VAT Ruling No. 020-02

April 1, 2002 VAT RULING NO. 020-02 RP-US Tax Treaty, Arts. 5 & 8; Revenue Regulation 7-95 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty. Mary Assumption S. Bautista-Villareal Principal, Tax Corporate Services Gentlemen : This refers to your letter dated March 26, 1998, requesting on behalf of your client, NEWSWEEK INTERNATIONAL (NI), for a formal ruling on the tax implication of the change in the scope of NI's business activities in the Philippines. It is represented that Newsweek International (NI) is a corporation duly organized under the laws of the State of New York, USA; that on September 15, 1954, NI was granted by the Securities and Exchange Commission (SEC) the authority to engage in business in the Philippines; that the activities of NI in the Philippines include soliciting the sale of, selling and circulating the magazine "Newsweek" and any edition thereof and other magazines, publications and printed matter and advertising in or in any of the same, collecting and carrying on any and all business transactions related thereto; that on July 01, 1997, NI discontinued its solicitation of advertisements in the Philippines and limited the scope of the Branch's activities in the Philippines to importation, sale, circulation and distribution of Newsweek magazine; that NI instead engaged the services of an independent agent in the solicitation of advertisements in the Philippines for arm's length fee; that, however, the Branch's registration as VAT taxpayer has not yet been canceled since the Branch still has uncollected advertising receivables as of July 01, 1997. Based on the foregoing, it is your opinion that the income derived by NI from advertisement placements solicited in the Philippines after July 01, 1997 is not taxable in the Philippines on the ground that the same is not attributable to NI's permanent establishment pursuant to Article 8(1) in relation to Article 5(5) of the RP-US treaty. In reply, please be informed that Article 8(1) and (2) of the RP-US tax treaty provides as follows: "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 an 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, Section 5(5) of the aforementioned treaty provides, viz : "Article 5 "PERMANENT ESTABLISHMENT "(5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that resident, he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the resident were not made under arm's length conditions." "xxx xxx xxx" It is clear from the above-cited provisions that business profits of a resident of US shall be taxable in the Philippines if it has a permanent establishment in the Philippines but only so much of them as is attributable to such permanent establishment. Similarly situated is the case of MARUBENI CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE (G.R. No. 76573, September 14, 1989), where the Supreme Court in denying the petition of Marubeni Corporation interpreted the circumstance in this wise: "In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the undisputed fact that the investment (totaling 283,260 shares including that of nominee) was for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni, Japan but certainly not of the branch in the Philippines. It is thus clear that petitioner, having made this independent investment attributable only to the head office, cannot claim the increments as ordinary consequences of its trade or business in the Philippines and avail itself of the lower tax rate of 10%." The above-cited case enunciated the doctrine that the Philippine branch of a foreign corporation possesses a separate and distinct personality from that of its head office for tax purposes. In other words, when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch of the resident foreign corporation. Such being the case, although NI has a branch in the Philippines, the income derived by it from the advertisement placements in the Philippines after July 01, 1997, which is no longer within the scope of its branch's activities consisting of importation, sale, circulation and distribution of Newsweek magazine, is not subject to income tax under Section 28(A)(1) in relation to Section 57(A) both of the Tax Code of 1997. Accordingly, profits derived by NI from advertisement placements in the Philippines after July 01, 1997 through an independent agent for an arm's length fee are not taxable in the Philippines inasmuch as the independent agent does not constitute a permanent establishment for NI in the Philippines. Finally, since NI is still a VAT-registered entity, the uncollected advertising receivables which it will receive after July 01, 1997 shall be subject to value-added tax imposed under Section 4.102-1(a) of Revenue Regulations No. 7-95, as amended. 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 considered null and void. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue