Re : Concept of "Doing Business"

March 11, 2004 SEC OPINION NO. 17-04 Re : Concept of "Doing Business" Mr. Romeo H. Duran Punongbayan & Araullo 20th floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue, 1200 Makati City, Philippines S i r : This refers to your letter dated February 6, 2004, inquiring on whether or not your client, American Airlines, Inc. (AAI) a foreign corporation organized and existing under the laws of Delaware, U.S.A. should register as a representative office under the provisions of the Foreign Investments Act considering that its activity in the Philippines as an off-line international carrier is limited to ticketing services through its main ticket sales office and through designated sales agents, which sale will not be subject to tax as "Gross Philippine Billings." Under Section 3 (d) of RA 7042, otherwise known as the Foreign Investments Act, it is provided that: "d) The phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business: shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;" As held in the cases of Commissioner of Internal Revenue vs. American Airlines, Inc .,180 SCRA 274 [1989];* Commissioner of Internal Revenue vs. British Overseas Airways Corporation ,140 SCRA 395 [1987]:** "Foreign airline companies which sell tickets in the Philippines through their local agents, whether called liaison offices, agencies or branches, are considered under the National Internal Revenue Code as resident foreign corporations engaged in trade or business in the Philippines. Such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business organization. Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount object." Based on the above-definition of doing business, it is clear that your client must register as a branch office under the provisions of the Foreign Investments Act considering that it has a ticketing office within Philippine territory, which will engage in the performance of acts in progressive prosecution of its business or in the continuity of commercial dealings or arrangements for commercial gain. EDSHcT Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel