DA ITAD BIR Ruling No. 103-06

August 29, 2006 DA ITAD BIR RULING NO. 103-06 Articles 5 (Permanent Establishment), 8 (Business Profits) Philippines-United States of America tax treaty; BIR Ruling No. 14-06 Regalado Bautista & Menzon Law Offices Suite 710 City & Land Mega Plaza ADB Ave. corner Garnet Street Ortigas, Pasig City. Attention: Atty. Edith Abana-Bautista Atty. Rhodora Corcuera-Menzon Gentlemen : This refers to your letter dated June 29, 2006 requesting a ruling on the tax implication of the purchase of software by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Wind River Systems International Inc. pursuant to Article 8 in relation to Article 5 of the Philippines-United States of America (US) tax treaty. It is represented that Wind River Systems International Inc. , a corporation which was formed or incorporated in the United States of America is registered in Singapore as Wind River Systems International Inc.-Singapore Branch (hereinafter, Wind River ) per Certificate of Registration of Foreign Company issued by Mrs. Ng-Lou Geok Choo, Assistant Registrar of Companies and Businesses, Singapore; that Wind River office is located at 1, International Business Park, #03-01C, Tower Block, The Synergy, S'pore 609917, Singapore; that Wind River is not registered either as a corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated August 9, 2006 issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software development involving imaging, communications and related technologies. It is further represented that Canon-Philippines purchased the Annual Support and Maintenance of Tornado and Annual Support and Maintenance for VxWorks OEM License as renewal from Wind River ; that as part of the software support and maintenance services agreement, maintenance services shall include the following: 1) Periodic maintenance releases; aDHCEA 2) Periodic patch release; 3) Customer support through Central Support and Field Support; 4) Access to windsurf web support site, Wind River's 24-hour online support, providing access to known problems lists, frequently asked questions (FAQs), online publications, and knowledge-based services; 5) Notification service for changes in product functionality or company information; 6) Proactive Alerts: Automatic reporting of changes to TSR/SPR status; 7) 1 to 1 exchange for hardware while on repair. That all the software and training material delivered to Canon-Philippines under the Wind River Systems, Inc. Software Support and Maintenance Services Agreement and any modification thereto shall be owned by Wind River ; and that the consideration for the purchase of the software shall be $1,104.00 for the Annual Support and Maintenance for Tornado and $2,199.00 for Annual Support and Maintenance for VxWorks OEM License. In reply please be informed that Article 8 in relation to Article 5 of the Philippines-US tax treaty provides: "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. 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 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; aIcDCT 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 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, in order for Wind River to be considered to have a permanent establishment to which said business profit may be attributed, it must satisfy the following conditions: 1 - the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment; - this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence; - the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed placed is situated." (Paragraph 2) Since it appears, based on the SEC Certificate that Wind River is not registered either as a corporation or as a partnership in the Philippines and that Wind River does not have a place of business at its disposal which is fixed or established at a distinct place with a certain degree of permanence in the Philippines through which it may use for carrying on its business, Wind River is deemed as not having a permanent establishment to which said business profit may be attributed to. Thus, for as long as Wind River is deemed not to have a permanent establishment in the Philippines to which profits may be attributable, income from its sale of software or services, such as that made to Canon-Philippines in the instant case, shall be exempt from income tax and consequently withholding tax. However, the electronic transfer of software from the non-resident supplier is importation of software and is subject to value-added tax (VAT) under Section 107 of the NIRC, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Cannon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12% from its payments before it telegraphically transfers it to the account of the Wind River . With regard to the procedures for withholding and paying the VAT, pursuant to Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, Canon-Philippines shall be responsible for the withholding of the 10 percent/(12 percent effective February 1, 2006) VAT on the license fee before remitting it to Wind River . In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Canon-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Canon-Philippines may include as part of the cost of the services provided to it by Wind River the VAT consequently shifted or passed on it and may treat such VAT either as expense or asset , whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Wind River and the fourth copy for Canon-Philippines as its file copy. ECTIHa This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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 Footnotes 1. Organization for Economic Cooperation and Development (OECD), 2005 edition, paragraph 2, pages 85-91.