July 22, 2004

ITAD RULING NO. 073-04

Articles 5 (Permanent Establishment),

7 (Business Profits), 12 (Royalties) and
15 (Dependent Personal Services)
Philippines-Netherlands tax treaty BIR
Ruling Nos. DA-ITAD 169-02, 28-04,
56-04 and 67-04

Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City

Attention: Ms. Veronica A. Santos

Tax Division

Gentlemen :

This refers to your letter dated May 17, 2004 requesting confirmation that
royalties to be paid by Wireless Services Asia, Inc. (Wireless (Philippines)) to Oy
Wireless Services Europe, Ltd. (Wireless (Finland)) are subject to 15 percent income
tax under the existing Philippines-Finland tax treaty.

It is represented that Wireless (Finland) is a nonresident foreign company

organized and existing under the laws of Finland with principal office at Itamerenkatu
5, 2nd Floor, 00180 Helsinki, Finland, as confirmed by the relevant Certification
issued by the National Board of Patents and Registration of Finland on December 11,
2003; that Wireless (Finland) is not registered either as a corporation or as a
partnership licensed to engage in business in the Philippines as confirmed by the
Certification of Non-Registration of Corporation/Partnership issued by the Securities
and Exchange Commission on December 11, 2003; that, on the other hand, Wireless
(Philippines) is a domestic company organized and existing under the laws of the
Philippines with principal office at 11th Floor, NOL Tower, Commerce Avenue,
Madrigal Business Park, Ayala Alabang, Muntinlupa City, Philippines; that Wireless
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 (Finland) and Wireless (Philippines) are engaged primarily in the sale of and the
provision of services related to digital products and in the hosting of applications for
delivery over GSM networks; that, on December 15, 2002, Wireless (Finland) and
Wireless (Philippines) entered into a License Agreement where Wireless (Finland)
granted Wireless (Philippines) the exclusive license to use and to sublicense in the
Philippines and in some other countries the Licensed Products and Trademarks
developed and owned by Wireless (Finland); that the Licensed Products (MBox© and
GameChannel©) are software that enable downloading of ringing tones, logos, Java,
and MMS to mobile phones, picture messaging, and short message service (SMS)
games applications (MBox©), and that enable SMS TV arcade gaming, chatting,
polling, and voting (GameChannel©); that the Trademarks are MBox© Platform
along with its wireless service applications and software protocols, and
GameChannel© along with its SMS TV applications; that in consideration, Wireless
(Philippines) shall pay Wireless (Finland) a royalty of not less than five percent (5 %)
but not more than forty percent (40 %) based on actual payments received by Wireless
(Philippines) from end users, advertisers, sponsors, mobile phone operators,
sublicensees, and other distribution partners; that the initially agreed royalty fee is
nineteen percent (19 %); that aside from the license, Wireless (Finland) shall provide
Wireless (Philippines) support and maintenance services and updates and add-ons
related to the Licensed Products; that as regard the support and maintenance services,
Wireless (Finland) shall make available to Wireless (Philippines) during normal
business hours in Finland a technical advisor who will assist the latter in
understanding and implementing the Licensed Products and will furnish the latter
general information relating to the Licensed Products; that as regard the updates and
add-ons, Wireless (Finland) shall use reasonable efforts to provide such updates and
add-ons to the Licensed Products; and that in consideration, Wireless (Philippines)
shall pay Wireless (Finland) technical fees for the actual support and maintenance
services rendered and service fees for the actual updates and add-ons provided.

In reply, please be informed that royalties to be paid by Wireless (Philippines)

to Wireless (Finland) for the exclusive license to use and to sublicense the Licensed
Products and Trademarks in the Philippines and in some other countries are royalties
within the definition of the term in paragraph 3, Article 12 (Royalties) of the
Philippines-Finland tax treaty, as "payments of any kind received as a consideration
(a) for the use of, or the right to use, any copyright of literary, artistic or scientific
work; (b) for the use of, or the right to use, any patent, trade mark, design or model,
plan, secret formula or process, or any industrial, commercial, or scientific
equipment; and (c) for information concerning industrial, commercial or scientific
experience." In the case of the Licensed Products which are in the nature of software,

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 payments therefor are "payments for the use or the right to use of a copyright of
literary, artistic, or scientific work" and are royalties, as emphasized in Paragraph
13.1, Commentary on Article 12 of the OECD Model Tax Convention on Income and
on Capital (Updated as of April 29, 2000) and in Revenue Memorandum Circular No.
77-2003 (Classification of Payments for Software for Income Tax Purposes) dated
November 18, 2003, to wit:

OECD Model Convention:

"Payments made for the acquisition of partial rights in the copyright (without
the transferor fully alienating the copyright rights) will represent a royalty
where the consideration is for granting of rights to use the program in a
manner that would, without such license, constitute and infringement of
copyright. . . "

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."

In the case of the Trademarks, payments therefor are clearly "payments for the use or
the right to use of a trade mark" and are also royalties.

This being so, the subject royalties to be paid by Wireless (Philippines) to

Wireless (Finland) are subject to taxation under Article 12 of the Philippines-Finland
tax treaty, to wit:

"Article 12

ROYALTIES

"1. Royalties arising in a Contracting State and paid to a resident of

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

"2. Such royalties may also be taxed in the Contracting State in which
they arise, and according to the law of that State. However, the tax so charged
shall not exceed

a) 15 per cent of the gross amount of the royalties, where the

royalties are paid by an enterprise registered with and engaged in
preferred areas of activities, and also royalties in respect of
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 cinematographic films or tapes for television or broadcasting, and
royalties for the use of or the right to use, any copyright of literary,
artistic or scientific work; and

b) in all other cases, 25 per cent of the gross amount of the

royalties."

"xxx xxx xxx"

Paragraph 1 states that the subject royalties may be taxed in Finland, where
Wireless (Finland), the beneficial owner of the royalties, is a resident. Paragraph 2
states that the subject royalties may also be taxed in the Philippines where they arise,
but the tax so charged shall not exceed: (a) 15 percent of the gross amount of the
royalties, if they are paid (i) by an enterprise registered with and engaged in preferred
areas of activities, (ii) in respect of cinematographic films or tapes for television or
broadcasting, or (iii) for the use or the right to use of a copyright of literary, artistic or
scientific work; and (b) 25 percent of the gross amount of the royalties in all other
cases.

Applying the provisions of paragraph 2 to the subject royalties, the part that
relates to the use or the right to use of the Licensed Products, being "payments for the
use or the right to use of software assimilated as copyright of literary, artistic, or
scientific work," are subject to income tax at the rate of 15 percent of the gross
amount of the royalties, and the part that relates to the use or the right to use of the
Trademarks, being "payments for the use or the right to use of a trade mark," are
subject to the rate of 25 percent of the gross amount of the royalties. (BIR Ruling Nos.
DA-ITAD 28-04 dated March 29, 2004 and DA-ITAD 67-04 dated July 9, 2004)

With regard to the technical fees for the support and maintenance services to
be rendered by Wireless (Finland) to Wireless (Philippines) where Wireless (Finland)
shall make available to Wireless (Philippines) during normal business hours in
Finland a technical advisor who will assist the latter in understanding and
implementing the Licensed Products and will furnish the latter general information
relating to the Licensed Products, such technical fees, under Section 42(C)(3) 1(1) of
the National Internal Revenue Code of 1997 (Tax Code), are considered income from
sources without the Philippines. This being so, such technical fees derived by
Wireless (Finland), being a foreign corporation, are not subject to Philippine income
tax, as provided under Section 23(F) 2(2) of the Tax Code. (BIR Ruling No. DA-ITAD
56-04 dated May 31, 2004)

With regard to the service fees for the updates and add-ons to the Licensed
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 Products to be provided by Wireless (Finland) to Wireless (Philippines), on the
assumption that Wireless (Finland) will be sending its personnel to the Philippines for
this purpose, such service fees are to be considered as business profits taxable under
paragraph 1, Article 7 (Business Profits)'' of the Philippines-Finland tax treaty, quoted
below:

"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 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:

a) that permanent establishment; or

b) sales within that other Contracting State of goods or

merchandise of the same or similar kind as those sold, or from other
business activities of the same or similar kind as those effected, through
that permanent establishment.

"xxx xxx xxx"

Paragraph 1 states that the subject service fees may be taxed in the Philippines
if they are attributable to a permanent establishment which Wireless (Finland) has in
that country. A permanent establishment, under paragraphs 1 and 2, Article 5
(Permanent Establishment) of the tax treaty, means a fixed place of business through
which the business of the enterprise is wholly or partly carried on, and includes, for
example, a place of management, a branch, an office, a factory, and a workshop. A
permanent establishment also includes the furnishing of services by a resident of a
Contracting State (through employees or other personnel thereof) in the other
Contracting State, where this activity continues in the other State for a period or
periods aggregating more than 183 days. Accordingly, the subject service fees to be
paid by Wireless (Finland) to Wireless (Philippines) will be subject to Philippine
income tax if the activity giving rise to the subject service fees (i.e., the provision of
updates and add-ons to the Licensed Products) is carried out for an aggregate period
of more than 183 days; otherwise, the subject service fees are exempt. (BIR Ruling
No. DA-ITAD 169-02 dated September 26, 2002)

As regards the remuneration of the personnel who will carry out the above

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 activity, such remuneration is generally subject to Philippine income tax, unless the
following conditions set forth in paragraph 2, Article 15 (Dependent Personal
Services) of the Philippines-Finland tax treaty below are all complied with:

"Article 15

DEPENDENT PERSONAL SERVICES

"1. Subject to the provisions of Articles 16, 18, 19 and 20, salaries,
wages and other similar remuneration derived by a resident of a Contracting
State in respect of an employment shall be taxable only in that State unless the
employment is exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in that other
State.

"2. Notwithstanding the provisions of paragraph 1, remuneration

derived by a resident of a Contracting State in respect of an employment
exercised in the other Contracting State shall be taxable only in the
first-mentioned State if the recipient is present in the other Contracting State for
a period or periods not exceeding in the aggregate 183 days in the calendar year
concerned, and the remuneration is paid by, or on behalf of, an employer who is
not a resident of the other State, and such remuneration is not borne by a
permanent establishment or a fixed base which the employer has in the other
State.

"xxx xxx xxx"

Paragraph 2 states that the subject remuneration will be exempt from tax if: (a)
the personnel are present in the Philippines for an aggregate period or periods not
exceeding 183 days in the calendar year concerned, (b) the remuneration is paid by an
employer who is not a resident of the Philippines, and (c) the remuneration is not
borne by a permanent establishment which the employer has in the Philippines. The
second and third conditions are satisfied by reason that the employer, Wireless
(Finland), is not a resident of the Philippines and it does not have a permanent
establishment or a fixed place of business in the Philippines. Thus, remuneration of
personnel involved in rendering the services mentioned herein shall be taxable based
on whether or not the first condition under Article 15, paragraph 2 of the
Philippines-Finland tax treaty is fulfilled. (BIR Ruling No. DA-ITAD 169-02 dated
September 26, 2002)

Finally, Section 108(A)[(l) and (5)] of the Tax Code states that "the use of or
the right or privilege to use any copyright and trademark (like the use of the Licensed

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 Products and Trademarks)" and "the supply of services by a nonresident person or his
employee in connection with the use of property or rights belonging to the
nonresident person (like the provision of updates and add-ons to the Licensed.
Products)" both fall within the definition of sale or exchange of services subject to ten
percent (10%) value-added tax (VAT). Accordingly, the subject royalties and service
fees to be paid by Wireless (Philippines) to Wireless (Finland) for services rendered
in the Philippines are subject to 10% VAT. (BIR Ruling Nos. DA-ITAD 28-04 dated
March 29, 2004 and DA-ITAD 67-04 dated July 9, 2004)

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 the resident
person making the payments to a nonresident person, Wireless (Philippines), shall be
responsible for the withholding of the 10% VAT on such payments before remitting
them to the nonresident person, Wireless (Finland). In remitting to the Bureau of
Internal Revenue the VAT withheld on such payments, Wireless (Philippines) shall
use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage
Taxes Withheld). If a VAT-registered taxpayer, Wireless (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,
Wireless (Philippines) may include as part of the cost of the license granted and the
services furnished to it by Wireless (Finland), the VAT consequently shifted or
passed on to it and may treat such VAT either as expense or asset, whichever is
applicable. In addition, upon Wireless (Finland)'s request, Wireless (Philippines) is
required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at
Source (BIR Form No. 2306), the first three copies to be given to Wireless (Finland)
and the fourth copy to be retained by Wireless (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 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:

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 (SGD.) MILAGROS V. REGALADO
Assistant Commissioner, Legal Service
Bureau of Internal Revenue
Footnotes
1. "Section 42. Income from Sources Within the Philippines. —
(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"
2. "Section 23. General Principles of Income Taxation in the Philippines. — Except
when otherwise provided in this Code:
xxx xxx xxx
(F) 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."

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 Endnotes

1 (Popup - Popup)
1. "Section 42. Income from Sources Within the Philippines. —
(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"

2 (Popup - Popup)
2. "Section 23. General Principles of Income Taxation in the Philippines. — Except
when otherwise provided in this Code:
xxx xxx xxx
(F) 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."

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