ITAD Ruling No. 028-05

April 6, 2005 ITAD RULING NO. 028-05 Article 8 of Philippines-United States Tax Treaty BIR Ruling No. 110-90 C. L. Manabat & Company Certified Public Accountant 3rd to 6th Floor, Salamin Bldg. 197 Salcedo St., Legaspi Village 1229 Makati City Attention: Atty. Domingo A. Lagundi, Jr. Tax Manager Gentlemen : This refers to your letter dated July 27, 2004, on behalf of your client Datacraft Communications Systems, Inc. (Datacraft-Phils), requesting confirmation of your opinion that the payment made by Datacraft-Phils to Cisco Systems, Inc. (Cisco) for the after-sale maintenance service rendered by the latter are not subject to withholding tax pursuant to the Philippines-United States tax treaty. It is represented that Cisco is a nonresident foreign corporation organized and existing under the laws of the United States of America (USA) with address at 170 W. Tasman Drive San Jose, California, USA; that Cisco is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated March 1, 2004; that a Global Systems Integrator Agreement ( Agreement ) was entered into in Singapore on December 22, 1998 by and between Cisco and Dimension, a South African corporation, for Dimension's purchase of "hardware and license software" (products) from Cisco, accompanied by certain services that are to be rendered by Cisco for the maintenance and support of their products; that the Agreement provides for its "scope", paragraph 2.6 of which provides as follows: " Affiliates (of Dimension) may purchase Products pursuant to the terms and conditions of this Agreement provided that; (a) the affiliate signs a Letter of Acceptance (LOA) with Cisco in which the Affiliates agrees to comply with the terms and conditions of this Agreement and which constitute a separate contract with Cisco; and (b) Cisco accepts and signs such LOA "; that Datacraft-Phils is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 4th Floor Philamlife Building, 126 L. P. Leviste St., Salcedo Village, Makati City 1227; that on November 24, 1998, in order to avail the benefits of the Agreement and to be able to purchase Cisco's products, Datacraft Asia Ltd. (Datacraft-Asia), a Singaporean company executed the required Letter of Acceptance (LOA) in Singapore, which was subsequently accepted and signed by Cisco on January 27, 1999, thereby creating a new contract separate from the Agreement, binding upon the parties; that among the provisions of the LOA was the declaration of Datacraft-Asia's authority to bind its subsidiaries within the term of its contract with Cisco under paragraph 3 of the LOA, as follows: " In executing the LOA, Datacraft-Asia is signing on behalf of certain Datacraft-Asia's subsidiaries as detailed in Exhibit 2, Authorized Subsidiaries. Datacraft-Asia hereby guarantees the performance by such subsidiaries of the financial and other contractual obligations set forth in this LOA and represents and warrants that it is empowered to enter into this LOA on behalf of such subsidiaries, and to bind such subsidiaries to the terms and conditions of this LOA "; that Datacraft-Phils, an authorized subsidiary of Datacraft-Asia, became a party to LOA with authority to purchase Cisco's products and the right to avail of the services attached to it; that it is the representation of Datacraft-Phils that all the services, which are to be rendered by Cisco in accordance with their contract, are to be performed in Singapore. In reply, please be informed that the payment for maintenance services attached for the products sold by Cisco to Datacraft-Phils are business profits subject to taxation under Paragraphs 1 and 2, Article 8 of the Philippines-United States tax treaty, 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. "2. Where a resident of one of the Contracting States has a permanent establishment in the other Contracting State, there shall in each Contracting State be attributed to the permanent establishment the business profits which would reasonably be expected to have been derived by it if it were on independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a permanent establishment. "xxx xxx xxx" Moreover, Article 5(1) and (2) of the said treaty provides, viz : "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 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 factor; (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) with the other Contracting State for a period or periods aggregating more than 183 days." "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a resident corporation of United States carries on business in the Philippines through a permanent establishment situated therein, the profits of the said corporation attributable to such permanent establishment shall be subject to Philippine income tax. For this purpose, a United States corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation through its personnel, continue (for the same or connected project) within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Considering that all services therewith connected for the purchase of Cisco's product by Datacraft-Phils, pursuant to the terms of the LOA signed between Cisco and Datacraft-Asia of which Datacraft-Phils is a subsidiary in relation to their Agreement, are to be performed entirely in Singapore, Cisco does not have a permanent establishment in the Philippines to which the service fees could be attributable. SHEIDC In view of the foregoing, the part of that fee which represents as maintenance service fee prior to the sale of product of Cisco to Datacraft-Phils shall be taxed as business profits, and therefore exempt from Philippine income tax. (BIR Ruling No. 110-90 dated June 1, 1990) 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.) JOSE MARIO M. BUAG Deputy Commissioner Legal and Inspection Group