) cdtech This supersedes BIR Ruling No. 25(b) (1)-000-00-099-90 dated May 28, 1990. Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)