ITAD Ruling No. 003-02

January 7, 2002 ITAD RULING NO. 003-02 RP-US, Articles 5 & 8 BIR Ruling No. ITAD-65-00 Poblador Bautista & Reyes 5th Floor SEDCCO 1 Bldg. 120 Rada cor Legaspi Sts., Legaspi Village, Makati City Attention: Atty . Gilbert Raymond T. Reyes Atty . Raymund Martin C . Rodriguez Atty . Susan Bustos-Jacinto Gentlemen : This refers to your letters dated August 14, 2001 and September 11, 2001 requesting confirmation of your opinion that the referral fees to be paid by Drake Beam Morin Philippines (DBM Philippines) to Drake Beam Morin, Inc. (DBM USA) under their Affiliate License Agreement (Agreement), are not subject to Philippine income tax pursuant to the RP-US tax treaty. It is represented that DBM USA is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, USA; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 27, 2001; that it is engaged in the business of providing, individual outplacement consulting programs and group outplacement consulting workshops; that it has access to, has developed and uses sophisticated technology and know-how in executive career continuation programs, spouse relocation counseling, retirement counseling, entrepreneurial programs, career decision workshops, selection interviews and other outplacement programs; that DBM Philippines is a 100% Filipino owned corporation duly organized and existing under Philippine laws; that it is engaged in the business of providing individual and group consultancy services; that on June 1, 2001, DBM Philippines, in its, desire to obtain DBM USA's sophisticated technology and know-how in the field of outplacement consulting services, entered into an Affiliate License Agreement with DBM USA registered with the Intellectual Property Office (IPO) under Certificate of Registration No. 5-2001-00055, dated July 30, 2001, effective for three (3) years commencing on June 01, 2001. It is further represented that under Clause 5.1 of the Affiliate License Agreement, DBM USA shall refer to DBM Philippines inquiries it received for services in the Philippines; that in case a DBM USA customer in the United States requires services to be performed in the Philippines, DBM USA will pass on the business to DBM Philippines by way of telephone advice, fax or letter advice; that upon receipt of the referral advice, DBM Philippines will then directly deal and transact with the DBM USA customer and perform all the services required by said customer in the Philippines; that in referring business to DBM Philippines, no employee or representative of DBM USA will render or perform any work or service in the Philippines; and that in consideration of the said referrals, DBM USA shall be entitled to a 15 percent referral fee for non-discounted business referrals it made to DBM Philippines. In reply, please be informed that 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 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. IHCDAS "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; 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. Based on the aforequoted provisions, it is clear that if a corporation which is a resident of the United States does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the same shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of the United States may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation, through its employees or other personnel, in the same or connected project, continue within the Philippines for a period or periods aggregating more than 183 days. Since the referral by DBM USA of prospective customers to DBM Philippines is performed by the former in United States and none of its personnel will arrive or stay in the Philippines for the purpose of performing the services required by the said customers, DBM USA is deemed not to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the referral fees received by DBM USA from DBM Philippines under their Affiliate License Agreement are not subject to Philippine income tax pursuant to Article 8(1) in relation to Article 5(2) of the RP-US tax treaty. (BIR Ruling No. ITAD-65-00 dated April 6, 2000) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group