ITAD Ruling No. 189-02

October 24, 2002 ITAD RULING NO. 189-02 RP-US Article 13 RP-Russia Article 12 RP-Netherlands Article 12 BIR Ruling No. DA-ITAD-140-00 Information Systems Operations Service Bureau of Internal Revenue NOB, BIR Road Diliman, Quezon City Attention: Mr. Alberto A. Pio de Roda Assistant Commissioner Gentlemen : This refers to your letter dated October 03, 2000, requesting confirmation of your opinion that the service fees to be paid by the Bureau of Internal Revenue (BIR) to Search Software America (SSA) are not subject to income tax, pursuant to the National Internal Revenue Code of 1997 and in relation to the RP-US tax treaty. It is represented that SSA is a corporation organized and existing under the laws of Delaware, USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated January 3, 2001; that Andersen Consulting Philippine Systems, Inc. (AC-PS, Inc.) is a corporation duly organized and existing under Philippine laws with principal address at 105 Dela Rosa corner Perea Sts., Makati City, Metro Manila; that a License Agreement was entered into between SSA and AC-PS, Inc. dated April 1, 1996; that SSA is the manufacturer and supplier of certain proprietary computer software packages and documentation named SSA-NAME3 and SSA-EXTENSIONS (hereinafter referred to as the "Product"); that SSA, under the License Agreement, granted AC-PS, Inc. a non-transferable and non-exclusive license to use the Product, subject to the terms and conditions as they may thereafter set forth; that AC-PS, Inc. is authorized to use the Product, while the agreement is in effect; that AC-PS, Inc. agreed to pay the license fee for the use of the Product; that an Addendum #1 to #3 to the Product Attachment to the License Agreement was entered into between SSA and BIR dated February 15, 2000, December 26, 2000 and November 5, 2001, respectively, in which these consist, among others, as follows: (1) that BIR is the owner of the License purchased on April 1, 1996 by AC-PS, Inc. on behalf of BIR and assigned to BIR by AC-PS, Inc. on May 19, 1999, (2) that the equipment is for the use of the UNIX operating system consisting of 52 CPUs in eight servers, (3) that BIR will notify SSA if there are changes in the equipment usage or if the Product is to be used on additional machines, (4) provided that the license is in force, SSA will provide maintenance in the form of revised releases of the Product and telephone based technical support, (5) that the maintenance fees for the Product amounting to US$24,000 for the year 2000 to 2001 and US$25,200 for the year 2002 are billed at 15% of the then current licensing fee for the product and equipment, such maintenance fee shall be due and payable annually in advance and SSA grants the BIR a one-time exception from the annual fee to prorate this fee to comply with the fiscal needs of the BIR, applicable to the year ending December 31, 2000, and for the year 2003 one year's maintenance for the ninth server is included in the upgraded fee and beginning January 2003, maintenance for this additional server will be included in the total maintenance fee for the 9 servers (6) that SSA shall post the availability of all corrective releases that SSA makes generally available to all end users of the Product to remedy any error on its website and supply it to BIR upon request, and all such corrective releases, when delivered, shall become part of the Product and shall be maintained in accordance with and subject to the SSA and conditions of the License Agreement, (7) that SSA shall provide to BIR free of charge, all enhancement and upgrades to the Product, (8) that SSA will provide technical support services via telephone, fax and email to BIR's users of the Product which comprises of the following: (a) troubleshooting involving SSA application level error messages, (b) questions on general functionality, (c) problem escalation to relevant group within SSA organization and (d) detailed tracking of all support issues, that the maintenance of the Product is strictly done in the US, there is no service performed in the Philippines, no presence of workers in the Philippines; that SSA does not sell anything in the Philippines but strictly maintaining their license which is installed on the computers. In reply, please be informed that Article 8 of the RP-US tax-treaty provides as follows: SHDAEC "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" Moreover, Article 5 of the RP-US tax treaty provides: "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. xxx xxx xxx" Based on the foregoing provisions, the profits of a corporation which is a resident of US is taxable only in the US, unless the American corporation carries on business in the Philippines through a permanent establishment situated therein to which such profits may be attributed to. In the absence of a fixed place of business, the existence of such permanent establishment may likewise be confirmed should the duration of stay of the enterprise's personnel in the Philippines exceed 183 days for the purpose of rendering the services in the Philippines. However, inasmuch as the maintenance services to be rendered by SSA under the License Agreement will be performed entirely in the USA, SSA cannot be considered to have a permanent establishment in the Philippines. Such being the case, the maintenance fees to be paid by BIR to SSA pursuant to the Addendum #1 to #3 to the Product Attachment of their License Agreement are not subject to Philippine income tax and consequently to the withholding tax prescribed under Section 28(B)(1) in relation to Section 57(A) and to the value added tax under Section 108, all of the 1997 Tax Code. ( BIR Ruling No. 140-00 ) 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service