DA ITAD BIR Ruling No. 054-07

April 20, 2007 DA ITAD BIR RULING NO. 054-07 Articles 5 & 8, Philippines-United States Tax Treaty; Sections 23 (F) & 42 (A) (3), NIRC; BIR Ruling No. DA-ITAD-63-06 Dulay Pagunsan & Ty Law Offices 4F Bee Lu Building 103-113 Sen. J. Puyat Avenue 1306 Pasay City Attention: Mr. Brigido J. Dulay Gentlemen : This refers to your letter dated August 28, 2006, and received by this Office January 18, 2007, on behalf of your client, CYBER CITY TELESERVICES LIMITED (hereinafter referred to as "CCTL"), requesting confirmation that service fees paid by CCTL to CCT MARKETING LLC (hereinafter referred to as "CML") are not subject to Philippine income tax as business profits attributable to a permanent establishment in the Philippines, pursuant to Article 8 (1) in relation to Article 5 of the Philippines-United States tax treaty and Sections 23(F), 28(B)(1) and (42)(A)(3) of the National Internal Revenue Code of 1997 (NIRC). It is represented that CML (formerly "Network Management Service LLC") is a nonresident foreign corporation organized and existing under the laws of the State of Delaware, USA, with address at the Continental Plaza, 401 Hackensack Avenue, Hackensack, New Jersey, 07601, USA, as evidenced by a certification issued by the Secretary of the State of Delaware dated October 4, 2006; that it is not registered either as a partnership or a corporation in the Philippines pursuant to a Certification of Non-registration issued by the Securities and Exchange Commission dated September 19, 2006; that it is engaged in the business of providing marketing and customer activation services for call centers and business process outsourcing companies; that, on the other hand, CCTL is a corporation existing under the laws of the Philippines and is duly registered with the Clark Special Economic Zone, Clark Development Corporation, with office address at 2528 Corporate Office, Cyber City Park, Apo Court along Sergio Osmea Road, CSEZ, Clark Field Pampanga; that it is engaged in the operation of a Call Center, Teleservices and other Information Technology related services to the foreign market. It is further represented that on August 17, 2001, CML and CCTL entered into a Marketing Services Agreement (Agreement) whereby CCTL appoints and engages the services of CML as its exclusive marketing representative to solicit clients and customers located in the United States of America who could utilize CCTL's call center and business process outsourcing services (hereinafter referred to as "the Services"), to include, but not limited to, the following: a) Hiring and retaining sales and marketing personnel in the United States (US), as employees, agents or independent contractors, on a full time or part basis, to promote, market, and sell the Services, upon such terms and conditions as CML may deem necessary and appropriate to meet its obligations; b) Attending and sponsoring marketing booths at US trade shows for the applicable industries to promote the Services, subject to the approval of CCTL; c) Developing and preparing necessary and appropriate marketing materials promote the Services to US-based clients or customers; d) Advising CCTL in connection with its compliance with applicable US legal requirements under Federal and State laws. Rules and regulations in offering the Services to US-based clients or customers; e) Utilizing the form agreements approved by CCTL to memorialize contract arrangements with US customers and to utilize the agreements of US customers, all subject to the continuing review and comment thereon and final approval thereof by CCTL authorized personnel; f) Establishing a limited liaison staff in the US, with appropriate available technical equipment, to initialize agreements and follow-on procedures between clients or customers in the United States and CCTL's operations personnel in the Philippines who will be directing and rendering e-Services, and to coordinate, when necessary and from time to time during the term of any such agreement, actions between CCTL and said clients or customers to help ensure the smooth and efficient commencement and ongoing performance of CCTL; g) Paying any item to US vendors of products and services sold or rendered to CCTL or any of its affiliates subject to receipt of copies of invoices from such vendors or CCTL; and h) Contracting for and procuring insurance coverage for CCTL where applicable and necessary, at the request of CCTL. And that, in return for providing its services, CCTL shall pay CML one hundred percent (100%) of all costs (Expenses) incurred by CML in performing its marketing and customer activation services and other related and ancillary services stipulated in the Agreement, and, an amount of six percent (6%) of the said Expenses; and that the Agreement shall have an initial term of ten (10) years and shall automatically be renewed for additional five (5) year terms unless other party notifies the other at least thirty (30) days in advance of its intention not to renew. Finally, it is asserted that, as the Agreement does not provide for CML to render services in the Philippines, CML will not be sending any of its personnel in the Philippines. In reply, please be informed that Article 5, and in relation thereto, Article 8 of the Philippines-United States tax treaty provide, viz : "Article 8 BUSINESS PROFITS 1. Business profits 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. 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. acTDCI 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. xxx xxx xxx" Based on the foregoing, the service fees of CCTL to CML shall not be subject to Philippine income tax if CML, being a resident of the US, does not have a fixed place of business in the Philippines; or if it has such a fixed place, said fee is not attributable to such fixed place. However, should employees of CML be required to render services in the Philippines and such furnishing of services continue within the Philippines for a period of more than 183 days within any twelve-month period, such shall be deemed to constitute as a permanent establishment of CML in the Philippines. Accordingly, such service fees shall be subject to Philippine income tax. In addition thereto, Section 23 (F) and, in relation thereto, Section 42 (A) (3) of the NIRC provide, viz : "SEC. 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." "SEC. 42. Income from Sources Within the Philippines . (A) Gross income From Sources Within the Philippines . xxx xxx xxx (3) Services . Compensation for labor or personal services performed in the Philippines;" Based on the above provision, income from services of a foreign corporation is taxable in the Philippines only if such services are performed within the Philippines. From the herein representations, it can be ascertained that CML does not have a fixed place of business in the Philippines to which its income may be attributed to, and that no personnel of CML will come to the Philippines to render services. In view thereof, this Office is of the opinion and hereby rules that income for services by CML to CCTL under the subject Agreement shall not be subject to Philippine income tax pursuant to Article 8 in relation to Article 5 of the Philippines-United States tax treaty. (BIR Ruling No. ITAD-63-06 dated June 1, 2006) HTCaAD This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service