ITAD Ruling No. 100-00

August 7, 2000 ITAD RULING NO. 100-00 RP-Singapore Articles 5 & 7 BIR Ruling #088-86 Picazo, Buyco, Tan, Fider & Santos 8th, 6th & 4th Floors, Singapore Airlines Building 138 H.V. dela Costa Street, Salcedo Village, Makati City Attention: Atty . Antonio A . Picazo Atty . Peter Donnely A . Barot Partners Gentlemen : This refers to your letter dated March 27, 2000 requesting confirmation of your opinion that the service fees paid to Morgan Stanley Dean Witter Asia (Singapore) Pte (hereinafter, "Morgan Stanley") by AsianBank Corporation (hereinafter, "AsianBank") and its shareholders including, A. Soriano Corporation, Philippine Investment-Management Consultants, Inc. and Philippine Long Term Equity Fund (hereinafter, the "Shareholders"), are not subject to Philippine tax pursuant to the RP-Singapore Tax Treaty. AsianBank and the Shareholders are hereinafter collectively referred to as the "Clients." It is represented that Morgan Stanley is a corporation engaged in providing financial services; that it is organized and existing under the laws of Singapore; that it is not registered to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated May 3, 2000; that the Clients are residents of the Philippines; that the Clients engaged the services of Morgan Stanley to be their exclusive financial advisor in connection with the sale of the Shareholders' shares in AsianBank and/or a merger of AsianBank with another financial institution (the "Transaction") and/or a proposed sale (the "Subsidiary Sale") of some or all of the share capital of one or more subsidiaries or associated companies of AsianBank under an Engagement-Letter between Morgan Stanley and the Clients dated September 17, 1999; that during the term of the aforesaid engagement, Morgan Stanley will provide the Clients with financial advice and assistance in connection with the Transaction and/or the Subsidiary Sale, which may include, if appropriate, advice and assistance with respect to defining objectives, performing valuation analysis, and structuring, planning and negotiating the relevant transaction; that whether or not the Transaction or Subsidiary Sale is completed, Morgan Stanley will charge the Clients an "Advisory Fee" which will compensate the said corporation for their time and effort expended; that under this arrangement, Morgan Stanley will charge a monthly retainer of US$50,000, to be paid by the Clients on a quarterly basis; that if the Transaction is completed, Morgan Stanley will charge a "Transaction Fee" against which any Advisory Fee previously paid will be credited; that if the Subsidiary Sale is completed, Morgan Stanley will charge a "Subsidiary Sale Fee" which will be calculated in the same manner as the calculation of the Transaction Fee; that the furnishing of services by Morgan Stanley will not exceed 183 days; and that Morgan Stanley does not have a "permanent establishment" in the Philippines as this term is defined in the RP-Singapore Tax Treaty. In reply thereto, please be informed that paragraph (1), Article 7 of the RP-Singapore Tax Treaty provides as follows: Article 7 Business Profits "1. The profits of all enterprise of a Contracting States 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 or has carried 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" Moreover, paragraphs (1), (2) and (3) of Article 5 of the aforesaid treaty provide, viz: "Article 5 Permanent Establishment "1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business which the business of the enterprise is wholly or partly carried on. "2. The term "permanent establishment" includes specially but is not limited to: a) A seat of management; b) A branch; IcHTED c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation 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" Under the aforementioned provisions, it is clear that if a corporation which is a resident of the Republic of Singapore does not carry on business in the Philippines through a permanent establishment situated therein, the profits of the Singaporean-resident corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of the Republic of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such Singaporean-resident corporation, through its employees or other personnel, continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Considering that the performance of Morgan Stanley's Advisory Services under the Engagement-Letter with the Clients will be for less than 183 days, Morgan Stanley cannot be considered to have a permanent establishment in the Philippines. Hence, the service fees paid to Morgan Stanley by the Clients under the Engagement-Letter are not subject to Philippine income tax. [BIR Ruling #088-86] However, the fees paid by the Clients to Morgan Stanley for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, the Clients, being the lessee of Morgan Stanley for the advisory services rendered under the Engagement-Letter, shall be responsible for the payment of VAT on said services on behalf of Morgan Stanley by filing a separate VAT declaration/return using BIR Form 1600 and the said VAT declaration/return can be used by the Clients, as evidence in claiming input tax credit (Sec. 4.102-1(b). Revenue Regulations No. 7-95) [BIR Ruling No. 49-96 dated April 11, 1996] TIaCHA In fine, while payments made by the Clients to Morgan Stanley for services rendered in the Philippines under the Engagement-Letter are not subject to income taxes in the Philippines, the same are subject to the 10% value-added tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group