DA ITAD BIR Ruling No. 071-07

June 1, 2007 DA ITAD BIR RULING NO. 071-07 Arts. 5 & 7, Philippines-Korea Tax Treaty; BIR Ruling No. DA-ITAD 083-05 Sycip Gorres Velayo & Co. 10F Pag-IBIG Fund WT Corporate Tower Mindanao Avenue, Cebu Business Park Cebu City Attention: Fabian K. Delos Santos Partner, Tax Services Gentlemen : This refers to your letter dated January 31, 2007 filed on behalf of your client, Philippine BXT Corporation (BXT-Philippines), requesting confirmation that the payments made under the Sales and Marketing Support Service Agreement (Agreement) entered into between BXT-Philippines and BXT Resort Development Corporation (BXT-Korea) are not subject to Philippine income tax pursuant to the Philippines-Korea tax treaty. It is represented that BXT-Korea is a nonresident foreign corporation duly organized and existing under the laws of Korea as evidenced by its Articles; that its principal office is located at Seoul City, Korea; that BXT-Korea is not registered either as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Corporation/Partnership dated December 11, 2006 issued by the Securities and Exchange Commission; that BXT-Philippines is a domestic corporation with principal office located at M.L. Quezon Highway, Maribago, Lapu-lapu City. It is further represented that on January 10, 2007, BXT-Korea and BXT-Philippines entered into an Agreement whereby BXT-Korea agrees to provide the following sales and marketing support services to BXT-Philippines: 1. Promotion and marketing services in Korea and other countries through BXT-Korea's network of international contacts and representatives; 2. Conduct marketing research, consumer preferences and market trends determination and competitive price studies; 3. Assistance in developing a marketing strategy and specific marketing activities outside the Philippines; and 4. Undertake other incidental marketing activities as may be requested by BXT-Philippines to promote its condominium business in Korea and in other countries abroad. That the foregoing services shall be rendered entirely by BXT-Korea outside the Philippines; that BXT-Korea, when necessary, shall send suitable personnel and/or staff to conduct marketing research and analysis in the Philippines during the term of the Agreement; that however, the duration of stay in the Philippine of the said BXT-Korea's personnel shall not exceed an aggregate period of one hundred eighty (180) days within any twelve-month period; that in consideration of the said services, BXT-Philippines shall pay BXT-Korea equivalent to fifteen percent (15%) of the sales price of the condotel units as commission; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed of Article 7(1) in relation to Article 5 of the Philippines-Korea tax treaty which respectively 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 so much of them as is attributable to that permanent establishment. xxx xxx xxx" "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes 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, a quarry or any other place of extraction of natural resources; g) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities for others. 3. a) a building site or construction, installation or assembly project or supervisory activities in connection therewith, constitute a permanent establishment only if such site, project or activity continues for a period of more than six months; b) the furnishing of services including consultancy services by an enterprise through an employee or other personnel constitutes a permanent establishment only if activities of that nature continue within a Contracting State for a period or periods exceeding in the aggregate 183 days within any twelve-month period; and xxx xxx xxx" Based on the abovequoted provisions, the profits of BXT-Korea are taxable only in Korea, unless it carries on business in the Philippines through a permanent establishment situated therein to which such profits are attributable. For this purpose, BXT-Korea may be deemed to have a permanent establishment in the Philippines if, among others, it furnishes services in the Philippines through its personnel for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Inasmuch as it is represented that the services will generally be performed by BXT-Korea outside the Philippines and that should it be necessary to send its employees to the Philippines, said employees will not stay in the Philippines for more than 183 days within any twelve-month period in their rendition of services to BXT-Philippines, BXT-Korea may be considered as not having a permanent establishment in the Philippines. In other words, BXT-Korea is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than 183 days within any twelve-month period in the course of their rendition of services to BXT-Philippines. (BIR Ruling No. DA-ITAD 083-05 dated August 22, 2005) Thus, the income derived by BXT-Korea from services rendered to BXT-Philippines shall not be subject to Philippine income tax and, consequently, to withholding tax. Moreover, while the payments for services rendered outside the Philippines are not subject to VAT, the fees paid for the services rendered for BXT-Philippines within the Philippines are, however, subject to 12% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, BXT-Philippines, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to BXT-Korea. In remitting the VAT withheld, BXT-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from BXT-Philippines if it is a VAT-registered taxpayer. In case it is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, it is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for BXT-Korea and the fourth copy for BXT-Philippines as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) cSHATC This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall 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