ITAD Ruling No. 148-02

August 23, 2002 ITAD RULING NO. 148-02 Section 28, 42 & 108, NIRC BIR Ruling No. 096-90 Atty. Royce W. Lane 5th Floor, Mass Mutual Towers 38 Gloucester Road Hong Kong-SAR S i r : This refers to your letter dated June 18, 2001 requesting for a ruling on the tax implications of the contemplated sale by your client, a company based in Hong Kong (HK Company), of its products in the Philippines and the establishment of a representative office in the latter. It is represented that HK Company is registered and existing under the laws of Hong Kong, People's Republic of China; that it is primarily engaged in the production and selling of gold products such as watches, coins, jewelry and other collector's items; that it is planning to sell its products in the Philippines and establish a non-trading representative office (RO) to be registered with the Securities and Exchange Commission; that the RO shall be limited to attracting prospective buyers and providing forms and promotional activities to customers of the HK Company; that the RO does not have authority to conclude the sale of the subject products on behalf of the HK Company; that in purchasing products of the HK Company, the purchasers in the Philippines are required to accomplish an order form accompanied by American backdraft and other considerations needed to be enclosed as evidence of an often to purchase; that these purchase requirements are facilitated by the RO; that all offers to purchase are sent either by courier or by mail to the HK Company for acceptance; that once the offer to purchase is accepted, the HK Company shall notify the purchaser in writing of its acceptance by mail; and that in essence, your position is as follows: a. There is an offer to purchase with complete consideration enclosed as said, first made known to the seller, only at Hong Kong; and b. There is acceptance decided in Hong Kong; and c. There is a notification of the acceptance done at Hong Kong via deposit at the Hong Kong Post Office, to the purchaser abroad. In the light of the aforegoing scenario, you are now requesting for a ruling as to the jurisdiction of the "point of sale" and the "doing of business" in the Philippines of the HK Company. In reply, please be informed that Article 1319 of the New Civil Code of the Philippines provides as follows: "Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (emphasis supplied) Based on the foregoing provisions, an offer where acceptance is made by letter or telegram does not bind the offerer except from the time it came to his knowledge. In other words, the Civil Code of the Philippines follows the cognition theory where a contract is considered perfected from the moment the acceptance by the offeree comes the knowledge of the offerer. The contract, in such a case, is presumed by law to have been entered into the place where the offer was made. Thus, as regards the issue on "point of sale", inasmuch as the offer to purchase in the instant case is made within the Philippines by purchasers in this country, the subject transaction is presumed to have been entered into and is perfected in the Philippines from the moment the acceptance by the HK Company is made known to the purchasers. Accordingly, the sale of the subject products of HK Company to purchasers in the Philippines is a sale within the Philippines and subject to Philippine income tax. It is also noteworthy that in the case of Commissioner of Internal Revenue vs. British Overseas Airways Corp., Nos. L.-65773-74, promulgated on April 30, 1987, the Supreme Court of the Philippines held that the source of income is the property, activity or service that produced the income. For an income to be considered as arising from Philippine sources, it is sufficient that the income is derived from an activity within the Philippines. Thus, in the instant case, the establishment by HK Company of a Representative Office in the Philippines for purposes of attracting and providing forms and promotional activities to prospective buyers, and the filling up of an order form accompanied by an American backdraft and other considerations needed to be enclosed as an evidence of an offer to purchase, constitute the activities that produced the income consisting of an American backdraft. And since the American backdrafts which constitute as payment thereof are being made here and therefore came from the Philippines, the source of the income is this country. ( BIR Ruling No. 098-90 dated May 28, 1990 ). As regards the issue whether HK Company is "doing business" in the Philippines, it must be determined whether HK Company is considered to be engaged in trade or business in the Philippines, otherwise, it is not doing business in the Philippines. To be considered as engaged in trade or business in the Philippines, a foreign corporation must have a continuity in the conduct of is business and must have the intention to establish a continuous business in the Philippines. This includes, but is not limited to, the appointment of a local agent and similar entities which is not of a temporary character or nature. Furthermore, the term "doing business" implies a continuity of commercial dealings and arrangements, and contemplates to that extent, the performance of acts or works or functions normally incident in the progressive pursuit of commercial gain or the object and purpose of the business organization. ( Commissioner of Internal Revenue vs. British Overseas Airways Corporation ) In the light of the facts as represented, the HK Company shall be deemed as a resident foreign corporation for doing business in the Philippines in view of its establishment of a Representative Office in the Philippines. The Representative Office, based on its functions, acts as the local agent of the HK Company in the latter's pursuit of commercial gain in the Philippines in a more or less permanent and continuous manner. Accordingly, the HK Company shall be subject to Philippine income tax at the rate of 32 percent of its gross income from all sources within the Philippines pursuant to Section 28 of the National Internal Revenue Code of 1997. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service