Bir Itad Ruling No. Da-065-07

May 16, 2007

DA ITAD BIR RULING NO. 065-07 Section 23 (F) in relation to Section 42 (A) (3) of the National Internal Revenue Code, as Amended; BIR Ruling No. DA-ITAD 105-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Atty. Fulvio D. Dawilan Partner, Tax Advisory and Compliance Gentlemen : This refers to your letter dated July 11, 2006 requesting confirmation that the marketing fees paid by KMP Engineering, Inc. (KMP) to T-Net Japan Co., Ltd. (T-Net) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent sections of the National Internal Revenue Code of 1997 (Tax Code of 1997) and the Philippines-Japan tax treaty. tax2007

It is represented that T-Net is a nonresident foreign corporation taxable under the laws of Japan with business address at 930-10, Nariai-Cho, Takamatsu-Shi, Kagawa-Ken, 761-8081 Japan and Tax Reference Number 00230286, as certified by the District Director of Takamatsu Tax Office in Japan on April 6, 2006; that T-Net is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission Cebu Extension Office on June 28, 2006; that KMP, on the other hand, is a domestic corporation with principal office at Salvage Road, Looc, Lapu-Lapu City, Cebu; that KMP is engaged in the manufacture of pre-fabricated steel structure. It is further represented that on April 1, 2006, KMP entered into a Marketing Agreement (Agreement) with T-Net; that under the said Agreement, Copyright 1994-2012

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T-Net shall provide the following services to KMP: 1.

Promotion or marketing of the products of KMP in Japan and other neighboring countries;

2.

Assistance to KMP in developing marketing strategies and specific marketing activities outside the Philippines;

3.

Representation of KMP in various marketing activities outside the Philippines; and

4.

Undertaking of such other incidental marketing activities as may be requested by KMP to promote the latter's product in other countries.

That the foregoing services shall in no case involve the transfer of T-Net's technology, know-how or other intellectual property rights; that the employees and personnel of T-Net shall exclusively perform the services for KMP in Japan or in other countries outside the Philippines; that as compensation for the service performed by T-Net, KMP shall pay Japanese Yen: Seven Hundred Fifty Thousand (JPN750,000.00) per month to T-Net; and that the issue or transaction subject of the above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 23 (F) of the Tax Code of 1997, as amended, provides: "Section 23. General Principles of Income Taxation in the Philippines. — Except when otherwise provided in this Code: xxx (F)

xxx

xxx

A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. xxx

xxx

xxx"

According to Section 23 (F), a foreign corporation like T-Net is taxable only on income derived from sources within the Philippines. In the case of income from the provision of services, such income is considered derived from sources within the Philippines if the services are performed in the Philippines, as stated in Section 42 (A) (3) of the Tax Code of 1997, as amended, below: "Section 42. Income from Sources Within the Philippines. — Copyright 1994-2012

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A.

Gross Income From Sources Within the Philippines. — The following items of gross income shall be treated as gross income from sources within the Philippines: xxx

xxx

xxx

(3) Services. — Compensation for labor or personal services performed in the Philippines; xxx

xxx

xxx"

Such being the case and since the subject services will be carried out entirely in Japan and other countries, the marketing fees to be paid by KMP to T-Net, being income not derived from sources within the Philippines by a foreign corporation, are exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 105-05 dated August 24, 2005) Lastly, since it is represented that the said services will be rendered in Japan and other countries, the marketing fees to be paid by KMP to T-Net will not be subject to VAT pursuant to Sec. 4.108-2 of the Revenue Regulations (RR) No. 16-2005, 1(1) as amended which states that: "Sec. 4.108-2. Meaning of 'Sale or Exchange of Services'. The term 'sale or exchange of services' means the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following; . . ." cSIADH

This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service

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Footnotes 1.

Consolidated Value-Added Tax Regulations of 2005.

May 16, 2007

DA ITAD BIR RULING NO. 064-07 Art. 12, Philippines-Malaysia Tax Treaty; BIR Ruling No. DA-ITAD-28-04 Punongbayan & Araullo 20th Flr., Tower 1 The Enterprise Center 6766 Ayala Avenue, 1200 Makati City Attention: Maria Victoria C. Españo Tax Partner Gentlemen : This refers to your letter dated October 4, 2006, requesting confirmation of your opinion that the license fees paid by ISC Consolsys Corporation (Consolsys-Philippines) to Consolsys Sdn Bhd (Consolsys-Malaysia) are subject to the 25% preferential tax rate provided under the Philippines-Malaysia tax treaty. It is represented that Consolsys-Malaysia is a nonresident foreign corporation and a resident of Malaysia under tax number C 1876318-09 as shown in the Certificate of Status of Tax Residence For the Year of Assessment 2005 dated June 12, 2006 issued by the International Tax Department, Policy Division of the Inland Revenue Board, Malaysia; that its principal office is located at the 9th Floor, Menara Getah Asli, 148, Jalan Ampang, 50450 Kuala Lumpur, Malaysia; that Consolsys is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration dated May 31, 2006 issued by the Securities and Exchange Copyright 1994-2012

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Commission; that Consolsys-Philippines is a domestic company with principal office address located at 5th Floor, Century Tower Bldg., Tordesillas corner H.V. dela Costa Streets, Salcedo Village, Makati City. It is further represented that on January 1, 2005, Consolsys-Malaysia and Consolsys-Philippines entered into a Terms of Relationship (Agreement) which outlines the relationship between the two parties regarding the licensing of the products (referred to in the Agreement as CS Products) as listed below: 1.

Signature Verification System (SVS)

2.

Fingerprint Authentication System (FAS)

3.

Controlled Document Inventory System (CDIS)

4.

CS-IP Concentrator (CS-IPC)

5.

CS-Java IP Concentrator (CS-JIPC)

6.

Consolsys Software Distribution System (CSDS)

7.

Business Performance Analysis System (BPAS)

8.

Tezauri Data Warehousing & Business Intelligence System

9.

Cheque Processing Solutions (CPS) —

Outward ChequeClearing System (OCCS)

—

Inward ChequeClearing System (ICCS)

10.

Open Systems Financial Architecture (OSFA)

11.

Conventional Core Banking Systems

12.

Islamic Core Banking Systems

13.

Consolsys Middleware

14.

Other new products as end when release by Consolsys R & D Department

That Consolsys-Philippines is authorized to sell, deliver and support Consolsys' CS Products software products in the Philippines; that Consolsys-Malaysia grants Consolsys-Philippines the right to sublicense CS Products to end-users; that Consolsys-Philippines is granted a non-exclusive, non-transferable, non-assignable Copyright 1994-2012

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license to sublicense the software listed as CS Products only to Consolsys-Philippines customers; that Consolsys-Philippines shall not provide the Software in any form to third parties other than properly sublicensed customers of Consolsys-Philippines; that in consideration of Consolsys-Philippines' payment of the required annual license and support fee, it will receive the Software Support consisting in: 1.

The right to permit to use its customers the Software during the period covered by the annual licensee fee and the right to distribute to its customers any applicable Software version upgrades subsequently developed by Consolsys-Malaysia for applicable release level of Software. Any new release of Software must be separately licensed and are not included as part of the annual license fee. CTAIDE

2.

The right to have Consolsys-Malaysia correct or replace any programming errors in the Software. Consolsys-Philippines must notify Consolsys-Malaysia of the problem and provide reasonably detailed description of the problem •

Provide CS Products development environment.

•

Provide technical support to Consolsys-Philippines technical staff.

•

Provide marketing and sales support including: Periodic on-site sales support RFP response support Product Literature/Sales Brochures Arrange and support customer visits Maintain customer Information List

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•

Provide CS Products Demonstration Software and Script

•

Offer and conduct regularly scheduled technical training courses at discounted rates. Courses are offered at the Kuala Lumpur Training Center.

•

Offer periodic sales training

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That the Agreement is effective as of January 2005; that an Addendum Agreement was also executed providing that the Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by Consolsys-Malaysia; and that the issue or transaction subject of above application is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that the license fees paid by Consolsys-Philippines to Consolsys-Malaysia for the use of the software products are royalties for the use or the right to use of a copyright under Article 12, paragraph (4) (a) of the Philippines-Malaysia tax treaty and in Revenue Memorandum Circular No. 77-2003 dated November 18, 2003, to wit: Philippines-Malaysia tax treaty: "4.a)

The term 'royalties' as used in this Article means payments of any kind received as consideration for: (i)

the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, any copyright of literary, artistic or scientific work, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience;

(ii)

the use of, or the right to use, cinematograph films, or tapes for radio or television broadcasting."

Revenue Memorandum Circular No. 77-2003: "Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines; thus, payments in consideration for the use of, or the right to use, a copyright or a copyrighted article relating to software are generally royalties."

Being royalties, the subject license fees are subject to the preferential income tax rate under paragraph (2) (b) (ii) of the Philippines-Malaysia tax treaty, to wit: "Article 12 ROYALTIES 1. Copyright 1994-2012

Royalties arising in a Contracting State and paid to a resident of CD Technologies Asia, Inc.

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the other Contracting State may be taxed in that other State, if such resident is the beneficial owner of the royalties. cDCaTS

2.

Such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State. However, if the recipient is the beneficial owner of the royalties: a)

b)

in the case of Malaysia: (i)

the tax so charged shall not exceed 15 per cent of the gross amount of the royalties; and

(ii)

approved industrial royalties derived from Malaysia by a resident of the Philippines shall be exempt from tax.

in the case of the Philippines: the tax so charged shall not exceed: (i)

15 per cent of the gross amount of the royalties where the royalties are paid by a registered enterprise as well as royalties defined in paragraph 4(a)(ii); and

(ii)

25 per cent of the gross amount of the royalties in all other cases. xxx

xxx

xxx"

Based on the aforequoted provisions, such royalties may be taxed in the Philippines at the rate of 15 percent if paid by a registered enterprise or if such consideration is for the use of, or the right to use, cinematograph films, or tapes for radio or television broadcasting; or 25 percent in all other cases. Since Consolsys-Philippines is not a registered enterprise and since the payment of the license fees is not for the use of, or the right to use, cinematograph films, or tapes for radio or television broadcasting, this Office is of the opinion and so holds that said license fees paid by Consolsys-Philippines to Consolsys-Malaysia under the subject Agreement are subject to 25 percent of the gross amount of the royalties pursuant to Article 12, paragraph 2 (b) (ii) of the Philippines-Malaysia tax treaty. (BIR Ruling No. DA-ITAD 28-04 dated March 29, 2004) Finally, as regards value-added tax (VAT), the royalties for the right to sublicense the Consolsys' CS Products to be paid by Consolsys-Philippines to Consolsys-Malaysia are subject to VAT under Section 108 (A) (1) of the National Copyright 1994-2012

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Internal Revenue Code of 1997 (Tax Code), as amended, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A)

Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . . The phrase 'sale or exchange of services' shall likewise include: (1)

The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx

xxx

xxx" 1(2)

With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that Consolsys-Philippines shall be responsible for the withholding of the VAT on the royalties before remitting them to Consolsys-Malaysia. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, Consolsys-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Consolsys-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Consolsys-Philippines may include as part of the cost of the software products licensed to it by Consolsys-Malaysia the VAT consequently shifted or passed on to it and may treat such VAT either as an expense or as an asset, whichever is applicable. In addition, Consolsys-Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Consolsys-Malaysia and the fourth copy for Consolsys-Philippines as its file copy. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned.

Very truly yours, Copyright 1994-2012

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Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1.

Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108 (A) to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

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May 15, 2007

DA ITAD BIR RULING NO. 063-07 Arts. 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD 231-02 Heinz UFC Philippines, Inc. 12F Centerpoint Condominium Garnet Road Cor. Julia Vargas Avenue Ortigas Center, Pasig City 1600 Attention: Salvador B. Viray Tax Manager Gentlemen : This refers to your letter dated December 14, 2005, 1(3) applying for a ruling that the service fees paid by Heinz UFC Philippines, Inc. (Heinz-Philippines) to Heinz Singapore PTE Ltd. (Heinz-Singapore) are exempt from Philippine income tax and from value-added tax (VAT) pursuant to the pertinent provisions of the Philippines-Singapore tax treaty. It is represented that Heinz-Singapore is a nonresident foreign corporation taxable under the laws of Singapore with office address at 501 Orchard Rd., # 13-01, Wheelock Place, Singapore 238880 as confirmed by the Certificate issued by Sabina H B Cheong (Mrs), Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax of the Authority of Singapore; that Heinz-Singapore is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on September 15, 2005; that Heinz-Philippines, on the other hand, is a company organized and existing under the laws of the Philippines with principal office at 9F Centerpoint Bldg., Garnet Road Cor. Julia Vargas Ave., Ortigas Center, Pasig City; that its primary purpose is to engage in, operate, conduct and maintain the business of manufacturing, importing, buying, selling, Copyright 1994-2012

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distributing or otherwise dealing in, at wholesale, food products, such as but not limited to sauces and condiments which are banana-based, tomato-based or chili-based, infant feeding products (excluding infant milk formula), pet food, tuna products, frozen foods, corned beef, convenience meals and food service products, and brewed soy sauce. SCEHaD

It is further represented that in 2002, Heinz Singapore and Heinz Philippines entered into a Services Agreement with a commencement date on April 1, 2002 (clause 3) and termination date (clause 6), whereby Heinz-Singapore shall provide the following services to Heinz-Philippines: I.

II.

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Business Advice •

Analysis of market and business opportunities

•

Development of budget and review of performance against budget targets

•

Assistance with business growth through acquisition

•

Development of strategic plans to build brand awareness

•

Supporting due diligence and commercial assessment of prospective JVs or acquisitions

•

Development and training associated with business continuity plans and crisis management

Finance/Legal •

Assistance with budgeting and planning

•

Assistance with major capital expenditure

•

Business development (e.g. financial analysis, forecasting, assessment)

•

Special project (e.g. taxation planning, incorporation, reporting)

•

Development and maintenance of reporting IT infrastructure

•

Provision of general legal advice, insurance management, contract drafting

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III.

IV.

V.

VI.

Treasury •

Monitoring of cash requirements

•

Monitoring of regional funding requirements

•

Transactional banking and corporate debt services

•

Monitoring of working capital and controllable assets

•

Accounting, budgeting and forecasting of FX, debt and structured finance solutions

•

FX risk management

•

Business process reviews and due diligence processes

Human Resources •

Administration of personnel related issues of affiliates

•

Recruiting and staffing

•

Administration of salaries and benefits

•

Monitoring of WHQ benefits programs

•

Administration of expatriate assignments, organizational structure, career and leadership development process

•

Performance management

Marketing •

Assistance with the development, administration implementation of marketing plans and strategies

•

Coordination of transfer across the region of new products, knowledge, best practice, etc.

•

Representation of local entities on the Global Category Management terms

Food Services •

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and

Monitoring of sales to quick service restaurants such as

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McDonalds, Tricon and Burger King

VII.

•

Development of food service marketing and sales strategies

•

Support of development of affiliate foodservice plans and programs

•

Coordination of regional quick service restaurants pricing

•

Training of regional foodservice sales and marketing personnel

•

Assistance with acquisitions related to foodservices

Manufacturing •

Identification and justification of key manufacturing projects

•

Strategic administration of manufacturing projects

•

Development of operation and manufacturing plans

•

Establishment of manufacturing strategies

•

Administrative assistance with implementation of operational improvements

•

Assistance with manufacturing issues in respect of due diligence process with potential acquisitions

•

Assistance with implementation of safety process and environmental monitoring systems

•

Provision of training for environment, health and safety (EHS) managers

•

Provision of advice on business and regulatory risk related to EHS issues

VIII. IT

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•

Provision of computer and network infrastructure support and related services

•

Development of regional guidelines

•

Development of local and regional IT initiatives for business

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development IX.

X.

Research and Development •

Assistance, review and implementation of quality and compliance systems and policies

•

Assistance with the development and implementation of products/process development or cost reduction projects

•

Assistance with handling of quality assurance, quality control, R&D, engineering and external affairs issues (e.g. consumer complaints)

•

Investigation and technical assistance with new business opportunities

•

Technical support and coordination of technical activities

Procurement •

Development of Asia Pacific purchasing strategy

•

Identification of Asia Pacific partners for sourcing of key components

•

Advice/assistance on make/buy decisions

•

Negotiation of pricing and terms on supply contracts

•

Provision of Asia recommendations

•

Recommendations and maintenance on vendor supply base

Pacific

commodity

hedging

That the nature of the Services required by Heinz-Philippines may, from time to time, require employees of Heinz-Singapore to be present in the Philippines for short periods of time; that the said Services Agreement shall continue without limitation as to time unless and until terminated by the parties; that no technical services were rendered by Heinz-Singapore for the Philippine operations from April 1, 2003 to March 31, 2004 per certification dated November 12, 2005 issued by Ms. Lana B. Parungao, HR & OD Griuo Head of Heinz-Philippines; and that the Services provided will be invoiced to Heinz-Philippines at a fee calculated at Cost plus an arm's length mark-up. In reply, please be informed of that Article 7 of the Philippines-Singapore Copyright 1994-2012

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tax treaty provides as follows: "Article 7 BUSINESS PROFITS 1.

The profits of an enterprise of a Contracting State 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."

In view of the foregoing, the profits of a Singapore enterprise shall be taxable only in Singapore unless such enterprise carries on business in the Philippines through a permanent establishment situated therein. If the Singapore enterprise carries on business as aforesaid, the profits of such enterprise may be taxed in the Philippines but only so much of them as is attributable to that permanent establishment. Applying this to the instant case, the service fees received by Heinz-Singapore for the services rendered in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the Philippines to which said fees may be attributed. In relation thereto, Article 5 of the Philippines-Singapore tax treaty provides: "Article 5 PERMANENT ESTABLISHMENT 1.

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

2.

The term "permanent establishment" includes specially but is not limited to:

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a)

A seat of management;

b)

A branch;

c)

An office;

d)

A store or other sales outlet;

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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."

Inasmuch as it is represented that the Services Agreement shall continue until terminated by either party, the whole of such Agreement, including its continuance, upon its automatic renewal, shall be regarded as being the "same or connected project" for the purpose of counting the aggregate period of 183 days. In other words, the 183 day period shall be counted based on the total number of days the services are rendered in the Philippines upon effectivity of the subject Services Agreement on its commencement date, April 1, 2002, including all periods resulting from its automatic renewal and not only within any 12-month period or a taxable year. Accordingly, for as long as the employees or agents of Heinz-Singapore do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to Heinz-Philippines for the "same or connected project" starting April 1, 2002 until terminated, then Heinz-Singapore is deemed not to have a permanent establishment in the Philippines to which payment of the service fees may be attributed to and therefore, exempt from Philippine income tax. (BIR Ruling No. DA-ITAD 231-02 dated December 27, 2002) Moreover, while the compensation for services rendered outside the Philippines is not subject to VAT, the fees paid for that portion of the services of Copyright 1994-2012

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Heinz-Philippines which are rendered in the Philippines are, however, subject to value-added tax (VAT) pursuant to Section 108 2(4) of the Tax Code of 1997, as amended by Republic Act No. 9337. Accordingly, Heinz-Philippines, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to Heinz-Singapore. In remitting the VAT withheld, Heinz-Singapore shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Heinz-Philippines if it is a VAT-registered taxpayer. In case Heinz-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, Heinz-Philippines is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for Heinz-Singapore and the fourth copy for Heinz-Philippines as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling shall apply to payments for services for the period starting April 1, 2002 onwards and is issued on the basis of the 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. 2.

Received by this Office on January 2, 2006. Effective February 1, 2006, the rate is 12% pursuant to Revenue Memorandum Circular No. 7-2006 — [Publishing the full text of the memorandum issued by Executive Secretary Eduardo R. Ermita informing the Secretary of Finance that his recommendation to increase the Value-Added Tax rate from 10% to 12% effective February 1, 2006 has been approved by the President].

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December 20, 2006

DA ITAD BIR RULING NO. 171-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-122-04 Ideal World Corporation Tres Cruses Rd. Bgy. de Ocampo Trece Martires City Cavite Attention: Mr. Mario M. Guy Chief Finance Officer Gentlemen : This refers to your application for tax treaty relief dated September 30, 2005, requesting confirmation that the dividend payments of Ideal World Corporation (IWC) to Happy World Incorporated (HWI) are subject to the 10% preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that HWI is a nonresident foreign corporation organized and existing under the laws of Japan with Business Registration No. 0110-01-018814 and with office address at Jingumae Happy Bldg., 6-19-14 Jingumae Shibuya-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification dated September 14, 2005 issued by the Securities and Exchange Commission; that IWC is a domestic corporation organized and existing under the laws of the Philippines, with office address at Tres Cruses Rd., Bgy. de Ocampo, Trece Martires City, Cavite, Philippines. Copyright 1994-2012

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It is further represented that as of March 16, 2005 to September 16, 2005, HWI owned Twenty One Thousand Eight Hundred (21,800) shares amounting to Two Million One Hundred Eighty Thousand Pesos (PhP2,180,000.00), representing 36.3% of the total shares in IWC; that on July 30, 2005, the Board of Directors of IWC resolved and approved the declaration of cash dividends of Five Pesos (PhP5.00) per share amounting to Three Hundred Thousand Pesos (PhP300,000.00) from the corporation's unrestricted retained earnings, payable to stockholders of record as of June 30, 2005, distributable on September 16, 2005. SAaTHc

In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides as follows: "Article 10 (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. (2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; (b) 25 per cent of the gross amount of the dividends in all other cases. xxx

xxx

xxx

(4) The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx

xxx

xxx"

Based on the aforequoted provisions, the Philippines may tax the dividends Copyright 1994-2012

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paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares of the issuing company during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that as of March 16, 2005 and up to September 16, 2005. HWI held 36.3% of the outstanding capital stock of IWC, as shown in the Certification issued by the Corporate Secretary of IWC dated June 2, 2006, the dividends paid to HWI by IWC are subject to the 10% preferential tax rate, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-122-04 dated November 3, 2004) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DTCAES

Very truly yours, Commissioner of Internal Revenue By:

(SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service

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Endnotes 1 (Popup - Popup) 1.

Consolidated Value-Added Tax Regulations of 2005.

2 (Popup - Popup) 1.

Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, amended Section 108 (A) to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. — (A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.

3 (Popup - Popup) 1.

Received by this Office on January 2, 2006.

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4 (Popup - Popup) 2.

Effective February 1, 2006, the rate is 12% pursuant to Revenue Memorandum Circular No. 7-2006 — [Publishing the full text of the memorandum issued by Executive Secretary Eduardo R. Ermita informing the Secretary of Finance that his recommendation to increase the Value-Added Tax rate from 10% to 12% effective February 1, 2006 has been approved by the President].

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