BIR Ruling [UN-156-94]

May 24, 1994 BIR RULING [UN-156-94] Quisumbing, Torres & Evangelista 11/F, Pacific Star Building Makati Ave. cor. Sen. Gil Puyat Ave., Makati, Metro Manila Attention: Atty . Jose R . Sandejas Gentlemen : This refers to your letter dated February 3, 1994 stating that Bear Stearns Philippines, Ltd. (Bear Stearns) is a Delaware Corporation with principal offices at 245 Park Avenue, New York, NY 10167; that it entered into a joint venture agreement with State Investment House, Inc. (State), a Philippine Corporation, to form Bear Stearns State Asia, Inc., (BSA); that BSA, State and Bear Stearns will work together to develop the securitization of Philippine housing mortgage loans and other Philippine receivables, such as automobile loans, and a secondary market for such securities, along with such other activities and in such other countries in Southeast Asia as may be agreed by the parties; that for this purpose, BSA, State and Bear Stearns will work together to organize or cause to be organized special purpose vehicles to acquire such loans and receivables and issue mortgage or other asset-backed securities and otherwise organize and promote securitization of assets in the Philippines; that pursuant to the Joint Venture agreement, Bear Stearns will render the following services in connection with the securitization transactions of BSA; cdtech "a. utilize its general securitization structuring and documentation expertise, including expertise in areas such as computer modelling, cash flow generation, valuation and scenario sensitivity analyses; and market analysis for pricing and distribution; "b. coordinate relations with the rating agencies, trustees and trust servicers; "c. create marketing materials, representations and research reports to help support security distribution"; that as remuneration for the above enumerated functions, Bear Stearns will receive fifteen percent (15%) of the structuring and underwriting fees paid on each securitization transaction; and that Bear Stearns will perform the above services and other activities contemplated to be performed by it under the joint venture agreement, in its New York office. In connection therewith, you now request confirmation of your opinion to the effect that fees to be received by Bear Stearns for rendering the aforementioned services in connection with the securitization transactions of BSA are not subject to Philippine income tax under the RP-US Tax Treaty. In reply thereto, I have the honor to inform you that paragraph (1), Article 8 of the RP-US Tax Treaty provides as follows: "Article 8 "Business Profits "(1) Business profit of a 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. 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 resident but only on so much of them as are attributable to the permanent establishment." Moreover, Article 5(1) and (2) of the said treaty provides, viz: "Article 5 "PERMANENT ESTABLISHMENT "(1) For the purpose 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. "(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; (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) . . . "(8) . . . Such being the case, and since Bear Stearns has no permanent establishment in the Philippines to which its business profits/income are attributable, the fees received by it for rendering the aforementioned services in connection with the securitization transactions of BSA in New York are not subject to Philippine income tax, (BIR Ruling No. 151-89 dated July 19, 1989). cdtech Very truly yours, ALICIA P. CLEMENO Actg. Assistant Commissioner (Legal Service)