2006 ITAD Rulings - Delegated Authority

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.
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
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 1
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 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
Bureau of Internal Revenue
December 29, 2006
Article 13, Philippines-Netherlands Tax Treaty;

BIR Ruling No. DA-ITAD 214-96;
BIR Ruling No. DA 326-05;
BIR Ruling No. 039-02
Castillo Laman Tan Pantaleon & San Jose

Law Offices
The Valero Tower, 122 Valero St.
Salcedo Village, 1227 Makati City
Attention: Atty. Maria Victoria D. Sarmiento
Gentlemen :
This refers to your application for relief from double taxation on behalf of your client, Eli Lilly
Philippines, Inc. (ELP), requesting confirmation of your opinion that:
a. ELP's plan to decrease its authorized capital stock is a non-taxable event. ELP is not subject
to any tax for receiving from Eli Lilly Nederland B.V. (ELN B.V.) the surrender shares as a
result of the partial liquidation, and for canceling/retiring the reduced ELP shares, since it is
merely performing the ministerial function of implementing the reduction in capital stock,
thus, ELP is not taking title nor does it receive any value for the surrendered shares; and
b. Assuming without admitting that the surrender by ELN B.V. of its shares of stock would fall
under what constitutes a sale of movable property, the said transaction will be solely taxable
in Netherlands, in accordance with the Philippines-Netherlands tax treaty.
It is represented that ELN B.V. nonresident foreign corporation duly organized and existing under
the laws of Netherlands with office address at Krijtwal 17-23, 3431, HA Nieuwegein, Netherlands; that it
is not licensed to do business in the Philippines as evidenced by a certification issued by the Securities and
Exchange Commission dated October 24, 2005; that ELP is a corporation organized and existing under the
laws of the Philippines with office address at 32/F Wynsum Corporate Plaza 22 Emerald Avenue, Ortigas
Center, Pasig City.
It is further represented that as of August 16, 2005, ELN B.V. owns a 103,353,050 shares of stock
of ELP with a par value of P10.00 as evidenced by Secretary's Certificate notarized February 1, 2006; that
on August 16, 2005, the Board of Directors of ELP unanimously approved the following resolution: DHESca
a. decrease the Authorized Capital Stock (ACS) of ELP by P500,000,000.00;
b. to amend Article VII of the amended articles of incorporation of ELP to effectuate the
decrease of ACS; and
c. to reduce the subscribed and paid-up capital stock of ELP from One Billion Thirty Three
Million Five Hundred Thirty Thousand Five Hundred Pesos (P1,033,530,500.00) divided
into One hundred Three Million Three Hundred Fifty Three Thousand Fifty Shares
(103,353,050) shares with a par value of Ten Pesos (P10.00) per shares to Five Hundred
Thirty Three Million Five Hundred Thirty Thousand Five Hundred Pesos (P533,330,500.00)
divided into Fifty Three Million Three Hundred Fifty Three Thousand Fifty (53,353,050)
shares with a par value of P10.00 per share, with the amount of Five Hundred Million Pesos
(P500,000,000,00) to be returned in cash to ELN B.V. as a partial return of its capital
investment; and
d. to authorize the Directors and proper officers of the ELP to expedite, file and submit such
documents and to do all acts or things as may be necessary to fully implement the decrease
of the ACS;
that said decrease in capital stock was duly approved by the SEC on November 11, 2005; that in
consideration of the surrender of the said shares by ELN B.V. and the cancellation of shares corresponding
to the decrease of the ELP's subscribed and paid up capital in the amount of Five hundred Million
(P500,000,000.00) par value worth of shares, ELP will return to ELN B.V. the amount of
P500,000,000.00, as partial return of its capital investment; that the decrease in the ACS corresponds to
50,000,000 shares of par value of P10.00 per share will be considered as retired.
In reply, please be informed that ELP is not subject to any tax on the surrender of ELN B.V.'s
shares in ELP due to the latter's reduction of its subscribed capital stock, since they are merely performing
a ministerial function required under the law to carry out the reduction of the capital stock and therefore
are not taking title to and do not represent value, since they are merely the documentary evidence of the
reduced capital stock and will cease to exist after their cancellation. (BIR Ruling No. DA-214-96 dated
June 26, 1996)
However, any gain or losses that may be sustained by ELN B.V. upon the surrender of its shares,
for the amount of value to be received in exchange, in the instant case, the net gain or income will be
subjected to Philippine income taxes. (BIR Ruling Nos. 119-84, 322-87, 136-88, 171-92, and UN248-94).
Therefore, gain is to be treated in the same manner as a gain from the sale or exchange of shares,
consistent with the decision of the Supreme Court in Wise & Co., Inc., and as such is subject to the
ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate],
27(A) or (E), 28(A)(1) or (2) and (B)(1) of the Tax Code of 1997, depending on the status of the
shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident
or non-resident). (BIR Ruling No. 39-02 dated November 11, 2002)
Since the shareholder is a resident of the Netherlands, Article 13 of the Philippines-Netherlands

will apply. It provides:
"Article 13
GAINS FROM THE ALIENATION OF PROPERTY
1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article

6, may be taxed in the State in which such property is situated. DHEcCT
2. Gains from the alienation of movable property forming part of the business property of
a permanent establishment which an enterprise of one of the States has in the other State, or of
movable property pertaining to a fixed base available to a resident of one of the States in the other
State for the purpose of performing professional services, including such gains from the alienation
of such permanent establishment (alone or together with the whole enterprise) or of such a fixed
base, may be taxed in the other State.
3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of

the States from the alienation of ships and aircraft operated in international traffic and movable
property pertaining to the operation of such ships or aircraft shall be taxable only in that State.
4. Gains from the alienation of any property other than those mentioned in paragraphs 1,
2 and 3, shall be taxable only in the State where the alienator is a resident.
5. The provisions of paragraph 4 shall not affect the right of each of the States to levy
according to its domestic law a tax on gains from the alienation of any property derived by an
individual who is a resident of the other State and has been a resident of the first-mentioned State at
any time during the six years immediately preceding the alienation of the property."
It is clear from the aforequoted provisions of the Philippines-Netherlands tax treaty that capital
gains from the alienation of any property, other than mentioned in paragraphs 1, 2 and 3 of Article 13 of
the tax treaty shall be taxable only in the State where the alienator is a resident. Considering that the
surrender of shares of stock is not among those mentioned in said paragraphs 1, 2 and 3 of Article 13 of
the Philippines-Netherlands tax treaty, any gain that may be derived by ELN B.V. from the surrender of its
shares of stock to ELP, which is a resident of the Netherlands, shall not be subject to Philippine income
tax under Section 28(A)(7)(c) of the Tax Code of 1997, but shall be subject to tax only in the Netherlands.
In the instant case, the surrender of the certificates of stock by the stockholders of ELP is a
necessary consequence of the decrease in the capital stock of the said corporation. Thus, in order to reflect
the corrected number of shares therein, it is required that the stockholders of record should transfer and
surrender their old certificates of stock to the corporation, without any monetary consideration, but only
for the purpose of replacing the old stock certificates into new ones. In other words, there is no effective
transfer of beneficial ownership over the said shares. Such being the case, the replacement of stock
certificates is not subject to the documentary stamp tax prescribed in Section 176 of the Tax Code, as
amended.
Accordingly, the issuance of new shares of stocks, to replace the previously issued and outstanding
shares of stocks of ELP pursuant to a decrease in its capital stock is exempt from the payment of
documentary stamp tax. (BIR Ruling DA-326-05 dated July 22, 2005)
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. HEDSIc
Legal Service
December 22, 2006
Article 11 of the Philippines-Singapore tax treaty;

Asahi Glass Philippines, Inc.

Barrio Pinagbuhatan
Pasig City
Attention: Ms. Sarah C. Soriano

Senior Manager
Finance and Accounting
Gentlemen :
This refers to your application for relief from double taxation, on behalf of AG Investment
(Singapore) Pte., Ltd. (AG Investment), on the Loan Agreement (Agreement) between Asahi Glass
Philippines Inc. (Asahi) and AG Investment, pursuant to the Philippines-Singapore tax treaty.
It is represented that AG Investment is a nonresident foreign corporation duly organized and

existing under the laws of Singapore with office address at 460 Alexandra Road, #30-02 PSA Building,
Singapore; that it is not registered either as a corporation or as a partnership in the Philippines per
certification issued by the Securities and Exchange Commission dated October 4, 2005; that Asahi is a
corporation organized and existing under the laws of the Philippines with office address at M. H. Del Pilar
Street, Barrio Pinagbuhatan, Pasig City and duly registered with the Board of Investments with Certificate
of Registration No. EP 88-675 dated October 6, 1988.
It is further represented that on November 24, 2005, Asahi and AG Investments entered into a Loan
Agreement commencing from the date of the said Agreement and ending on November 30, 2010 wherein
AG Investment shall make available to Asahi a long term loan of aggregate principal amount not
exceeding at any time of Thirty Million US Dollars (US$30,000,000.00) which shall bear interest at a rate
equal to the prevailing procurement cost of AG Investment plus reasonable margin to be determined by
AG Investment (currently 0.50%) for each calendar month, provided however, that such interest shall not
exceed 3-month BBA LIBOR (British Banking Association London Inter Bank Offered Rates) plus 2% at
any interest period. aDSHIC
In reply, please be informed that Article 11 of the Philippines-Singapore tax treaty provides viz:
"Article 11
INTEREST
1. Interest arising in a Contracting State and paid to a resident of the other Contracting
State may be taxed in that other State.
2. However, such interest may be taxed in the Contracting State in which it arises, and
according to the law of that State, but if the recipient is the beneficial owner of the interest the tax
so charged shall not exceed 15 per cent of the gross amount of the interest. The component
authorities of the Contracting States shall by mutual agreement settle the mode of application of this
limitation.
3. The term 'interest' as used in this Article means income from debt-claims of every kind,
whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's
profits, and in particular, income from government securities and income from bonds or debentures,
including premiums and prizes attaching to such securities, bonds or debentures, as well as income
assimilated to income from money lent by the taxation law of the State in which the income arises,
including interest on deferred payment sales. Penalty charges for late payment shall not be regarded
as interest for purposes of this Article."
xxx xxx xxx"
Based on the aforequoted provision, interest income arising in the Philippines and paid to a resident
of Singapore is taxable in the Philippines at a preferential tax rate not exceeding 15% of the gross amount
thereof if the recipient of such interest is the beneficial owner thereof.
In view thereof, this Office is of the opinion and so holds that the interest payments made by Asahi
to AG Investments, the beneficial owner of the interest under the Loan Agreement, are subject to the
preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 11 of the
Philippines-Singapore tax treaty. (BIR Ruling No. 142-95 dated September 13, 1995)
Moreover, the above Loan Agreement is subject to the documentary stamp tax imposed under
Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243 1(1), at
the rate of One peso (P1.00) for each Two Hundred Pesos (P200) or fractional part of the aggregate
principal amount of the Loan Agreement.
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. ITDSAE
Very truly yours,
By:

Legal Service
Footnotes
1. Republic Act No. 9243 — An Act Rationalizing The Provisions on the Documentary Stamp Tax of the
National Internal Revenue Code of 1997, as amended and for Other purposes. (Effective date is March 20,
2004 per Revenue Regulations No. 13-2004)
December 21, 2006
Sec 106 & 108, Sec 149 of the Tax Code 1997;
Article 34, Vienna Convention on Diplomatic Relations;
Embassy of Australia
23rd Floor, Yuchengco Tower
RCBC Plaza
Ayala Avenue, Makati City
Gentlemen :
This has reference to your Note No. 459/06 and File No. MN94/00110 dated November 6, 2006
referred to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for
the exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for
the official use of the Embassy of Australia, specifically described as follows:
Make: Toyota Camry 2.4V A/T

Model Year: 2006
Color: Thermalyte
Engine Number: 2AZ-E013987
Chassis Number: MR053BK40-07003804
In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations
reads:
"ARTICLE 34
A diplomatic agent shall be exempt from all dues and taxes, personal or real, national,
regional or municipal, except:
(a) indirect taxes of a kind which are normally incorporated in the price of goods or
services; ITCcAD
xxx xxx xxx"
Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption
from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by
that Embassy of goods and/or services shall in general, be subject to the value-added tax prescribed under
Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code
of 1997.
However, applying the principle of reciprocity, this Office may confirm exemption of the Embassy
of Australia and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from
the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government
allows similar exemption to the Philippine Embassy and its personnel on their purchase of
locally-assembled motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2006 Toyota Camry 2.4V A/T for the official use of the
Embassy of Australia is exempt from value-added tax. (BIR Ruling No. DA-ITAD-58-01 dated July 12,
2001)
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,

Legal Service
December 18, 2006
Article 20, Philippines-Germany tax treaty; BIR Ruling No.

DA-ITAD-85-05; 30-06
European International School

No. 75 Swaziland Street
Better Living Subdivision
Parañaque City
Attention: Mr. Ludwig Etzel

Administrator
Deutsche Schule Manila
Gentlemen :
This refers to your letter dated September 11, 2005, applying for tax treaty relief on the salaries
and/or other emoluments received by Mr. Walter Jrg Dietze, a teacher engaged to teach in Deutsche
Schule Manila (DSM) for a period of not exceeding two (2) years, pursuant to Article 20 of the
Philippines-Germany tax treaty.
It is represented that DSM is the German component of the European International School with
principal address at No. 75 Swaziland St., Better Living Subdivision, Parañaque City; that Mr. Walter Jorg
Dietze is, at present or immediately before, a resident of the Federal Republic of Germany as evidenced by
the Certification letter issued by Mr. Markus Tschan, Third Secretary, Press and Cultural Affairs of the
Embassy of the Federal Republic of Germany in Manila; that DSM entered into a Contract of Employment
for Limited Period of Time with Mr. Dietze from August 1, 2006 to July 31, 2008.
In reply, please be informed that Article 20 of the Philippines-Germany tax treaty provides as
follows:
"ARTICLE 20
TEACHERS AND RESEARCHERS
1. Remuneration which a professor or teacher, who is or immediately before was a

resident of a Contracting State and who visits the other Contracting State for a period not exceeding
two years for the purpose of carrying out advanced study or research or for teaching at a university,
college, school or other educational institution, receives for such work shall not be taxed in that
Contracting State.
2. This Article shall not apply to income from research if such research is undertaken not
in the general interest but primarily for the private benefit of a specific person or persons." HCITcA
Based on the aforequoted provision, it is clear that the remuneration paid to a teacher who, is or
immediately before his visit to the Philippines, a resident of Germany and who stays in the Philippines for
the purpose of teaching for a period not exceeding two years shall not be subject to Philippine income tax.
In view, thereof, this Office is of the opinion and so holds that the subject remuneration of Mr. Walter Jorg
Dietze for teaching in DSM for a period not exceeding two (2) years shall not be subject to Philippine
income tax. (BIR Ruling No. DA-ITAD 30-06 dated March 16, 2006) cda2007tax
Very truly yours,
By:

Legal Service
December 15, 2006
Article 11, Philippines-Japan tax treaty; BIR Ruling No.

DA-ITAD-68-03
Isla Lipana & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City
Attention: George J. Lavadia

Principal, Tax Services
Gentlemen :
This refers to your letter dated April 18, 2006, on behalf of your client Totoku Philippines, Inc.
(TPI) requesting confirmation of your opinion that the interest payments made by TPI to Totoku Electric
Company Ltd. (TEC), are subject to the preferential tax rate of 15%, pursuant to Article 11(2)(b) of the
It is represented that TEC is a corporation with office address at 3-21 Okubo 1-Chome,
Shinjuku-ku, Tokyo, Japan and is a resident of Japan for the purpose of Japan taxation and registered as a
taxable person in Japan under tax reference number 382019, per Certification dated November 16, 2005,
issued by the Chief of Shinyuku District Taxation Office in Japan; that it is not registered either as a
corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange
Commission dated February 2, 2005; that TPI is a corporation duly organized and existing under the laws
of the Philippines with office address at Lot Bl-3 Rd., Carmelray Industrial Park II Brgy. Tulo Calamba
City; that it was registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export
Enterprise on April 28, 1999; that on August 28, 2001 TPI and TEC entered into a Loan Agreement
wherein TPI borrowed from TEC an amount of Nine Hundred Thousand US Dollars (US$900,000) with
an interest rate of 4.74% per annum; and that the Agreement has a term of three years.
"Article 11
State may be taxed in that other Contracting State.
2. However, such interest may also be taxed in the Contracting State in which it arises,
and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the
interest the tax so charged shall not exceed: CHDAEc
a) 10 per cent of the gross amount of the interest if the interest is paid in
respect of Government securities, or bonds or debentures;
b) 15 per cent of the gross amount of the interest in all other cases.
xxx xxx xxx
whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's
profits, and in particular, income from Government securities and income from bonds or
debentures, including premiums and prizes attaching to such securities, bonds or debentures.
xxx xxx xxx"
Based on the above-quoted provision of the Philippines-Japan tax treaty, the preferential tax rate to
be withheld by TPI on its interest payments to TEC under their Loan Agreement shall be fifteen percent
(15%) of the gross amount of the interest since it is not paid in respect of Government securities or bonds
or debentures. (BIR Ruling No. DA-ITAD-68-03 dated May 5, 2003)
Moreover, the Loan Agreement between TPI and TEC dated August 28, 2001 is subject to
documentary stamp tax imposed under Section 180 of the National Internal Revenue Code (NIRC) of 1997
at a rate of Thirty Centavos (P0.30) on each of Two Hundred Pesos (P200), or fractional part thereof, of
the face value of such contract.
Very truly yours,
By:

Legal Service
December 18, 2006
Section 108 (B) (3) & 106 (A) (2) (c) of the National Internal
Revenue Code of 1997;
Articles 5 & 7, Paragraph 1 (a) of the GADC between GOP and
GOA
ITAD Ruling No. 10-05
Philippines-Australia Land Administration and

Management Project
3F JMT Bldg. Ortigas Center,
Pasig City
Gentlemen :
This refers to the Australian Embassy's Note No. 425-06 File No. MN94/00112 dated October 19,
2006, endorsed to this Office by the Department of Foreign Affairs (DFA) and the Department of Finance
(DOF), requesting for tax-free local purchase of motor vehicles, for the official use of the
Philippines-Australia Land Administration and Management Project (PALAMP), specifically described as
follows:
Organization: Philippines-Australia Land Administration and

Management Project
Make: Three (3) units 2006 Toyota HiAce 2.5 GL
Grandia Diesel
Engine Nos.: 2KD-1508766
2KD-1513336
2KD-1515462
Chassis Nos.: JTFRS13P9-00003521
JTFRS13P3-00003644
JTFRS13P0-00003908
In reply, please be informed that Section 106 (A)(2)(c) 1(2) and Section 108(B)(3) of the National
Internal Revenue Code of 1997 (NIRC), as amended, provide, viz:
"Section 106. Value-added Tax on Sale of Goods or Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the
gross 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; . . . . . ..
(2) The following sales by VAT-registered persons shall be subject to zero

percent (0%) rate:
xxx xxx xxx
(c) Sales to persons or entities whose exemption under special laws or

international agreements to which the Philippines is a signatory effectively subjects
such sales to zero rate. DEScaT
xxx xxx xxx"
"Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —
xxx xxx xxx"
(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
xxx xxx xxx
(3) Services rendered to persons or entities whose exemption under special

laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero percent (0%) rate;
xxx xxx xxx"
In connection thereto, Article 5, paragraphs 1 and 2 of the General Agreement on Development

Cooperation (GADC) between the Government of the Republic of the Philippines (GRP) and the
Government of Australia (GOA) dated October 28, 1994 and entered into force on March 12, 1998
provides, viz:
"Article 5
Subsidiary arrangements
1. In support of the objectives of this Agreement, the Government of Australia and the
Government of the Republic of the Philippines, or their agencies, statutory authorities or
organizations may conclude subsidiary arrangements in respect of specific activities.
2. Subsidiary arrangements shall make specific reference to this Agreement and the terms
of this Agreement shall, unless otherwise stated, apply to such subsidiary arrangements. Wherever
possible, such subsidiary arrangements shall set out: (Emphasis supplied)
(a) the name and duration of the activity;
(b) a description of the activity and statement of its objectives;
(c) the nominated implementing agencies in both countries;
(d) potential benefits of the activity;
xxx xxx xxx"
Moreover, Article 7, paragraph 1(a) of the above-mentioned GADC between GRP and GOA,
pertinently provides as follows:
"Article 7
Project supplies and professional and technical material and services
1. In respect of project supplies and professional and technical material and services
whether to be imported from outside or procured within the Philippines, the Government of the
Republic of the Philippines shall: ScHADI
(a) for direct supplies of domestic goods and services, subject them to zero
rate or for purposes of Value Added Tax (VAT); exempt direct importation of goods
from import duties, VAT and other taxes imposed in the Philippines (or pay such
duties thereon); and be responsible for inspection fees, storage charges and all other
levies, fees and charges;
xxx xxx xxx"
3. The disposal of vehicles provided for activities executed under this Agreement shall be
the subject of discussions between the two Governments and shall take into account the transport
requirements of other activities assisted by the GOA under the program of development
cooperation."
Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply
to subsidiary arrangements with specific reference thereto. Article 7 of the GADC states that GRP shall
subject to zero percent rate, for purposes of VAT, direct supplies of domestic goods and services in
respect of project supplies and professional and technical material and services for the execution of
development activities under the GADC, while it shall exempt direct importation of goods from import
duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). Moreover, paragraph
3 of the same Article 7 provides for the disposal of vehicles acquired for the activities executed under the
GADC.
In relation thereto, a Subsidiary Arrangement (SA) between the GRP and the GOA relating to the
Philippines-Australia Land Administration And Management Project (PALAMP) was concluded pursuant
to and subject to the provisions of the GADC on August 20, 2004.
Such being the case, this Office is of the opinion and so holds that since the Subsidiary
Arrangement relating to PALAMP is in accordance with the GADC between the GRP and GOA, an
international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and
services of PALAMP are subject to zero percent rate for purposes of VAT in respect of supplies, and
professional and technical material and services provided by the GOA, while direct importations of goods
are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003)
In view of the foregoing, the local purchase of PALAMP of three (3) units 2006 Toyota HiAce 2.5
GL, Grandia Diesel, herein described and for its official use are subject to VAT at zero percent rate
pursuant to sections 108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC.
As regards the seller of goods and services to PALAMP, the sales by a VAT-registered entity of
goods and services under the above circumstances shall be treated as effectively zero-rated transactions.
[Sec 4.100.3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would
mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the
PALAMP. To enable local sellers to refund the amount of the tax inputted into the cost of goods and
services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of
view of the VAT-registered seller, although the sale of goods or services to PALAMP is a taxable
transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of
the local supplier and the input tax on his own purchase of goods, properties or services related to such
effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated
February 7, 2000) ICAcHE
Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to

PALAMP is required to file an application and secure prior approval for zero-rating to be able to claim tax
credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale,
with the Large Taxpayer's Audit and Investigation Division II (LTAID II), if VAT-registered seller is a
large taxpayer, or with the Audit Information, Tax Exemption and Incentives Division (AITEID) of this
Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for
12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96).
Without prior approved application for effective zero-rating, the transaction which may otherwise be
treated as zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered
seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his
entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Secs. 4.102-2, 4.103-1
and 4.107-1(d), Revenue Regulations No. 7-95)
This ruling is issued on the basis of 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
party is concerned.
Very truly yours,

Legal Service
Footnotes
1. 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.
December 18, 2006
Arts. 5 & 7, Philippines-Japan Tax Treaty;

BIR Ruling No. DA-ITAD 79-06
JPN, Inc.
Lot 9, Block 13, Phase 1
Cavite Economic Zone,
Rosario, Cavite
Attention: Mr. Yoshitaka Fukumoto

President
Gentlemen :
This refers to your tax treaty relief application dated February 21, 2006, received by this Office on
August 9, 2006, for the service fees paid by JPN, Inc. (JPN-Philippines) to Ishii Hyoki Co. Ltd.
(Ishii-Japan).
It is represented that Ishii-Japan is a nonresident foreign corporation organized and existing under
the laws of Japan with principal office address at No. 5 Asahioka, Kannabe-cho, Fukayasugun, Hiroshima
720-22 Japan; that Ishii-Japan is not registered either as a corporation or as a partnership in the Philippines
as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on
April 19, 2006; that JPN-Philippines is a corporation duly organized and existing under the laws of the
Philippines with principal address located at Lot 9 Block 13, CEPZ, Rosario, Cavite; that JPN-Philippines
is a PEZA-registered enterprise engaged in the manufacture, assemble or fabricate nameplates, seal
printing membrane panel and other products related to marking and signs.
It is further represented that on February 1, 2004, Ishii-Japan and JPN-Philippines entered into a
Contract whereby Ishii-Japan commits the following services to JPN-Philippines:
1. General consultation and management (e.g. assist in strategic planning and forecasting) CHEIcS
• Advice and assistance on JPN-Philippines' current operations
• Development of global business strategies and provision of strategic global leadership
• Advice on maintaining and administering proper accounting procedures, ledgers,

payroll processing and other bookkeeping records
• Advice necessary to ensure that the manufacture, marketing and/or sale of the
products are at the standard of quality
2. Administrative support services
3. Training and personnel development (e.g. give advice on standards recruitment of executive
staff)
4. Financial and budgetary planning (e.g. budget review, financial projection and analysis) and
5. Marketing services (e.g. give advice on marketing strategies, business development, and
marketing analysis)
• Advertising, marketing, sales support to increase the sales business for

JPN-Philippines including but not limited to: market research requirements and
questionnaire structure/content; packaging design
• Advice on expansion in the sales share in the Japan market.
That the foregoing services will be performed by Ishii-Japan outside the Philippines; that in cases where it
would be necessary for Ishii-Japan to send its personnel in the Philippines, the stay of these individuals in
the Philippines shall not exceed 183 days in any given year; that said services shall in no case involve the
transfer of Ishii-Japan of any know-how; that as a consideration for the said services, JPN-Philippines will
pay Ishii-Japan a fixed monthly fee, in addition to bearing out-of-pocket expenses which are separately
reimbursable to Ishii-Japan at their actual cost; that the Contract shall be valid and binding for a period of
one (1) year from the effective date, 1 February 2004, and, unless terminated by either party at least thirty
(30) days prior to the date of expiration, shall be automatically renewed for successive period of one (1)
year; 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 of Article 7 of the Philippines-Japan tax treaty quoted as follows:
"Article 7
1. The profits of an enterprise of a Contracting State shall be taxable only in that

Contracting 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 that other Contracting State but only so much of them as is
attributable to that permanent establishment. AHSaTI
xxx xxx xxx"
Based on the above, the profits of an enterprise of a Contracting State shall be taxable only in that
permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of
the enterprise may be taxed in that other Contracting State but only so much of them that is attributable to
that permanent establishment. Applying this to the instant case, the service fees received by Ishii-Japan for
services rendered in the Philippines under the Contract shall be taxable in the Philippines only if it has a
permanent establishment in the Philippines in connection with the activities giving rise to such income.
In relation thereto, Article 5 of the same tax treaty defines a permanent establishment, as follows:
"Article 5
1. For the purposes of this Convention, the term 'permanent establishment' means a fixed
place of business through which the business of an enterprise is wholly or partly carried on.
xxx xxx xxx
6. An enterprise of a Contracting State shall be deemed to have a permanent

establishment in the other Contracting State if it furnishes in that other Contracting State
consultancy services, or supervisory in connection with a contract for a building, construction or
installation project through employees or other personnel — other than an agent of an independent
status to whom paragraph 7 applies — provided that such activities continue (for the same project or
two or more connected projects) for a period or periods aggregating more than six months within
any taxable year. However, if the furnishing of such services is effected under an agreement
between the Governments of the two Contracting States regarding economic or technical
cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to
have a permanent establishment in that other Contracting State.
xxx xxx xxx."
Paragraph 6 of Article 5 provides that an enterprise of Japan shall be deemed to have a permanent
establishment in the Philippines if it furnishes in the Philippines consultancy services, or supervisory
services in connection with a contract for a building, construction or installation project through
employees or other personnel — other than an agent of an independent status to whom, paragraph 7
applies —, provided that such activities continue (for the same project or two or more connected projects)
for a period or periods aggregating more than six months within any taxable year.
Thus, Ishii-Japan is deemed not to have a permanent establishment for as long as its employees do
not stay in the Philippines for a period or periods aggregating more than six months within any taxable
year in the course of their rendition of services to JPN-Japan. Such being the case, the income derived by
Ishii-Japan from services rendered to JPN-Japan shall not be subject to Philippine income tax and, as such,
shall likewise be exempt from withholding tax. (BIR Ruling No. DA-ITAD 79-06 dated July 19, 2006)
As regards the imposition of the VAT on the rendition of services of Ishii-Japan, please be
informed further that Section 108 of the Tax Code of 1997 1(3) provides as follows: DEAaIS
"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%) 2(4) 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' means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, . . . ." (Emphasis supplied).
Thus, in general, the VAT is imposed on services rendered by Ishii-Japan in the Philippines. On
every payment of service fees, JPN-Philippines is required to withhold such VAT and treat the same as a
"passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now
Section 4.114-2(b) of Revenue Regulations No. 16-05].
However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No.
153866, February 11, 2005), the Supreme Court held, viz:
"Special laws may certainly exempt transactions from the VAT. 3(5) However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special
law under which respondent was registered. The purchase transactions it entered into are, therefore,
not VAT-exempt. These are subject to the VAT; respondent is required to register.
xxx xxx xxx
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is
zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate, because the ecozone within which it is registered is managed and operated by the PEZA as a
separate customs territory. This means that in such zone is created the legal fiction of foreign
territory. Under the cross-border principle of the VAT system being enforced by the Bureau of
Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for
consumption outside if the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT, then the same rule holds for such
exports from the national territory — except specifically declared areas — an ecozone.
xxx xxx xxx
Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the
VAT as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the
law does not distinguish, we ought not to distinguish. AaEcHC
Moreover, the exemption is both express and pervasive for the following reasons:
. . ., RA 7916 states that 'no taxes, local and national, shall be imposed on business
establishments operating within the ecozone.' Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may
still be passed on and, therefore, indirectly imposed on the same entity — a patent circumvention of
the law. That no VAT shall be imposed directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando
aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is
also prohibited indirectly.
xxx xxx xxx"
Based on the foregoing, transactions exempt from VAT by reason of PD 66 and RA 7916 are
effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the
provision for exempt transactions under Section 109(q) [now Section 109(K)] of the Tax Code of 1997
which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act
No. 7916 or PEZA Law, is particularly applicable to the instant case.
Such being the case, the payment of services fees by JPN-Japan, being a PEZA-registered
enterprise, to Ishii-Japan under the subject Contract should be, as it is hereby confirmed to be, exempt
from VAT.
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,
By:

Legal Service
Footnotes
1. Please note that this cited provision has been retained by Republic Act (RA) No. 9337, although with the
modification as to the applicable rate when the circumstances so warrant.
2. Effective February 1, 2006, the rate shall be 12%.
3. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No.
9337]
December 18, 2006
Section 23 (F) in relation to Section 42 (A) (3) and Section 108

(A)
of the National Internal Revenue Code of 1997;
Nihon Houzai Laguna Corp.

Rm. 202 M, 124 East Science Avenue
Laguna Technopark, Biñan, Laguna
Attention: Mr. Teruo Nishimura

Vice President
Gentlemen :
This refers to your tax treaty relief application dated February 21, 2006, received by this Office on
August 12, 2006, for the service fees paid by Nihon Houzai Laguna Corp. (Nihon-Philippines) to Nihon
Hosai Co. Ltd. (Nihon-Japan).
It is represented that Nihon-Japan is a nonresident foreign corporation organized and existing under
the laws of Japan with principal office address at No. 2-4-2 Hatanodai Shinagawa Tokyo, Japan; that
Nihon Japan is not registered either as a corporation or as a partnership in the Philippines as shown in the
Certification of Non-Registration issued by the Securities and Exchange Commission on June 14, 2006;
that Nihon-Philippines is a corporation duly organized and existing under the laws of the Philippines with
principal address located at GRM Bldg. Rm. 202 M, 124 East Science Avenue, Laguna Technopark Biñan,
Laguna; that Nihon-Philippines is a PEZA-registered enterprise as shown in its Certificate of Registration
No. 04-09-F dated June 14, 2004. acCDSH
It is further represented that on January 3, 2005, Nihon-Japan and Nihon-Philippines entered into a
Contract whereby Nihon-Japan commits the following services to Nihon-Philippines:
1. Facilitation of the purchases being made by Nihon-Philippines from various suppliers

outside the territorial jurisdiction of the Philippines;
2. Recommendation of the appropriate measures to be undertaken by Nihon-Philippines to

improve/sustain the level and quantity of its production; and
• Provision of other services such as competitive sourcing of new products, project

management, technical development, testing and evaluation of quality assurance and
transportation and commercialization of new/existing products.
That Nihon-Japan shall not be under any obligation to send its employees or representative to the
Philippines; that as a consideration for the said services, Nihon-Philippines will pay Nihon-Japan the
amount of Twenty Thousand US Dollars ($20,000.00) per month; that the Contract shall be valid and
binding for a period of one (1) year from the effective date, 3 January 2005, and, unless terminated in
writing by either party at least thirty (30) days prior to the date of expiration, shall be automatically
renewed for successive period of one (1) year; 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 National Internal Revenue Code of 1997, as
amended, (Tax Code of 1997) provides:
"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 derived from sources within the Philippines.
xxx xxx xxx"
According to Section 23(F), a foreign corporation like Nihon-Japan is taxable only on income
derived from sources within the Philippines. With respect to income from the provision of services, such
income is considered as 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, quoted below:
"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;
TIDcEH
xxx xxx xxx"
Such being the case and since the subject services will be rendered outside the Philippines, the
service fees to be paid therefor by Nihon-Philippines to Nihon-Japan, being income not derived from
sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR
Ruling No. DA-ITAD 105-05 dated August 24, 2005)
Similarly, the service fees are not subject to the twelve percent (12%) VAT imposed under Section
108(A) of the Tax Code of 1997, as amended:
"Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —
services, including the use or lease of properties: Provided, That the President, upon
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%),
xxx xxx xxx
the Philippines for others for a fee, remuneration or consideration . . .
xxx xxx xxx"
Section 108(A) above clearly states that the sale or exchange of services subject to VAT include
only those services that are performed in the Philippines. Accordingly, since the said services will not be
performed in the Philippines, the service fees to be paid by Nihon-Philippines to Nihon-Japan are therefore
exempt from VAT.
Very truly yours,
By:

Legal Service
Footnotes
1. 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)
December 18, 2006

(A) National Internal Revenue Code of 1997; BIR Ruling No.
DA-ITAD 105-05
Latitude Broadband, Inc.

U2101 21st Floor, Citibank Tower
Paseo de Roxas, Makati City
Attention: Mr. Federico S. Payot

Vice President for
Finance & Operations
Gentlemen :
This refers to your letter dated August 7, 2006, requesting exemption from Philippine income tax
the payments of Latitude Broadband, Inc. (Latitude-Philippines) to IQPC Worldwide PTE Ltd
(IQPC-Singapore) pursuant to the provisions of the Philippines-Singapore tax treaty.
It is represented that IQPC-Singapore with address at 61 Robinson Road, # 14-01 Robinson Centre,
Singapore and is a resident of Singapore for income tax purposes as confirmed by the Certificate of
Residence issued by Sabina H B Cheong (Mrs), Assistant Commissioner, Corporate Tax Division for
Comptroller of Income Tax, Inland Revenue Authority of Singapore; that IQPC-Singapore is not registered
either as a corporation or as a partnership in the Philippines as shown in the Certification of
Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on
November 30, 2006; that IQPC-Singapore is engaged in organizing international events; that
Latitude-Philippines is a domestic company with principal office located at 21-A Citibank Tower, 8741
Paseo de Roxas, Makati City. THSaEC
It is further represented that on May 10, 2006, IQPC-Singapore and Latitude-Philippines entered
into a Sponsorship Agreement whereby the latter will participate as a sponsor in Wireless Broadband
Week, an international event organized by IQPC-Singapore, from October 3 to October 4, 2006 in
Singapore; that the sponsorship cost of Latitude-Philippines for the said event is US$16,600; 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 National Internal Revenue Code of 1997, as
amended, (Tax Code of 1997) provides:
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."
xxx xxx xxx"
According to Section 23(F), a foreign corporation like IQPC-Singapore is taxable only on income
derived from sources within the Philippines. With respect to income from the provision of services, such
income is considered as 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, quoted below:
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 international event will be held in Singapore, the
sponsorship fee to be paid therefor by Latitude-Philippines to IQPC-Singapore, being income not derived
from sources within the Philippines by a foreign corporation, is exempt from Philippine income tax. (BIR
Similarly, the subject sponsorship fee is not subject to the twelve percent (12%) VAT imposed
under Section 108(A) of the Tax Code of 1997, as amended:
tax equivalent to ten percent (10%) 1 of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: Provided, That the President, upon recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), HaEcAC
xxx xxx xxx
the Philippines for others for a fee, remuneration or consideration . . .
xxx xxx xxx"
Section 108(A) above clearly states that the sale or exchange of services subject to VAT include
only those services that are performed in the Philippines. Accordingly, since the said international event
will not be performed in the Philippines, the sponsorship fee to be paid by Latitude-Philippines to
IQPC-Singapore is therefore exempt from VAT.
Very truly yours,
By:

Legal Service
December 15, 2006
Sec 106 & 108 of the Tax Code 1997;

BIR Ruling UN-085-94
Embassy of Brazil
17 Talisay Street, North Forbes Park
Makati City
Attention: Mr. Paulo Tarrisse da Fontoura

Minister/Deputy Chief of Mission
Gentlemen :
This has reference to your Form MV-2A dated October 9, 2006, referred to this Office by the
Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment
of value-added tax (VAT) and ad valorem tax on the local purchase of a motor vehicle, for the personal
use of Mr. Paulo Tarrisse da Fontoura, Minister/Deputy Chief of Mission of the Embassy of Brazil,
specifically described as follows:
Type of Use: Personal

Make: Mitsubishi Adventure
Model Year: 2001
Chassis Number: PAEVB2WLR1B00195
Engine Number: 4G63AB6650
reads:
"A diplomatic agent shall be exempt from all dues and taxes, personal or real, national,
regional or municipal, except: IEHScT
"(a) indirect taxes of a kind which are normally incorporated in the price of
the goods and services;
"xxx xxx xxx"
Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption
from the value-added tax (VAT) on its local purchases of locally-assembled motor vehicles. In other
words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles shall, in
general, be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes
under Section 149, all of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may confirm exemption to the Embassy
of Brazil and its personnel on their local purchases of goods and/or services it appearing from the list
submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government allows
similar exemption to the Philippine Embassy and its personnel on their purchases of goods and services in
your country.
Hence, the local purchase of once (1) unit of 2001 Mitsubishi Adventure, for the personal use of
Mr. Paulo Tarrise da Fontoura, Minister/Deputy Chief of Mission of the Embassy of Brazil is exempt from
value-added tax and ad valorem tax. (BIR Ruling UN-085-94 dated March 7, 1994)
This ruling is issued on the basis of the facts represented. However, if upon investigation it shall be
Very truly yours,

Legal Service
December 15, 2006
Article 21, Philippines-Austria tax treaty; BIR Ruling No.

DA-ITAD-28-06

No. 75 Swaziland Street
Better Living Subdivision
Parañaque City

Administrator
Gentlemen :
This refers to your letter dated September 11, 2005, applying for tax treaty relief on the salaries
and/or other emoluments received by Mr. Christoph Norbert Balssnig, a teacher engaged to teach in
Deutsche Schule Manila (DSM), for a period of not exceeding two (2) years, pursuant to Article 21 of the
Philippines-Austria tax treaty.
principal address at No. 75 Swaziland St., Better Living Subdivision, Parañaque City; that Mr. Christoph
Norbert Balssnig was, immediately before his employment in the Philippines, a resident of the Republic of
Austria with address at Hochschaberstrae, Lienz, Tirol, Austria; that Mr. Balssnig has formally given
notice of his departure from his residence in Lienz and is now residing in Metro Manila as evidenced by
the Acknowledgement Letter issued by the local authorities in Lienz dated August 11, 2006; that DSM
entered into a Contract of Local Employment with Mr. Balssnig engaging the latter to teach at DSM for
the School Year 2006-2008 from August 1, 2006 to July 31, 2008.
In reply, please be informed that Article 21 of the Philippines-Austria tax treaty provides as
follows:
"ARTICLE 21
PROFESSORS AND TEACHERS
1. Remuneration which a professor or teacher, who is a resident of one of the Contracting

States and who visits the other Contracting State for a period not exceeding two years for the
purpose of teaching or carrying out advanced study or research at a university, college, school or
other educational institution, receives for those activities shall be taxable only in the first-mentioned
State.
2. This Article shall not apply to remuneration which a professor or a teacher receives for
conducting research if the research is undertaken primarily for the private benefit of a specific
person or persons. aITECA
3. For the purposes of paragraph 1 of this Article, the term "remuneration" shall include
remittances from sources outside the other State sent to enable the professor or teacher to carry out
the purposes referred to in paragraph 1."
Based on the aforequoted provision, it is clear that the remuneration paid to a teacher who is a
resident of Austria and who stays in the Philippines for the purpose of teaching for a period not exceeding
two years shall not be subject to Philippine income tax.
In view thereof, and considering that Mr. Balssnig was a resident of Austria immediately before his
employment in the Philippines, this Office is of the opinion and so holds that the subject remuneration of
Mr. Christoph Norbert Balssnig for teaching in DSM for a period not exceeding two (2) years, shall not be
subject to Philippine income tax pursuant to Section 21 of the Philippines-Austria tax treaty. (BIR Ruling
No. DA-ITAD 28-06 dated March 16, 2006)
Very truly yours,
By:

Legal Service
December 15, 2006
Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34, Vienna
Convention on Diplomatic Relations; BIR Ruling No.
ITAD-133-06
23rd Floor, Yuchengco Tower, RCBC Plaza,
6819 Ayala Ave. cor. Sen. Gil Puyat Ave.,
Makati City
Attention: Mr. Shane Thomas Cleary

Second Secretary
Gentlemen :
This has reference to your Note No. 450/06 and File No. MN94/00109 dated October 31, 2006
the exemption from payment of ad valorem and value-added taxes (VAT) on the local purchase of one (1)
unit motor vehicle for the personal use of Mr. Shane Thomas Cleary, Second Secretary of the Embassy of
Australia specifically described as follows:
Make: Ford Escape XLT 3.0L V6 4X4 A/T

Model Year: 2006
Color: Magnetic Silver
Frame Number: PE2ET68151WE00543
Engine Number: AJ012745
reads:
"ARTICLE 34
goods or services;
"xxx xxx xxx"
from VAT and ad valorem tax on its local purchases of goods and services. In other words, purchases by
of 1997. aESHDA
However, applying the principle of reciprocity, this Office may confirm the exemptions to the
Embassy of Australia or its personnel on their local purchases of goods and/or services it appearing from
the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your Government
allows similar exemptions to Philippine Embassy and/or its personnel on their purchase of
locally-assembled motor vehicles thereat.
Hence, the local purchase of one (1) unit of 2006 Ford Escape XLT 3.0L V6 4X4 A/T for the
personal use of Mr. Shane Thomas Cleary, Second Secretary of the Embassy of Australia is exempt from
VAT and ad valorem tax. (BIR Ruling No. ITAD-133-06 dated October 30, 2006)
Very truly yours,
Legal Service
December 15, 2006
Sec 106 & 109 (K), National Internal Revenue Code of 1997, as
amended; Articles 5 & 7, General Agreement on Development
Cooperation between the Government of Australia and the
Government of the Republic of the Philippines; BIR Ruling No.
ITAD-066-06
Philippines-Australian Basic Education

Assistance For Mindanao (BEAM) II Project
c/o DepEd Region XI
Torres St., Davao City
Gentlemen :
This has reference to the Australian Embassy's Note No. 425/06 and File No. MN94/112 dated
October 27, 2006 referred to this Office by the Department of Finance (DOF) and the Department of
Foreign Affairs (DFA), requesting exemption from payment of ad valorem and value-added taxes (VAT)
on the purchase of one (1) unit 2006 Toyota Grandia Hi Ace and four (4) units 2006 Toyota Fortuner for
official use by the Philippines-Australia Basic Education Assistance for Mindanao (BEAM) II Project
Make Model Year Color Chassis Number Engine Number
Toyota Hi Ace GL 2006 Nobel Pearl JTFRS13P3- 2KD-1472054

Grandia 00002526
Toyota Fortuner 2006 Super White MROYZ59G6- 1KD-9671341

00035999

00038915
00039237

00038835
In reply, please be informed that Section 106(A)(2)(c) of the National Internal Revenue Code of
1997, as amended (NIRC) provides, viz:
"Section 106. Value-added Tax on Sale of Goods or Properties. EcHTDI
such tax to be paid by the seller or transferor: Provided, That the President, upon the
value-added tax to twelve-percent (12%), . . .
xxx xxx xxx"
(2) The following sales by VAT-registered persons shall be subject to zero percent (0%)
rate:
xxx xxx xxx
(c) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero rate."
In this connection, Article 5, paragraphs 1 and 2 of the General Agreement on Development

Cooperation (GADC) between the Government of Australia (GOA) and the Government of the Republic
of the Philippines (GRP), signed on October 28, 1994 and entered into force on March 12, 1998, provides,
viz:
"Article 5
xxx xxx xxx"
Relative thereto, Article 7, paragraph 1 (a) of the GADC between GRP and GOA, pertinently
provides, viz:
"Article 7
Republic of the Philippines shall:
rate for purposes of Value Added Tax (VAT); exempt direct importation of goods
levies, fees and charges;" CDHacE
xxx xxx xxx
3. The disposal of vehicle provided for activities executed under the Agreement shall be
requirements of other activities assisted by the Government of Australia under the Program of
development cooperation."
Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply
to Subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7(1)(a) and (3) of
the GADC state that GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic
goods and services in respect of project supplies and professional and technical material and services
including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT
and other taxes imposed in the Philippines (or pay such duties thereon).
It is worthy to rule that the abovementioned BEAM was created by virtue of the concluded
Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government
of Australia on June 27, 2001 pursuant to Article 5 of the GADC.
Such being the case, this Office is of the opinion and so holds that since BEAM was created by
virtue of a subsidiary arrangement pursuant to the GADC, an international agreement to which the
Philippines is a signatory, then direct supplies of domestic goods and services of BEAM are subject to
VAT at zero percent rate in respect of supplies, motor vehicles and professional and technical material and
services provided by the Government of Australia while direct importations of goods are exempt from
VAT. (BIR Ruling No. ITAD-066-06 dated June 7, 2006)
In view of the foregoing, the local purchase by BEAM II of one (1) unit of 2006 Toyota Grandia Hi
Ace and four (4) units Toyota Fortuner for official use, is subject to VAT at zero percent rate, pursuant to
Section 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC.
As regards the seller of goods and services to BEAM, the sales by a VAT-registered entity of goods
and services under the above circumstances shall be treated as effectively zero-rated transactions. (Sec
4.106.5(c), Revenue Regulations No. 16-2005) In this jurisdiction, the grant of VAT exemption alone
would mean that the sellers shall bear the burden of the tax if they tax inputted into the cost of goods and
view of the VAT-registered seller, although the sale of goods or services to BEAM is a taxable transaction
for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local
supplier and the input tax on his own purchase of goods, properties or services related to such effectively
zero-rated sale becomes available as tax credit of refund. (VAT Ruling No. 008-00 dated February 7,
2000)
Treated as effectively zero-rated transaction, the VAT-registered seller of goods or services to

BEAM is required to file an application and secure prior approval for zero-rating to be able to claim tax
to the Large Taxpayers Audit and Investigation Division (LTAID II) if VAT-registered seller is a large
taxpayer, or to the Audit Information, Tax Exemption and Incentives Division (AITIED) of this Bureau if
the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months
from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without an
approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be
considered exempt. Consequently, failure of the part of a VAT-registered seller to secure an approval for
effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax
credit/refund on the (VAT) input tax passed on to him. (Sections 4.106-6 of Revenue Regulations No.
16-2005) TIHDAa
This ruling is issued on the basis of facts represented. However, if upon investigation it shall be
party is concerned.
Very truly yours,

Legal Service
December 15, 2006
Art. 11, Philippine-Germany Tax Treaty; Art. 11,

Philippine-Netherlands Tax Treaty; Sec. 23 (F) in connection with
Sec. 42 (A) (3) of the Tax Code of 1997; BIR Ruling No.
DA-ITAD 105-05; BIR Ruling No. DA-ITAD 55-05
Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City
Attention: C. P. Noel
Vice Chairman and
Deputy Managing Partner
Gentlemen :
This refers to your request for clarification of the following:
1) That the Intercreditor Agency Fee, JBIC Facility Agency Fee and the Lead Arranger Front
End Fee to be paid by STEAG State Power, Inc. (SPI) to Bayerische Hypo-und Vereinsbank
AG (HVB) for services performed by the latter outside of the Philippines are considered
income derived from sources outside the Philippines and therefore not subject to Philippine
income tax and any withholding tax.
2) That the interest income derived by HVB-Germany and ING-Netherlands in the Philippines
from the loan agreement referred to in BIR Ruling No. DA-ITAD 104-06 dated August 30,
2006 is subject to tax at a rate of 10% of the gross amount of the interest under the
provisions of Article 11(2)(a)(ii) of the Philippines-Germany and Philippines-Germany and
Philippines-Netherlands tax treaties, respectively. THCSAE
The factual representations recited in BIR Ruling No. DA-ITAD 104-06 dated August 30, 2006 are
hereby adopted.
In addition thereto, it is also represented that SPI will pay service fees, namely Intercreditor Fee,
JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a nonresident German
commercial bank, for performing services as the appointed agent of the JBIC and NEXI Loan Facility and
for arranging the said credit facilities; and that the services of HBV as the appointed agent of JBIC and
NEXI Loan Facilities are being performed entirely outside the Philippines as well as its services as the
lead arranger of the said facilities.
In reply, please be informed of the following:
1) On the Intercreditor Agency, JBIC Facility Agency and the Lead Arranger Front End Fees
that will be paid by SPI to HVB
Section 23(F) of the National Internal Revenue Code of 1997 (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 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.
xxx xxx xxx
According to Section 23(F), a foreign corporation like HVB 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:
xxx xxx xxx

the Philippines;
xxx xxx xxx"
Such being the case and since the subject services were carried out entirely outside the Philippines,
the intercreditor agency, JBIC facility agency and the Lead Arranger front end fees paid by SPI to HVB,
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) IcSHTA
2) On Interest income derived by HVB-Germany and ING-Netherlands in the Philippines

arising from the loan agreement
Article 11 of the Philippines-Germany tax treaty provides:
"Article 11
INTEREST
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State
may be taxed in that other State.
according to the law of that State, but the tax so charged shall not exceed:
a) 10 per cent if such interest is paid:
(i) in connection with the sale on credit of any industrial, commercial or

scientific equipment, or
(ii) on any loan of whatever kind granted by a bank, or
(iii) in respect of public issues of bonds, debentures or similar obligations.
b) 15 per cent of the gross amount of such interest in all other cases
xxx xxx xxx
4. The term 'interest' as used in this Article means income from Government securities, bonds
or debentures, whether or not secured by mortgage and whether or not carrying a right to
participate in profits, and debt-claims of every kind as well as all other income from money
lent by the taxation law of the State from which the income is derived.
xxx xxx xxx."
Article 11 of the Philippines-Netherlands tax treaty also provides:
"Article 11
INTEREST
1. Interest arising in one of the States and paid to a resident of the other State may be taxed in
that other State.
2. However, such interest may be taxed in the State in which it arises and according to the laws
of that State, but if the recipient is the beneficial owner of the interest the tax so charged
shall not exceed:
a) 10 per cent of the gross amount if such interest is paid:

scientific equipment, or TcICEA
(ii) on any loan of whatever kind granted by a bank, or any other financial
institution,
(iii) in respect of public issues of bonds, debentures or similar obligations,
b) 15 per cent of the gross amount of the interest in all other cases
xxx xxx xxx
or debentures, whether or not secured by mortgage but not carrying a right to participate in
profits, and debt-claims of every kind as well as all other income assimilated to income from
money lent by the taxation law of the State in which the income arises. Penalty charges for
late payment shall not be regarded as interest for the purpose of this Act.
xxx xxx xxx."
In view of all the foregoing, the interest income derived by HVB and ING, in the Philippines falls
under interest income "on any loan of whatever kind granted by a bank or any other financial institutions",
and is subject to the preferential tax rate of 10 percent of the gross amount of the interest under paragraph
(2)(a)(ii) for both the Philippines-Germany and Philippines-Netherlands tax treaties, respectively. (BIR
Ruling No. DA-ITAD 55-05 dated June 16, 2005)
This ruling supplements BIR Ruling No. DA-ITAD 104-06 dated August 31, 2006 and applies the
appropriate final withholding tax rate with respect to the interest income derived by HVB and ING in the
Philippines in the light of the additional factual representation.
Very truly yours,
By:

Legal Service
December 13, 2006
Articles 5 (Permanent Establishment), 8 (Business Profits)

Philippines-United States of America tax treaty; Revenue
Memorandum Circular No. 44-05; BIR Ruling No. DA-ITAD
91-06
Regalado Bautista & Menzon

Law Offices
Suite 710 City & Land Mega Plaza
ADB Ave. corner Garnet Street
Ortigas, Pasig City
Attention: Atty. Edith Abana-Bautista
Gentlemen :
This refers to your letter dated March 16, 2006 requesting a ruling on the tax implication on the
purchase of a software (C++ Test Professional Edition-Windows Node Lock License) by Canon
Information Technologies Philippines, Inc. (Canon-Philippines) from Parasoft Corporation (Parasoft)
It is represented that Parasoft is a nonresident foreign corporation, organized and existing under the
laws of the United States of America, with principal office at 101 E. Huntington Dr., 2nd Floor Monrovia,
CA 91016 USA as shown in the Certificate of Status Domestic Corporation issued by Mr. Bill Jones,
Secretary of State of California; that Parasoft is not registered either as a corporation or as a partnership in
the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated
November 23, 2005 issued by the Securities and Exchange Commission; that Canon-Philippines is a
corporation duly organized and existing under the laws of the Philippines with office address at 2nd Floor
Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design
and software development involving imaging, communications and related technologies. aEIADT
It is further represented that Canon-Philippines purchased a software (C++ Test Professional

Edition-Windows Node Lock License) from Parasoft under an End User Software License Agreement
(Agreement) where Parasoft grants to Canon-Philippines a non-exclusive, non-transferable license to use
the software but not to sell, transfer, or sublicense the software; that Canon-Philippines is authorized to
install, use, display, and operate the software product for its own internal use, on the specific set of
computer hardware and operating system on which the software is designed to run; that Canon-Philippines
is authorized to make one (1) copy of the original recorded media provided by Parasoft for archival
purposes or as part of Canon-Philippines normal system backup procedures; that each archival copy shall
display the same program name, serial number, version number, copyright and trademark, notices as the
original licensed copy provided by Parasoft; that Parasoft shall retain title and ownership of the software
and all portions thereof and all applicable rights in patents, copyrights and trade secrets in the software;
that Parasoft will also provide Canon-Philippines the necessary maintenance services under Exhibit B
(Software Maintenance Services and Updates) of the Agreement for a period of one year automatically
renewable on a year to year basis unless terminated in writing; that the Software Maintenance Services
includes the response to and resolution of encountered Errors in the Software by telephone, electronic
mail, fax or delivery of Error Corrections, Enhancements, Updates and Releases; that the maintenance
shall be within reasonable limits, as determined by Parasoft, and does not include requests for basic
product training or technical consulting; that the provision of services shall be performed outside the
Philippines as confirmed by the Certification issued by Canon-Philippines; and that as consideration for
the purchase of software and for the maintenance services, Canon-Philippines will pay Parasoft $3,495.00
US Dollars and $700.00, respectively, inclusive of freight and other miscellaneous charges payable within
60 days from date of invoice.
In reply please be informed as follows.
Concerning software payments, the Bureau of Internal Revenue has issued two Revenue
Memorandum Circulars (RMC) that govern the taxation of software payments. The first Circular (RMC
77-2003 1(7)) covers software payments made as of November 18, 2003 and until September 7, 2005 and
generally treats software payments as royalties, thus:
"Definition of Royalties Includes Payments for the Use of Software:
The term 'royalties' as generally used means payment of any kind received as a consideration
for the use of, or the right to use, any copyright of literary, artistic or scientific work including
cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade
mark, design, or model, plan, secret formula or process, or for the use of, or the right to use,
industrial, commercial or scientific equipment, or for information concerning industrial, commercial
or scientific experience. The term 'use' as contained herein shall include the reselling or distribution
of software.
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 copy or a copyrighted article relating to software are generally
royalties."
On the other hand, the second Circular (RMC 44-2005 2(8)) covers payments made as of September
8, 2005 and onwards and substantially amends the first Circular by treating software payments either as
business income, royalties, rental income, or capital gains, depending on the nature of the transaction out
of which such payments are made. It provides: aATHES
"Section 5. CHARACTERIZATION OF TRANSACTIONS — The character of payments

received in a transaction involving the transfer of computer software depends on the nature of the
rights that the transferee acquires under the particular arrangement regarding the use and
exploitation of the program.
a. Transfer of copyright rights. A transfer of software is classified as a transfer of a

copyright right if, as a result of the transaction, a person acquires any one or more of the rights
described below:
i. The right to make copies of the software for purposes of distribution to

the public by sale or other transfer of ownership, or by rental, lease or lending;
ii. The right to prepare derivative computer programs based upon the
copyrighted software;
iii. The right to make a public performance of the software;
iv. The right to publicly display the computer program; or
v. any other rights of the copyright owner, the exercise of which by

another without his authority shall constitute infringement of said copyright.
The determination of whether a transfer of a copyright right in a software is a sale or

exchange of property is made on the basis of whether, taking into account all facts and
circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that
does not constitute a sale or exchange because not all substantial rights have been transferred will be
classified as a license generating royalty income.
When only copyright rights are transferred, payments made in consideration therefor are
royalties. On the other hand, when copyright ownership is transferred, payments made in
consideration therefor are business income.
b. Transfer of copyrighted articles. A copyrighted article incorporating a software

includes a copy of the software from which the work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or device. The copy of the software may
be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard
drive of a computer, or in any other medium.
xxx xxx xxx
c. After-Sales Service. Contracts for the use of software are often accompanied with the
provision of services (e.g., installation, maintenance, and customization of the software) by
personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller, and
distributor. Payments as consideration for after-sales service in a mixed contract are not royalties
alone, but will include income from services. The appropriate course to take with such a contract
is, in principle, to break down, on the basis of the information contained in the contract or by
means of a reasonable apportionment, the whole amount of the stipulated payments according to
the various parts of what is being provided under the contract, and then to apply to each part of it
so determined the taxation treatment proper thereto. Thus, the part of the payments representing the
use of the software will be treated as royalties and taxable as such and the other part of the
payments representing the provision of services will be treated as income from services and taxable
as such. (Emphasis supplied) cHaADC
If, however, one part of what is being provided constitutes by far the principal purpose of the
contract and the other parts stipulated therein are only of an ancillary and largely unimportant
character, then the treatment applicable to the principal part should generally be applied to the
whole amount of the consideration. (De minimis)"
The substantial difference between the two Circulars is their characterization of payment from the
purchase of a copyrighted article incorporating a software, like the license fee for the Licensed Software
where the licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and
not readily the right to market or exploit the Licensed Software. Under the first Circular, the license fee is
treated as royalties and taxable as such, while under the second Circular, the license fee is treated as
business income (or business profits) and taxable as such, as described above.
If should be noted that under the same Agreement, Parasoft will also provide Canon-Philippines the
necessary maintenance services. Thus, in accordance with the aforequoted Section 5c of the RMC No.
44-2005, the subject Agreement should be characterized by breaking down the same into the portion which
represents the use of the software and the portion which pertains to the provision of services.
As to the portion of the Agreement referring to the use of the software, it being clear that Parasoft
merely grants to Canon-Philippines a non-exclusive, non-transferable license to use the software but not to
sell, transfer, or sublicense the software, the payments of Canon-Philippines, being an end-user, to
Parasoft shall be considered as business profits. Thus, payments (license fee) by Canon-Philippines to
Parasoft that would be made 60 days from January 17, 2006, being business income (or business profits),
will be subject to income tax in the Philippines only if they are attributable to a permanent establishment
which Parasoft has in the Philippines, under paragraph 1, Article 8 in relation to Article 5 of the
Philippines-United States tax treaty, to wit:
"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."
"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; DHESca
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, in order for Parasoft to be considered to have a permanent establishment to
which said business profits may be attributed, it must satisfy the following conditions 3(9):
— the existence of a "place of business", i.e., a facility such as premises or, in certain instances,
machinery or equipment;
— this place of business must be "fixed", i.e., it must be established at a distinct place with a
certain degree of permanence;
— the carrying on of the business of the enterprise through this fixed place of business. This
means usually that persons who, in one way or another, are dependent on the enterprise
(personnel) conduct the business of the enterprise in the State in which the fixed place is
situated.'' (Paragraph 2)
Since Parasoft, based on the documents submitted, does not have a place of business at its disposal
which is fixed or established at a distinct place with a certain degree of permanence in the Philippines
through which it may carry on its business, Parasoft does not have a permanent establishment to which its
business profits may be attributed to.
This is further bolstered by the fact that it is neither registered as a corporation nor as a partnership
in the Philippines.
This being so, the business profits earned by Parasoft from its sale of the subject software to
Canon-Philippines shall not be subject to Philippine income tax.
On the other hand, as to the portion of the Agreement referring to the provision of services, the
payments of Canon-Philippines shall be considered as income from sources without the Philippines under
Section 42(C)(3) of the National Internal Revenue Code (Tax Code) of 1997. (BIR Ruling No. DA-ITAD
91-06 dated August 14, 2006)
However, the electronic transfer of software from the non-resident supplier is importation of
software and is subject to value-added tax (VAT) under Section 107 of the Tax Code of 1997, as amended
by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly,
Canon-Philippines being the direct importer of the downloadable software, is subject to 12% VAT and is
required to withhold 12% VAT from its payments before it telegraphically transfers it to the account of the
Parasoft. THDIaC
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 Canon-Philippines shall be responsible for the withholding of the
12 percent VAT on the license fee before remitting it to Parasoft. In remitting to the Bureau of Internal
Revenue the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600 (Monthly
Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer,
Canon-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,
Canon-Philippines may include as part of the cost of the services provided to it by Parasoft the VAT
consequently shifted or passed on to it and may treat such VAT either as expense or asset, whichever is
applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of
Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Parasoft and the fourth Copy
for Canon-Philippines as its file copy.
Very truly yours,
By:

Legal Service
Footnotes
1. Classification of Payments for Software for Income Tax Purposes.
2. Taxation of Payments for Software.
3. Organization for Economic Cooperation and Development (OECD), 2005 edition, paragraph 2, pages
85-91.
December 13, 2006
Sec 109 - National Internal Revenue Code 1997;

Article III, Section 10 - Vienna Convention on the Privileges and
Immunities of the Specialized Agencies of the United Nations;
United Nations Children Fund (UNICEF)

31F Yuchengco Tower, RCBC Plaza
6819 Ayala Avenue
Makati City
Gentlemen :
This refers to your letter dated October 13, 2000, indorsed to this Office by the Department of
Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment
of value-added tax (VAT) of ten (10) locally-purchased motor vehicles, for the official use of the United
Nations Children's Fund (UNICEF), specifically described as follows:
Make Model Year Color Chassis Engine Number

Number
Toyota 4X4 Hi 2006 Lithium MR0FZ29G2- 1KD-7167266

Lux 3.0 01538335

Lux 3.0 01538527

Lux 3.0 01538326

Lux 3.0 01538491
Lux 3.0 01538341

Lux 3.0 01538460

Lux 3.0 01538369

Lux 3.0 01538364

Lux 3.0 01538546

Lux 3.0 01538296
In reply, please be informed that Section 109 of the National Internal Revenue Code of 1997
(NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides as follows:
"SEC. 109. Exempt Transactions. — Subject to the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the value-added tax:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"
In relation thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the
Specialized Agencies of the United Nations dated November 21, 1947 provides:
"Article III
xxx xxx xxx
Section 10
While the specialized agencies will not, as a general rule, claim exemption from excise
duties and from taxes on the sale of movable and immovable property which form part of the price
to be paid, nevertheless when the specialized agencies are making important purchases for official
use of property on which such duties and taxes have been charged or chargeable, States parties to
this Convention will, whenever possible, make appropriate administrative arrangements for the
remission or return of the amount of duty or tax.
"xxx xxx xxx"
Based on the above provisions, important purchases for official use of property in the Philippines of
the specialized agencies of the United Nations (UN) are accorded exemption from indirect taxes such as
VAT imposed under Section 107 of the NIRC.
Such being the case, and since the UNICEF is a specialized agency of the UN, this Office is of the
opinion and so holds that aforementioned purchase of ten (10) units 2006 Toyota 4X4 Hi Lux 3.0 Diesel,
for the official use of the UNICEF, is exempt from VAT.
It is hereby understood that this exemption applies only to vehicles purchased under the name of
United Nations Children's Fund for its official use.
Very truly yours,
By:

Legal Service
December 13, 2006
Sec 106 & 108 of the National Internal Revenue Code of 1997;
Article 34, Vienna Convention; VAT Ruling No. 006-97
Embassy of Canada
8/F Tower 2, RCBC Plaza
6819 Ayala Avenue, Makati City
Gentlemen :
This has reference to your Note No. 0308/06 dated October 23, 2006, referred to this Office by the
Department of Finance (DOF) and the Office of Protocol, Department of Foreign Affairs (DFA),
requesting for a tax-free purchase on a local motor vehicle for the official use of the Embassy of Canada,
Make: Toyota GL Grandia 2.5 Diesel M/T

Model Year: 2006
Color: Dark Gray Mica
Engine Number: 2KD-1520781
Frame Number: JTFRS13P9-00003826
reads:
"ARTICLE 34
goods or services: cETDIA
"xxx xxx xxx"
that Embassy of goods and/or services shall in general, be subject to the VAT prescribed under Sections
106 and 108 of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant exemptions to the Embassy of
Canada in its local purchases of goods and/or services it appearing from the list submitted by the
Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption to
the Philippine Embassy on its purchases of goods and services in your country.
Hence, the herein local purchase of one (1) Toyota GL Grandia 2.5 Diesel M/T for the official use
of the Embassy of Canada is exempt from VAT. (BIR Ruling No. ITAD 23-99 dated August 30, 1999)
Very truly yours,

Legal Service
December 12, 2006
Article 4, Philippines-Spain tax treaty
Laya Mananghaya & Co.

Certified Public Accountants and Management Consultants
22/F Philamlife Tower
8767 Paseo de Roxas
Makati City 1226
Attention: Raymund S. Gallardo

Partner, Tax and Corporate Services
Melea B. Solis-Cruz
Manager, Tax and Corporate Services
Gentlemen :
This refers to your letters dated 17 October 2005 and 28 December 2005, on behalf of your client,
Solid Cement Corporation (SCC), requesting for the correct tax treatment of income earned in the
Philippines of its expatriate employee by the name of Mr. Jaime Ruiz De Haro, and his spouse, Mrs.
Esther Sulis Massana.
It is represented that Mr. De Haro, a Spanish national, has been employed by SCC, a member of the
CEMEX Philippine Group of Companies, since May 5, 2003 up to the present with no definite intention of
returning to his home country; that he is the President and Chief Executive Officer of SCC; that by virtue
of his position in SCC, the spouses have been staying in the Philippines since the said date; that as an alien
individual working in the Philippines for an indefinite period of time, Mr. De Haro filed his 2003 and
2004 income tax returns with the Philippine Bureau of Internal Revenue; that Mr. De Haro's wages are
being paid under a split-pay arrangement, i.e., a portion of his income is being paid in Spain and the
remaining portion is being paid in the Philippines; that as can be noted in his 2004 (but not in his 2003)
Philippine income tax return, Mr. De Haro remitted additional income tax upon filing thereof because the
offshore portion (being paid in Spain) was not subjected to withholding taxes, since SCC has no control
over its payment; that in computing his income tax liability, he has been treated as a resident alien for
income tax purposes pursuant to Section 5 of Revenue Regulations No. 2; that Mrs. Massana has not been
deriving income from Philippine sources; that she is a plain housewife; and that Mr. De Haro and Mrs.
Massana are holders of Alien Certificates of Registration and Certificates of Residence (Temporary)
which are issued by the Philippine Bureau of Immigration.
In reply, please be informed that under Section 22(F) of the National Internal Revenue Code (Tax
Code) of 1997, the term "resident alien" means an individual whose residence is within the Philippines
and who is not a citizen thereof. HDTSIE
In relation thereto, Section 4 of Revenue Regulations No. 2 (Income Tax Regulations) provides as
follows, viz:
"An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and nature of his stay. A mere floating
intention indefinite as to time, to return to another country is not sufficient to constitute him a
transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident.
One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient. But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been consummated or abandoned."
Based on the foregoing, it can be deduced that an alien (or one who is not a citizen of the
Philippines) may be considered a resident of the Philippines for income tax purposes if: (1) he or she is not
a mere transient or sojourner, (2) he or she has no definite intention as to his stay, or (3) his or her purpose
is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien
makes his or her home temporarily in the Philippines.
Thus, Mr. De Haro and Mrs. Massana are considered residents of the Philippines for purposes of
our income tax laws.
Section 23(D) of the Tax Code provides that, "(a)n alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the Philippines".
Furthermore, Section 24(A)(1)(c) of the same Code provides that "(a)n income tax is hereby
imposed: . . . (o)n the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within
the Philippines by an individual alien who is a resident of the Philippines".
Accordingly, compensation received by Mr. De Haro for labor or personal services performed in
the Philippines is treated as his gross income from sources within the Philippines under Section 42(A) of
the Tax Code which provides that:
"SEC. 42. Income from Sources Within the Philippines. —
(A) Gross Income From Sources Within the Philippines. — The following items of gross
xxx xxx xxx
xxx xxx xxx"
Based on the foregoing, Mr. De Haro is correct in including his wages or salaries coming from
Spain (under the split-pay arrangement) in computing his income tax liability in the Philippines, because
in earning such wages or salaries, he renders personal service in the Philippines as President and Chief
Executive Officer of SCC and thus, payments received in consideration thereof is gross income from
sources within the Philippines. cDCEIA
In sum, this Office is of the opinion as it hereby holds that Mr. De Haro and Mrs. Massana (once
gainfully employed), are resident aliens under the Tax Code of 1997 and are liable to tax in the Philippines
"in respect only of income from sources therein".
parties are concerned.
Very truly yours,
(SGD.) JOSE MARIO C. BUÑAG

Commissioner
December 11, 2006

Embassy of the Federal Republic of Nigeria

2211 Paraiso Street
Dasmariñas Village
Makati City
Attention: Mr. Fonma T. Usoro

Administrative Attaché
Gentlemen :
This has reference to your Note No. NE/16/10/2006 dated October 25, 2006, referred to this Office
by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption from
payment of taxes on the local purchase of a motor vehicle, for the personal use of Mr. Fonma T. Usoro,
Administrative Attaché of the Embassy of the Federal Republic of Nigeria, specifically described as
follows:

Make: Mitsubishi Pajero Gas 2.5 (MT)
Model Year: 1995
Chassis Number: DONV320SJ00383
Engine Number: 4G54B6388
reads:
"ARTICLE 34
"xxx xxx xxx"
general, be subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal
Revenue Code of 1997. TDaAHS
of the Federal Republic of Nigeria and its personnel on their local purchases of goods and/or services,
specifically on the purchase of locally-assembled motor vehicles, it appearing from the list submitted by
the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar exemption
to the Philippine Embassy and its personnel on their purchases of goods and services in your country. cda2007tax
Hence, the local purchase of one (1) unit of 1995 Mitsubishi Pajero Gas 2.5 (MT), for the personal
use of Mr. Fonma T. Usoro, Administrative Attaché of the Embassy of the Federal Republic of Nigeria is
exempt from VAT. (BIR Ruling No. DA-ITAD-001-99 dated June 24, 1999)
Very truly yours,

Legal Service
December 8, 2006

(A) National Internal Revenue Code; BIR Ruling No. DA-ITAD
105-05
Fernandez Aguja Law Firm

CPA-Lawyers
Suite 5F JL Bldg., Don Jose Avila cor.
Don Gil Garcia Streets, Cebu City
Attention: Atty. Luna Mae F. Aguja

Partner
Gentlemen :
This refers to your letter dated October 31, 2006 on behalf of your client, Taiyo Yuden
(Philippines), Inc. (PTY) (Taiyo-Philippines), requesting confirmation of your opinion that the
commission payments it makes to Wako Denki Co., Ltd. (Wako-Japan) under the Sales Promotion
Agreement for the latter's sales promotion activities rendered entirely outside the territorial jurisdiction of
the Philippines are subject to the 0% preferential withholding tax rate under Article 7 in relation to Article
5 of the Philippines-Japan Tax Treaty and that said commission payments are not subject to the
Value-Added Tax under Section 109(K) of the 1997 Tax Code, as amended.
It is represented that Wako-Japan is a nonresident foreign corporation organized and existing under
the laws of Japan, with principal office at 5-1-2 Sotokanda Chiyodaku, Tokyo, Japan; that it is engaged in
the business of manufacture and distribution of IC, LSI, and electronic components, wireless
communication equipment, boat equipment; that Wako-Japan is not registered either as a corporation or as
a partnership in the Philippines as evidenced by the Securities and Exchange Commission's Certificate of
Non-Registration of Corporation/Partnership dated October 3, 2006; that Taiyo-Philippines is a domestic
corporation with principal office at Mactan Economic Zone I, Lapulapu City. It is a duly registered
Philippine Economic Zone Authority (PEZA) export enterprise under Certificate of Registration No.
89-04.
It is further represented that on August 1, 2005, Taiyo-Philippines and Wako-Japan executed a

Sales Promotion Agreement and a Supplemental Agreement dated October 26, 2006 under which
Wako-Japan agreed to render Sales Promotion services, which shall include the following among others:
a) To conduct research and studies on the current and future market conditions include the
demand, price and supply of Products;
b) To conduct research and studies on the Target Customer's needs and/or demands for the
Products and other related matters;
c) To provide the guidance and advise to Taiyo-Philippines how to sell the Products at its best;
d) To support the business relation between Taiyo-Philippines and/or Taiyo Yuden Co., Ltd.
(JTY) and Target Customer; and
e) To do and perform other sales promotions specifically requested by Taiyo-Philippines and/or

JTY. ITDHSE
That Wako-Japan shall perform the foregoing Sales Promotion activities and services completely outside
the territorial jurisdiction of the Philippines; that the said services shall be rendered only in Japan or in any
other foreign country outside Philippine jurisdiction; that the rendition of the sales promotions services
shall in no way involve a grant of license for the use of Wako-Japan's proprietary rights nor will it involve
any transfer of technological know how and other intellectual property rights; that in consideration for the
above services, Taiyo-Philippines shall pay Commissions in the amount of 3% of the amount of gross sales
to PENTAX Cebu; 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 or 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:
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.
xxx xxx xxx"
According to Section 23(F), a foreign corporation like Wako-JAPAN 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:
xxx xxx xxx

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 commission payments to be paid by Taiyo-Philippines to Wako-Japan, being income not
derived from sources within the Philippines by a foreign corporation, is 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 commission payments by Taiyo-Philippines to Wako-Japan will not be subject to VAT imposed under
Section 108(A) of the Tax Code of 1997, as amended, which provides:
tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: Provided, That the President, upon 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: cDAISC
(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 term exceeds
one and one-half percent (1 1/2%).
the Philippines for others for a fee, remuneration or consideration, . . ."
Section 108(A) clearly states that the sale or exchange of services subject to VAT include only
those services that are performed in the Philippines. Accordingly, since the subject services will not be
performed in the Philippines, the commission payments in consideration for the said services to be paid by
Taiyo-Philippines to Wako-Japan are therefore exempt from VAT.
Very truly yours,
By:

Legal Service
December 8, 2006
Secs. 106 & 108 of the National Internal Revenue Code of

1997; Article 34 of the Vienna Convention; BIR Ruling No.
ITAD-34-99
Embassy of the United States of America

Roxas, Boulevard
Manila
Attention: Mr. Marvin Burgos

Special Agent (Inspector, USAID)
Gentlemen :
This has reference to your Note Verbale No. 1395 dated October 4, 2006 referred to this Office by
the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a tax-free
purchase of one (1) locally assembled motor vehicle described hereunder, for the personal use of Mr.
Marvin Burgos, Inspector, USAID of the Embassy of the United States of America:
Make: Toyota Fortuner 4X2 G Gas A/T

Model Year: 2006
Color: Lithium
Frame No.: MR0ZX69G4-00008626
Engine No.: 2TR-6271720
reads:
"ARTICLE 34
goods or services;
"xxx xxx xxx"
that Embassy of goods and/or services shall, in general, be subject to the value-added tax prescribed under
Sections 106 and 108, both of the National Internal Revenue Code of 1997.
the United States of America and/or its personnel on their local purchases of goods and/or services it
appearing from the list submitted by the Department of Foreign Affairs that your Government allows
similar exemption to Philippine Embassy and/or its personnel on their purchases of goods and services in
your Country. CTIDcA
Hence, the herein local purchase of one (1) unit of Toyota Fortuner 4X2 G Gas A/T for the personal
use of Mr. Marvin Burgos, Special Agent (Inspector, USAID) of the Embassy of the United States of
America is exempt from VAT (BIR Ruling No. DA-ITAD-34-99 dated October 18, 1999)
Very truly yours,

Legal Service
December 8, 2006
Articles 5, 7 & 15 Philippines-Korea tax treaty;

Kepco Ilijan Corporation

18 Floor, Citibank Tower
8714 Paseo de Roxas
Makati City
Attention: Atty. Ricardo A. Galano III

Corporate Counsel
Gentlemen :
This refers to your letter dated May 25, 2006, requesting tax treaty relief on behalf of Korea
Electric Power Corporation ("KEPCO" for brevity), pursuant to the Philippines-Korea tax treaty.
It is represented that KEPCO is a nonresident foreign corporation, with principal address at 167
Samseong-Dons, Gangnam-Gu, Seoul, 135-791, Korea, and is a resident of Korea for the purpose of the
Philippines-Korea tax treaty, with Tax Identification No. 120-82-020052 as confirmed by the Certification
of Residence issued by the Commissioner of the National Tax Administration of Korea dated May 2006;
that KEPCO is not registered either as a corporation or as a partnership in the Philippines per certification
issued by Securities and Exchange Commission dated May 29, 2006; that Kepco Ilijan Corporation
("KEPCO" for brevity), on the other hand, is a corporation duly organized and existing under the laws of
the Philippines. SDHCac
It is further represented that KEPCO has an existing Energy Conversion Agreement (ECA) with the
National Power Corporation (NPC) for the operation and maintenance of the 1200 MW Ilijan Combined
Cycle Power plant located in Batangas City; that on November 9, 2000, KEPCO and KEILCO entered into
a Managerial and Technical Services Agreement (MTSA), pursuant to which KEPCO shall provide the
following managerial and technical advisory services to KEPCO as follows:
Scope of Work
Major Scope of Work
The Contractor 1(10) shall provide the following major services, including all incidental services
related thereto, to the Owner 2(11) during the term of this Agreement 3(12).
1. consulting and advisory services to the Owner;
2. advisory services in respect of technical and engineering matters as may be required by the
Owner in the development, implementation and administration of the Project 4(13), and for the
design, construction, testing, commissioning, operation and maintenance of the Power
Station 5(14);
3. training of the Owner's staff and a personnel in accordance with Schedule "B" at the
Contractor's facilities in Korea and coordinating such training with the training to be
provided to the Owner's staff and personnel by the Construction Constructors 6(15) pursuant to
the Construction Contracts; and
4. supply or procurement of equipment, instruments, tools spare parts and other materials and
supplies for the Power Station as the Owner may request.
Technical Support
Without limiting the Contractor's responsibilities in Section 2.2.1, the Contractor shall provide the
following specific technical support services, and all incidental services related thereto, to the Owner
during the term of this Agreement:
1. assistance to the Owner in the formulation of various procedures and guidelines for the safe
operation and maintenance of the Power Station, including but not limited to the procedures
relating to the operation of all equipment, corrective and preventive maintenance and
emergency actions, in accordance with Good Operating Procedures;
2. review and evaluation of the designs of the Power Station in order to check conformity with
the specifications set forth in the Construction Contracts and the ECA, and providing
recommendations on improvements or other necessary changes to such designs;
3. review and evaluation of the training, operation and maintenance manuals in order to check
conformity with the requirements of the ECA and the O&M Protocol, and providing
recommendations on the improvements or other necessary changes to such manuals;
4. review and evaluation of the equipment warranties provided by the Construction Contractors
and other equipment suppliers of the Owner, if any, and providing recommendations on
improvements or other necessary changes to such warranties; IaHAcT
5. review of the various Projects Documents entered into or to be entered into by the Owner as
they may impact on or related to the financing, design, construction, testing, commissioning,
operation and maintenance of the Power Station and the development, implementation and
administration of the Project, and providing recommendations on necessary amendments to
such Project Documents;
6. provision of a computerized maintenance and logistics management system, including

specific routines or programs for materials and spare parts inventory and for the
administration, control, supervision, operation and maintenance of the Power Station;
7. advice on the structuring of an efficient organizational and personnel set-up in respect of the
construction, operation and maintenance of the Power Station, including the identification of
the qualification requirements of the Owner's operation and maintenance personnel;
8. provision of technical and engineering advice (a) in the administration of the Project
Document, (b) during the testing of the various equipment at the place of manufacture, and
(c) during the commissioning and testing of the Power Station;
9. inspection of, reporting on and evaluation and monitoring of (a) all proposed designs or
amended designs of the Power Station, (b) the Construction Contractors' progress reports
and invoices, (c) all payments to the Construction Contractors and other suppliers, (d) all
expenditures, and (e) all contractual claims;
10. preparation and submission of periodic and adhoc reports, based on information provided by
the Owner, within such periods as the Owner and the Contractor may subsequently agree on,
on matters relating to the construction, operation and maintenance of the Power Station and
the development, implementation and administration of the Project;
11. review and evaluation of all engineering matters pertaining to the construction, operation and
maintenance of the Power Station, including any major overhaul thereof; and
12. provision of other technical assistance and advisory services as the Owner
may request and deem necessary or as the Contractor may deem appropriate,
Administrative Support
(a) The Contractor shall advise the Owner as may be necessary to ensure that the Power Station
will be constructed, managed, operated and maintained in accordance with (i) the standard
set out in the ECA, (ii) Good Operating Procedures, (iii) the operation and maintenance
manuals provided by the Construction Constructors or any other equipment vendor and such
other requirements as may be applicable to the warranties of the Construction Contractors or
any other equipment vendor, (iv) the Annual Operating Budget and Annual Operation Plan,
(v) applicable Law, Consents and all other requirements of Governmental Authorities, (vi)
the requirements of the Project's insurers, (vii) applicable dispatch instructions given by
NPC in accordance with the ECA, (viii) such operating rules, procedures and standards of
NPC, as may be applicable to the Project from time to time, (ix) the O&M Protocol and (x)
such security requirements or measures as may be agreed to by the Owner and the
Contractor; CIDcHA
(b) Without limiting the Contractor's responsibilities in Section 2.2.1, Section 2.2.2, and
paragraph (a) of this Section the Contractor shall provide the following specific
administrative support services, and all incidental services related thereto, during the term of
the Agreement:
1. advice on the Owner's performance of corporate business activities;
2. advice on the administration and management of the various Project Documents;
3. advice on matters relating to the Owner's application for, and renewal and
maintenance of, the various Consents required for the Owner's business operations
and as may be required by the Project;
4. advice on matters relating to the planning, supervision and implementation of the

various financial requirements of the Owner and the management of the Owner's
financial resources, such as the maintenance of financial records and books of
accounting;
5. advice on matters relating to the negotiation, execution and performance of the

Financing Agreements and the administration and performance of the Owner of its
obligations under the Financing Agreements;
6. advice on matters relating to the formulation and review of various internal

procedures, guidelines and regulations of the Owner, including such regulations
governing the Construction Contractors and other suppliers, their subcontractors and
their employees, agents, representatives and personnel as may be deemed necessary to
ensure the safe, timely and successful construction, commissioning, testing, start-up
and operation and maintenance of the Power Station;
7. advice on matter relating to the recruitment and mobilization of the personnel

(including staff) of the Owner;
8. advice on matters relating to the preparation, review and implementation of the

Annual Operating Budget, Annual Operating Plan and the Long-Term Major
Maintenance Plan;
9. Assistance in the formulation of the Owner's internal auditing procedures from time
to time;
10. advice on matters relating to the preparation and monitoring of the schedules for the
construction, operation and maintenance of the Power Station;
11. advice on matters relating to any dispute arising out of any of the Project Documents;
and
12. provision of other administrative assistance, support and resources as the Owner may
reasonably request or as the Contractor may deem appropriate. HICEca
Under the said contract it is also stipulated on Article 8.2 Licenses:
8.2 Licenses
8.2.1 Provisions of Licenses
The Contractor shall grant or cause to be granted to Owner such licenses of all patents and other
proprietary rights held by any person as may be reasonably required for the provision of the services and
fulfillment of the Contractor's obligations under this Agreement. Such licenses shall be in such form as
shall be reasonably approved by the Owner, and shall be irrevocable, non-exclusive and royalty free to the
Owner and its successors and assigns.
Furthermore, per Certification dated October 10, 2006 issued by Ricardo A. Galano III, Corporate
Counsel of Kepco Ilijan Corporation, it is represented that services under the Management and Technical
Service Agreement for the year 2005 rendered both outside the Philippines and those performed in the
Philippines did not exceed an aggregate of 183 days within any twelve-month period; and as a service
agreement, the MTSA only involves the rendition of the following: a) consulting and advisory services; b)
technical support services; and c) administrative support services; that during the term of the agreement no
technological processes, intellectual property rights, patients, technical information and other "know-how"
were transferred by KEPCO to the Corporation so as to constitute any royalties within the contemplation
of the applicable laws.
That in consideration for the aforementioned services, KEILCO shall pay to KEPCO annual fees, to
be prorated and paid on a monthly basis as provided in Article 6 of the Agreement; that the services shall
be done in Korea subject to a few exceptions wherein it is necessary to perform certain service in the
Philippines for purposes of verifying and confirming all the works done in Korea; that on May 3, 2006,
KEPCO issued a certification stating that the aggregate number of days of stay in the Philippines by
KEPCO's personnel are forty eight (48) days for the year 2005.
In reply, please be informed that Article 7(1) and, in relation thereto, Article 5 of the
Philippines-Korea tax treaty which respectively provide, 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 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.
"Article 5
2. The term 'permanent establishment' includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory; TAaEIc
e) a workshop;
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources;
g) premises used as a sales outlet; and
h) a warehouse, in relation to a person providing storage facilities for others.
3. a) a building site or construction, installation or assembly project or supervisory

activities in connection therewith, constitute a permanent establishment only if such site, project or
activity continues for a period of more than six months;
b) the furnishing of services including consultancy services by an enterprise through an

employee or other personnel constitutes a permanent establishment only if activities of that nature
continue within a Contracting State for a period or periods exceeding in the aggregate 183 days
within any twelve-month period; and
c) a place of exploration of natural resources constitutes a permanent only if it exists for

more than six months
xxx xxx xxx"
Based on the aforequoted provisions, the profits of KEPCO are taxable only in Korea unless it
carries on business in the Philippines through a permanent establishment situated therein to which such
profits may be attributable. For this purpose, KEPCO may be deemed to have a permanent establishment
in the Philippines, if among others, it furnishes services in the Philippines through its personnel for a
period or periods exceeding in the aggregate 183 days within any twelve-month period.
The documents submitted to this Office show that the personnel of KEPCO rendered services under
the MTSA, for an aggregate period not exceeding 183 days within a twelve-month period. Thus, KEPCO
is not deemed to have a permanent establishment by virtue of the rendition of said services in the
Philippines to which its profits could be attributable. In view thereof, this Office is of the opinion and so
holds that the profits derived by KEPCO from the rendition of services under the MTSA shall not be
subject to Philippine income tax pursuant to Article 7(1) in relation to Article 5(3)[b] of the
Philippines-Korea tax treaty. (BIR Ruling No. DA-ITAD-202-02 dated November 25, 2002; BIR Ruling
No. ITAD-069-00 dated April 07, 2000)
As regards the remuneration to be paid to KEPCO's personnel who will render services in the
Philippines, Article 15 of the same treaty provides, viz:
"Article 15
DEPENDENT PERSONAL SERVICES
1. Subject to the provisions of Article 16 (Directors' Fees), 18 (Pensions and Annuities),

19 (Government Service), 20 (Students and Apprentices), and 21 (Professors and Teachers),
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
that 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: EAIcCS
a) the recipient is present in the other State for a period or periods not exceeding
in the aggregate 183 days in the calendar year concerned, and
b) the remuneration is paid by, or on behalf of an employer who is not a resident

of the other State, and
c) the remuneration is not borne by a permanent establishment or a fixed base

which the employer has in the other State.
xxx xxx xxx"
Based on the above provision, the remuneration derived by KEPCO's personnel in connection with
their visit to the Philippines shall be subject to Philippine income tax if their presence in the Philippines
exceeds in the aggregate 183 days in a calendar year, and if their remuneration is paid by an enterprise
which is a resident of the Philippines, and finally, if the remuneration is borne by a fixed base which
KEPCO has in the Philippines.
Inasmuch as the presence of KEPCO's personnel in the Philippines did not exceed in the aggregate,
a period of more than 183 days for the year 2005, their remuneration for said taxable years shall not be
subject to Philippine income tax, pursuant to Article 15 of the Philippines-Korea tax treaty. (BIR Ruling
No. DA-ITAD-083-05 dated August 22, 2005)
In the event that a transfer of information or know-how arises from the MTSA, the pertinent
paragraphs of Article 12 of the above mentioned tax treaty shall apply to payments therefor. It provides:
"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. However, such royalties may be taxed in the Contracting State in which they arise, and
according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax
so charge shall not exceed 15 per cent of the gross amount of the royalties.
3. Notwithstanding the provisions of paragraph 2 thereof, the amount of tax by the

Philippines on the royalties paid by a company, being a resident of the Philippines, registered with
the Board of Investments under the investment incentives laws of the Philippines to a resident of
Korea, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount
of the royalties.
4. The term "royalties" as used in this Article means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work,
any patent, trademark design or model, plan, secret formula or process, or for the use of, or the right
to use industrial, commercial or scientific equipment or for information concerning industrial,
commercial or scientific experience, and includes payments of any kind in respect of motion picture
films and works on films or videotapes for use in connection with television or tapes for the use of
radio broadcasting. CcTHaD
xxx xxx xxx"
Thus, pursuant to the foregoing provisions, payments to be made by KEPCO under the MTSA for
any transfer of information or know-how are royalties which may be subject to a 10% preferential tax rate
if the paying company is registered with the Board of Investments and engaged in preferred areas of
investment and 15% in all other cases as long as the recipient of the royalty payments is the beneficial
owner of the royalties and a resident of the Contracting State.
Finally, royalty payments which might be made under the MTSA for the services to be rendered by
KEPCO in the Philippines are subject to the value-added tax (VAT) pursuant to Section 108 of the Tax
Code of 1997. 7(16)
Regulations No. 14-2002, provide that KEILCO shall be responsible for the withholding of the VAT on
the service fees before remitting them to KEPCO. In remitting to the Bureau of Internal Revenue the VAT
withheld on the service fees, KEILCO shall use BIR Form No. 1600 (Monthly Remittance Return of VAT
and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, KEILCO 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, KEILCO may include as part of the cost of the
services furnished to it by KEPCO 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, KEILCO is required to issue
the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three
copies thereof to be given to KEPCO upon its request, and the fourth copy to be retained by KEILCO as
its file copy. (BIR ITAD Ruling No. DA-ITAD-147-05 dated November 29, 2005)
disclosed that the actual facts are different, then thus ruling shall be without force and effect insofar as the
Very truly yours,
By:

Legal Service
Footnotes
1. Contractor refers to Korea Electric Power Corporation (KEILCO).
2. Kepco Ilijan Corporation (KEPCO).
3. Managerial and Technical Services Agreement between KEPCO and KEILCO.
4. "Project".
5. "Power Station" means the 1200 MV natural gas fired combined cycle power plant with diesel fuel fire
capability to be located in Ilijan, Batangas on a build, operate and transfer basis, and all other facilities
constructed or to be constructed in respect thereof by the Owner to enable the Owner to fulfill its
obligations under the ECA, and including the Switchyard Facilities, Access Road, Diesel Fuel Pipeline and
Jetty.
6. "Construction Contractors" means Raytheon Ebasco Overseas Ltd, and United Engineers International, Inc.
and Mitsubishi Corporation.
7. Republic Act No. 9337 (An Act Amending Section 27, 28, (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), signed into law on May
24, 2005 and became effective on November 1, 2005, amended Section 108(A), which now reads:
"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 one and one-half percent (1 1/2%); 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' means the performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration. . ."
The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the
Memorandum Circular No. 7-2006 (Publishing the full Text of the Memorandum from Executive Secretary
December 7, 2006

6760 Ayala Avenue
1226 Makati City
Attention: Atty. R.C. Vinzon

Tax Services
Gentlemen :
This refers to your application for relief from double taxation dated March 31, 2005, on behalf of
your client, NEC Tokin Electronics (Philippines), Inc. (NEC Tokin), requesting confirmation that the fee
paid to NEC Tokin Corporation (NTC) for the purchase of production and inventory control system is not
subject to the Philippine income tax under Articles 5(6), 7(1) and 12(4) of the Philippines-Japan tax treaty.
It is represented that NTC is a corporation duly organized and existing under the laws of Japan with
office address at 6-7-1 Kooriyama, Futoshiro Ku, Sandai City, Miyagi Prefecture, Japan; that NTC is not
registered either as a corporation or as a partnership in the Philippines per Certification of
Non-Registration issued by the Securities and Exchange Commission dated April 5, 2005; that NEC Tokin
is a corporation duly organized and existing under and by virtue of the laws of the Philippines with
registered office and principal place of business at 1 Ring Road, Light Industry & Science Park (LISP) II,
Barangay La Mesa, Calamba, Laguna; that on February 23, 2003, NEC Tokin purchased a production and
inventory control system (system) under a Software Purchase Agreement (Agreement); that pursuant to
such Agreement, NTC installed production and inventory control system that is customized for NEC
Tokin's production and inventory process design for internal use only and will monitor and track the
production of electro-mechanical devices, and record the current inventory of the said devices at any given
time; that the system was purchased in a one-time transaction for which a lump-sum amount was paid and
thereafter, NEC Tokin gained full ownership of the production inventory and control system; and that the
employees of NTC will install the system in the Philippines and will stay for a few days only.
It is your position that the payments made for the production and inventory control system
purchased by NEC Tokin are not technically considered as software payments subject to royalties but are
payments that represent business profits paid to NTC, which does not have a permanent establishment in
the Philippines. cda2007tax
In reply, please be informed as follows.
Memorandum Circulars (RMCs) that govern the taxation of software payments. The first Circular, RMC
77-2003 (Classification of Payments for Software for Income Tax Purposes), which covers software
payments made from November 18, 2003 to September 7, 2005, generally treats software payments as
royalties. It provides:
The term "royalties" as generally used means payment of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work
including cinematograph films, or films or tapes used for radio or television broadcasting, any
patent, trade mark, design, or model, plan, secret formula or process, or for the use of, or the right to
use, industrial, commercial or scientific equipment, or for information concerning industrial,
commercial or scientific experience. The term "use" as contained herein shall include the reselling
or distribution of software. HDTSIE

royalties."
On the other hand, the second Circular, RMC 44-2005 (Taxation of Payments for Software), which
covers software payments made from September 8, 2005 and thereafter, substantially amends the first
Circular by treating software payments either as business income, royalties, rental income, or capital gains,
depending on the nature of the transaction out of which such payments are made. Software payments are
treated as royalties only if the transaction does not constitute a sale or exchange and not all substantial
rights in the software have been transferred, but are merely for the transfer of copyright rights in the
software. (BIR Ruling No. DA-ITAD-42-06 dated April 11, 2006)
Accordingly, the fees paid for the purchase of production and inventory control system under the
subject Agreement, from the effective date of the Agreement on February 24, 2003 up to September 7,
2005, which fees are treated as royalties under RMC 77-2003, are subject to the reduced tax rate under
paragraph 2, Article 12 of the Philippines-Japan tax treaty, to wit:
"Article 12
ROYALTIES
2. However, such royalties may also be taxed in the Contracting State in which they arise,
royalties the tax so charged shall not exceed:
a) 15 per cent of the gross amount of the royalties if the royalties are paid
in respect of the use of or the right to use cinematograph films and films or tapes for
radio or television broadcasting;
b) 25 per cent of the gross amount of the royalties in all other cases.
xxx xxx xxx
4. The term 'royalties' as used in this Article means payments of any kind received as a
including cinematograph films and films or tapes for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use,
or scientific experience."
xxx xxx xxx"
Based on the aforequoted provision, payments for the purchase of production and inventory control
system under the SPA by NEC Tokin to NTC are subject to the reduced income tax of twenty five percent
(25%) of the gross amount thereof.
On the other hand, the fees paid for the purchase of production and inventory control system under
the SPA payable to NTC by NEC Tokin from the effective date of RMC 44-2005 on September 8, 2005
and thereafter, which fees are treated as business profits under this RMC, are subject to income tax only if
the same are attributable to a permanent establishment which NTC has in the Philippines, in accordance
with paragraph 1, Article 7 of the Philippines-Japan tax treaty, to wit:
"Article 7

attributable to that permanent establishment.
xxx xxx xxx"
Moreover, Article 5 of the said treaty provides, viz:
"Article 5
2. The term "permanent establishment" includes especially:
a) a store or other sales outlet;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse;
g) a mine, an oil or gas well, a quarry or other place of extraction of natural

resources.
3. A building site or construction or installation project constitutes a permanent

establishment only if it lasts more than six months.
xxx xxx xxx

consultancy services, or supervisory services in connection with a contract for building, construction
or installation project through employees or other personnel — other than an agent of an
independent status to whom paragraph 7 applies — provided that such activities continue (for the
same project or two or more connected projects) for a period or periods aggregating more than six
months within any taxable year. However, if the furnishing of such services is effected under all
agreement between the Governments of the two Contracting States regarding economic or technical
have a permanent establishment in that other Contracting State. HCEaDI
xxx xxx xxx"
Based on the foregoing, in order for any business profits derived by NTC from its transaction with
NEC Tokin to be taxed in the Philippines, NTC must have a permanent establishment in the Philippines to
which said profits must be attributed. Furthermore, a Japanese corporation may be deemed to have a
permanent establishment in the Philippines, if among others, the furnishing of services by such
corporation, through its employees or other personnel, in the same or connected project, continues within
the Philippines for a period or periods aggregating more than six months within any taxable year.
Since NTC, based on the documents submitted, does not appear to have in the Philippines a place
of business at its disposal which is fixed or established at a distinct place, which has a certain degree of
permanence, and through which it carries out its business considering that the employees of NTC shall
perform the subject services in the Philippines for one hundred twenty (120) days only for the taxable year
as evidenced by the certification issued by NEC Tokin, NTC is not deemed to have a permanent
establishment in the Philippines to which its business profits may be attributed.
Accordingly, this office is of the opinion and so holds that the fees paid for the purchase of
production and inventory control system by NEC Tokin to NTC from September 8, 2005 and thereafter,
under the subject agreement, are not subject to income tax. (BIR Ruling No. DA-ITAD 030-05 dated April
12, 2005)
However, the fees paid for the purchase of production and inventory control system by NEC Tokin
to NTC before February 1, 2006 are subject to VAT pursuant to Section 106(A) of the Tax Code of 1997
1(17) at the rate of 10% and beginning February 1, 2006 and thereafter are subject to VAT at the rate of
12%. With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue
Regulations No. 14-2002, provide that NEC Tokin shall be responsible for the withholding of the VAT on
the license fees before remitting them to NTC. In remitting to the Bureau of Internal Revenue the VAT
withheld on such fees, NEC Tokin shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and
Other Percentage Taxes Withheld). If a VAT-registered taxpayer, NEC Tokin may use as documentary
accompanying it. If a non-VAT-registered taxpayer, NEC Tokin may include as part of the cost of the
copy of the software purchase agreement sold to it by NTC the VAT consequently shifted or passed on to
it and may treat such VAT either as an expense or an asset, whichever is applicable. In addition, NEC
Tokin is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, the first three copies thereof to be given to NTC upon its request, and the fourth copy to be
retained by NEC Tokin as its file copy. HESIcT
Very truly yours,
By:

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 106(A) to read as:
"SEC. 106. Value-added Tax on Sale of Goods or Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross 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 one and one-half percent (1 1/2%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 1/2%).
xxx xxx xxx"
December 6, 2006
DA-ITAD-138-04
Embassy of the Republic of Singapore

35th Floor, Tower 1, The Enterprise Center
6766 Ayala Avenue,
Makati City
Gentlemen :
This has reference to your Note No. MNL105/2006 dated November 7, 2006 referred to this Office
payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use of
the Embassy of the Republic of Singapore, specifically described as follows:

Model Year: 2006
Color: Deep Nautica
Engine Number: 2TR-8012443
Chassis Number: MROZX69G6-00010085
reads:
"ARTICLE 34
services;
xxx xxx xxx"
Sections 106 and 108 of the National Internal Revenue Code of 1997. IEAaST
of the Republic of Singapore and/or its personnel on their purchases of locally-assembled motor vehicles it
appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your
Government allows similar exemption to the Philippine Embassy and its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2006 Toyota Fortuner 4X2 G Gas A/T for the official
use of the Embassy of the Republic of Singapore is exempt from value-added tax. (BIR Ruling No.
DA-ITAD-138-04 dated November 25, 2004)
Very truly yours,

Legal Service
November 23, 2006
Article 5 & 7 of the Philippines-Japan tax treaty; BIR Ruling No.

DA-ITAD-69-04
Luzon Electronics Technology, Inc.

Special Export Processing Zone
Gateway Business Park
Javalera, Gen. Trias, Cavite
Attention: Ms. Luz G. Cuyco

Manager for Finance Department
Gentlemen :
This refers to your letter dated January 9, 2006, applying for relief from double taxation on income
payments made by Luzon Electronics Technology, Inc. (LETI) to Marubun Corporation (Marubun) in
consideration for engineering and technical support rendered by the latter pursuant to the
It is represented that Marubun is a corporation duly organized and existing under the laws of Japan,
with office address at Marubun Daiya Bldg. 8-1, Nihonbashi Odenmacho, Chuo-Ku, Tokyo 103, Japan as
evidenced by a copy of its Company Registration certified by the Registration Officer of the Tokyo legal
Affairs Bureau on September 27, 2005; that it is not registered either as a corporation or as a partnership
licensed to do business in the Philippines per certification issued by the Securities and Exchange
Commission dated August 18, 2005; that LETI is a PEZA registered enterprise with Certificate of
Registration No. 95-121 duly organized and existing under the laws of the Philippines with principal office
at SEZ, Gateway Business Park, Javalera, General Trias, Cavite City.
It is further represented that on June 21, 2005, LETI and Marubun entered into an Agreement for
the purpose of providing services of a Technical Supervisor to support Engineering requirements for Akim
(Index type mounter equipment of LETI) consisting of the following: (a) test run and adjustment work, (b)
scheduled maintenance, (c) claim and complaints; that the cost of one Supervisor dispatched to LETI shall
be at 70,000 yen/day, however, for a move day, LETI pays 35,000 yen/day; that the Agreement shall be
valid one year after signing of the Agreement and such term shall be automatically extended for successive
terms of one (1) year at the same condition unless either party gives notice of termination not less than
three (3) months prior to the current term; and that the subject transaction is not under any investigation,
audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings,
or a judicial appeal of the taxpayer involved. HCacTI
"Article 7

xxx xxx xxx"
Moreover, Article 5 of the said treaty provides, viz:
"Article 5
xxx xxx xxx"

establishment in the other Contracting State if it is furnishes in that other Contracting State
consultancy services, or supervisory services in connection with a contract for a building,
construction or installation project through employees or other personnel — other than an agent of
an independent status to whom paragraph 7 applies —, provided that such activities continue (for
the same project or two or more connected projects) for a period or periods aggregating more than
six months within any taxable year. However, if the furnishing of such services is effected under an
xxx xxx xxx"
Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan
carries on business in the Philippines through a permanent establishment situated therein, the profits of the
same shall be subject to Philippine income tax, but only so much of such profits as is attributable to that
permanent establishment. For this purpose, a corporation which is a resident of Japan may be deemed to
have a permanent establishment in the Philippines if, among others, the furnishing of consultancy or
supervisory services by such corporation, through its employees or other personnel, in the same or
connected project, continue within the Philippines for a period or periods aggregating more than six
months in any taxable year except when the furnishing of such services is effected under an agreement
between the Governments of Japan and Philippines regarding economic or technical cooperation, in which
case, the corporation shall not be deemed to have a permanent establishment in the Philippines.
Considering that the services specified in the Agreement are generally performed by Marubun in its
office in Japan and that if such services are performed in the Philippines, the length of stay of personnel of
Marubun shall not exceed six (6) months, and that for the succeeding periods covering the renewed terms
of the Agreement, Marubun employees who would be coming to the Philippines to render the services
under the Agreement will not stay in the Philippines for a period or periods aggregating more than six (6)
months within any taxable year per certification issued by LETI dated July 26, 2006, Marubun is not
deemed to have a permanent establishment in the Philippines to which its business profits may be
attributed to. Therefore, the income derived by Marubun from services rendered to LETI is not subject to
Philippine income tax, pursuant to Article 7(1) in relation to Article 5 of the Philippines-Japan tax treaty.
(BIR Ruling No. DA-ITAD-69-04 dated July 13, 2004) SEACTH
As the regards the imposition of the VAT on the rendition of services of Marubun, please be
informed further that Section 108 of the Tax Code of 1997 1(18) provides as follows, to wit:
Thus, in general, the VAT should be imposed when Marubun provides the above services in the
Philippines "for short durations and in no case shall exceed an aggregate of 3 months in any given
calendar year". LETI shall then be required to withhold such VAT and treat the same as a "passed on"
VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section
4.114-2(b) of Revenue Regulations No. 16-05].
xxx xxx xxx
consumption outside of the territorial border of the taxing authority. If exports of goods and services
exports from the national territory — except specifically declared areas — to an ecozone.
xxx xxx xxx
law does not distinguish, we ought not to distinguish. cTaDHS
xxx xxx xxx"
provision for exempt transactions under Section 109 (K) of the Tax Code of 1997, as amended which
provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916
or PEZA Law, is particularly applicable to the instant case.
Such being the case, the payment of services fees by LETI, being a PEZA-registered enterprise to
Marubun, under the above Agreement should be as it is hereby confirmed to be exempt from VAT.
This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall
Very truly yours,
By:

Legal Service
Footnotes
9337].
November 21, 2006
Embassy of the People's Republic of Korea

10F, Pacific Star Building
Makati Avenue, Makati City
Attention: Mr. Hong Sung Mog

Minister and Consul General
Gentlemen :
This has reference to your Note No. KPH 2006-397 dated October 19, 2006 referred to this Office
payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for
the personal use of Mr. Hong Sung Mog, Minister and Consul General of the Embassy of the People's
Republic of Korea, specifically described as follows:
Make: Honda CRV 4X4 2.4L A/T

Model Year: 2006
Engine Number: RRMD55-6400501
Chassis Number: PADRD78506V400492
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from value-added tax (VAT) and ad valorem tax on its local purchases of goods and services. In other
words, purchases by that Embassy and its diplomatic agents of goods and/or services shall, in general, be
subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem taxes under Section
149, all of the National Internal Revenue Code of 1997. IEAaST
of the People's Republic of Korea and/or its personnel on their purchases of locally-assembled motor
vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005,
that your Government allows similar exemption to Philippine Embassy and/or its personnel on their
purchase of locally-assembled motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4L A/T for the personal use of
Mr. Hong Sung Mog, Minister and Consul General of the Embassy of the People's Republic of Korea is
exempt from value-added tax. (BIR Ruling No. 138-05 DA-ITAD- dated November 15, 2005)
Very truly yours,

Legal Service
November 21, 2006
Art. 13, Philippines-United States of America Tax Treaty; BIR

Ruling No. DA-ITAD 108-02

6760 Ayala Avenue
1226 Makati City
Attention: M.F.A. Balili

Tax Services
Gentlemen :
This refers to your letter dated July 28, 2006, filed with this Office on August 21, 2006, requesting
confirmation of your opinion that the royalties paid by Warner Bros. (F.E.) Inc. — Philippine Branch
(Warner Philippines) to Twentieth Century Fox International Corporation (Fox-US) for the use in the
Philippines of motion picture films owned by Fox-US are subject to (1) the preferential rate of 15% final
withholding tax pursuant to the provisions of Article 13(2)(b)(iii) of the Philippines-United States of
America (Philippines-US) tax treaty, and (2) the 12% value-added tax.
It is represented that Fox-US is a nonresident foreign corporation and a resident of the United
States of America for purposes of U.S. taxation as shown in the Certification dated July 13, 2006 issued by
Andrew E. Zuckerman, Field Director, Philadelphia Accounts Management Center, Department of the
Treasury, Internal Revenue Service, Philadelphia, PA 19255; that its principal office is located at 10201
West Pico Boulevard, Los Angeles, California; that Fox-US is not registered either as a corporation or as a
partnership in the Philippines as confirmed by the Certification of Non-Registration dated August 1, 2006
issued by the Securities and Exchange Commission; that Warner Philippines is a company duly organized
under the laws of the State of New York, with its principal offices at 10201 West Pico Boulevard, Los
Angeles, California 90035, U.S.A. and the Philippines branch of Warner Bros. (F.E.), Inc., a company
duly organized under the laws of the State of Delaware, with its principal branch offices at 4th Floor,
Ramon Magsaysay Award Foundation Center, 1680 Roxas Boulevard, Manila.
It is further represented that on August 15, 2001, Fox-US and Warner Philippines entered into a
Philippines Motion Picture License Agreement whereby the former grants to the latter the exclusive
Theatrical Rights in the Language 1(21) for the Picture(s) in the Territory 2(22); that in consideration of the
rights granted to Warner Philippines, the former shall pay Fox-US a royalty equal to 92% of Gross
Billings accrued in each fiscal year less 100% of the Allowable Distribution Expenses; 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.
EACIaT
In reply, please be informed that as regards income tax, the royalties for the theatrical rights to be
paid by Warner Philippines to Fox-US are subject to the preferential tax rate under Article 13 of the
Philippines-US tax treaty, to wit:
"Article 13
ROYALTIES
1. Royalties derived by a resident of one of the Contracting States from sources within the
other Contracting State may be taxed by both Contracting States.
2. However, the tax imposed by that other Contracting State shall not exceed —
a) In the case of the United States, 15 percent of the gross amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties,
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid
by a corporation registered with the Philippine Board of Investments and
engaged in preferred areas of activities, and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third State.
3. The term 'royalties' as used in this article means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or scientific
work, including cinematographic films or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or
other like right or property, or for information concerning industrial, commercial or
scientific experience. The term 'royalties' also includes gains derived from the sale, exchange
or other disposition of any such right or property which are contingent on the productivity,
use, or disposition thereof.
xxx xxx xxx"
Paragraph 2(b)(iii) above provides that royalties arising in the Philippines and derived by a resident
of the United States shall be subject to the lowest rate of Philippine income tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third State (commonly
known as the most-favored-nation tax treatment of royalties). In relation thereto, the Supreme Court, in
Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105
dated June 25, 1999), has cited two conditions for royalties arising in the Philippines and derived by a
resident of another country (in this case, the United States) to be subject to a most-favored-nation tax
treatment. First, the royalties in question derived by a resident of the other country (the United States)
must be of the same kind as those derived by a resident of the third country which are subject to the
most-favored-nation tax treatment under the existing tax treaty between the Philippines and the third
country. Second, the mechanism employed by the other country (the United States) in mitigating the
effects of double taxation of foreign-sourced income derived by its residents must be the same with that
employed by the third country, which can be determined by taking into account and comparing the
respective articles on Elimination of Double Taxation of the other country (the United States) and the third
country under their respective tax treaties with the Philippines. EacHSA
In looking for a third country which grants a most-favored-nation tax treatment on royalties, among
the countries you cited you placed emphasis on Russia, particularly, the Convention between the
Government of the Republic of the Philippines and the Government of the Russian Federation for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Philippines-Russia tax treaty), whose provisions on taxes apply on income derived or which accrued
January 1, 1998.
As to the first condition for the most-favored-nation tax treatment, it is noteworthy that payments
for copyright of literary, artistic or scientific work (to which royalties for the theatrical rights to be paid by
Warner Philippines to Fox-US are assimilated), which are considered royalties under paragraph 3, Article
13 of the Philippines-United States tax treaty, are likewise considered as such under paragraph 2, Article
12 of the Philippines-Russia tax treaty, to wit:
"Article 12
ROYALTIES
1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State
2. However, the royalties may also be taxed in the Contracting State in which they arise and
according to the laws of the State, but the tax so charged shall not exceed 15 per cent of the
gross amount of royalties.
xxx xxx xxx"
As to the second condition for the most-favored-nation tax treatment, it is also noteworthy that the
United States and Russia employ the same mechanism in mitigating the effects of double taxation of
foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under
their respective articles on Elimination of Double Taxation of their tax treaties with the Philippines, to wit:
United States:
"Article 23
RELIEF FROM DOUBLE TAXATION
Double taxation of income shall be avoided in the following manner:
1. In accordance with the provisions and subject to the limitations of the law of the United
States (as it may be amended from time to time without changing the general principle
hereof), the United States shall allow to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of taxes paid or accrued to the
Philippines and, in the case of a United States corporation owning at least 10 percent of the
voting stock of a Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines
by the Philippine corporation paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be based upon the amount of tax
paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the
purpose of limiting the credit to the United States tax on income from sources within the
Philippines or on income from sources outside the United States) provided by United States
law for the taxable year. For the purpose of applying the United States credit in relation to
taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income)
shall be applied to determine the source of income. For purposes of applying the United
States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in
paragraphs 1(b) and (2) of Article 1 (Taxes Covered) shall be considered to be income taxes.
DHITCc
xxx xxx xxx"
Russia:
"Article 23
In the case of the Philippines, double taxation shall be avoided in the following manner:
Subject to the provisions of the laws of the Philippines relating to the allowances as credit
against Philippine tax of tax payable in any country other than the Philippines, income taxes paid or
have accrued under the laws of the Russian Federation and in accordance with this Convention,
whether directly or by deduction, in respect of income from sources within the Russian Federation
shall be allowed as a credit against Philippines tax payable in respect of that income.
In the case of a Philippine corporation owning more than 50 per cent of the voting stock of a
Russian company from which it receives dividends in any taxable year, the Philippines shall also
allow credit for the appropriate amount of taxes paid or accrued in the Russian Federation to a
Russian company paying such dividends with respect to the profits out of which such dividends are
paid. The deduction shall not, however, exceed that part of the Philippine income tax, as computed
before the deduction is given, which is appropriate to the income which may be taxed in the Russian
Federation.
In the case of the Russian Federation, double taxation shall be avoided in the following
manner:
Where a resident of the Russian Federation derives income from the Philippines, the amount
of tax of that income payable in the Philippines in accordance with the provisions of this
Convention, may be credited against the tax levied in the Russian Federation imposed on that
resident. The amount of credit, however, shall not exceed the amount of the Russian tax on that
income computed in accordance with taxation laws and regulations of the Russian Federation.
Under the ordinary credit method, the United States and Russia (as countries of residence of the
income recipient) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability
in their countries that is attributable to the income taxed in the Philippines (the country of source or
country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the
effective tax rate of the United States and of Russia on a particular income, the taxpayer would not receive
full credit for the income tax imposed by the Philippines on such income.
Therefore, because the two conditions for the most-favored-nation tax treatment on royalties are
both satisfied, this Office is of the opinion and so holds that the royalties for the theatrical copyrights to be
paid by Warner Philippines to Fox-US are subject to the preferential income tax rate of 15% based on the
gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in
relation to paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to
paragraph 2, Article 12 of the Philippines-Russia tax treaty. (BIR Ruling No. DA-ITAD 108-02 dated May
30, 2002) ISCHET
Finally, as regards value-added tax (VAT), the royalties for the theatrical rights to be paid by
Warner Philippines to Fox-US are subject to VAT under Section 108(A) of the National Internal Revenue
Code of 1997 (Tax Code), as amended, to wit:
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
. . . 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" 3(23)
Regulations No. 14-2002, provide that Warner Philippines shall be responsible for the withholding of the
VAT on the royalties before remitting them to Fox-US. In remitting to the Bureau of Internal Revenue the
VAT withheld on the royalties, Warner Philippines shall use BIR Form No. 1600 (Monthly Remittance
Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Warner 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, Warner Philippines may include
as part of the cost of the musical copyrights licensed to it by Fox-US the VAT consequently shifted or
passed on to it and may treat such VAT either as expense or asset, whichever is applicable. In addition,
Warner Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source
(BIR Form No. 2306), the first three copies for Fox-US and the fourth copy for Warner Philippines as its
file copy.
Very truly yours,
By:

Legal Service
Footnotes
1. The "Language" shall be Tagalog and English. A Picture shall be deemed to be in the Language if its
original soundtrack is in the language, or if its is sub-titled or dubbed in the Language if and as approved by
Fox in Advance in writing. The soundtrack on any sub-titled version shall be in the English language.
2. The "Territory" shall be in the Philippines and its respective territories and possessions, as their political
borders exist on the Commencement Date.
114, 116, 117, 119, 121, 148, 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, as amended Section 108(A) to read as:
. . . 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"
November 17, 2006
Sec 106 & 108 of the National Internal Revenue Code 1997;
Article 34, Vienna Convention; BIR Ruling No. ITAD-156-02
Delegation of European Commission

in the Philippines
7th Floor, Salustiana D. Ty Tower
104 Paseo de Roxas
Legaspi Village
Makati City
Attention: Mr. Gabriel Munuera Vinals

First Secretary and Head of
Political/Economic/Trade/Public Affairs Section
Gentlemen :
This has reference to your Note No. 06-180 dated October 6, 2006 referred to this Office by the
Department of Finance and the Department of Foreign Affairs, Office of Protocol, requesting for the
exemption from payment value-added tax (VAT) on the local purchase of one (1) unit motor vehicle for
the personal use of Mr. Gabriel Munuera Vinals, First Secretary and Head of
Political/Economic/Trade/Public Affairs Section of the Delegation of the European Commission,
Make: Hyundai Santa Fe 4X2 CRDI 2WD 2.2L A/T

Model Year: 2006
Color: Platinum Silver
Engine Number: D4EB6950742
Frame Number: KMHSH81WP6U086497
In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic
Relations, pertinent portion of which reads:
"ARTICLE 34
"(a) indirect taxes of a kind which are normally incorporated in the price of goods or
services: aSAHCE
"xxx xxx xxx"
from the VAT on its local purchases of goods and services. In other words, purchases by that Embassy of
goods and/or services shall, in general, be subject to the value-added tax prescribed under Sections 106
and 108, both of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant exemption to Mr. Gabriel
Munuera Vinals, a Spanish national, and whose Embassy in the Philippines is included in the updated list
of diplomatic missions entitled to VAT exemption on the purchase of locally-assembled motor vehicles,
on the basis of reciprocity, as confirmed by the Office of Protocol of the DFA in its letter dated October
18, 2005, that his Government allows similar exemption to Philippine Embassy personnel on their
purchases of goods and services in his country.
Hence, the herein request for VAT exemption on the local purchase of one (1) unit of 2006
Hyundai Santa Fe 4X2 CRDI 2WD 2.2L A/T, for the personal use of Mr. Gabriel Munuera Vinals, First
Secretary and Head of Political/Economic/Trade/Public Affairs Section of the Delegation of the European
Commission in the Philippines, is hereby granted. (BIR Ruling No. ITAD-156-02 dated September 10,
2002)
Very truly yours,

Legal Service
November 17, 2006
Convention on Diplomatic Relations; BIR Ruling No. ITAD-19-04
Makati City
Attention: Mr. Justin Wade Reuben Sibley

Second Secretary
Gentlemen :
This has reference to your Note No. 427/06 and File No. MN94/00109 dated October 20, 2006
unit motor vehicle for the personal use of Mr. Justin Wade Reuben Sibley, Second Secretary of the
Embassy of Australia specifically described as follows:
Make: Ford Escape XLT 3.0L V6 4X4 A/T
Model Year: 2006
Color: Panther Black
Frame Number: PE2ET68151WE00583
Engine Number: AJ013154
reads:
"ARTICLE 34
services: aSAHCE
"xxx xxx xxx"
of 1997.
Hence, the local purchase of one (1) unit of 2006 Ford Escape XLT 3.0L V6 4X4 A/T for the
personal use of Mr. Justin Wade Reuben Sibley, Second Secretary of the Embassy of Australia is exempt
from VAT and ad valorem tax. (BIR Ruling No. ITAD-19-04 dated February 23, 2004)
the herein parties are concerned. EacHCD
Very truly yours,

Legal Service
November 8, 2006
DA-ITAD-119-01
Embassy of the State of Qatar

1378 Caballero St. corner Lumbang St.,
Dasmariñas Village
Makati City
Gentlemen :
This has reference to your Note No. QAT/MNL/080/2006 dated October 2, 2006 referred to this
Office by the Department of Finance and the Department of Foreign Affairs, requesting for the exemption
from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use
of the Embassy of the State of Qatar, specifically described as follows:

Model Year: 2006
Color: Lithium
Chassis Number: MROZX69G8-00009942
reads:
"ARTICLE 34
services;
xxx xxx xxx"
Thus, the tax exemption privilege of an Embassy an/or its diplomatic agents does not include exemption
Sections 106 and 108 of the National Internal Revenue Code of 1997. DEICTS
of the State of Qatar and/or its personnel on their purchases of locally-assembled motor vehicles it
Hence, the local purchase of one (1) unit of 2006 Toyota Fortuner 4X2 G Gas A/T for the official
use of the Embassy of the State of Qatar is exempt from value-added tax. (BIR Ruling No.
DA-ITAD-119-01 dated December 6, 2001)
Very truly yours,

Legal Service
November 8, 2006
Article 11 — Philippines-Japan tax treaty;

Gramata & Associates Law Office

2nd Floor, FCC Building
7494 Santillan Street
1230 Makati City
Attention: Mr. Delfin N. Gramata
Gentlemen :
This refers to your application for relief from double taxation dated March 14, 2006, requesting
confirmation on behalf of your client, T & S Laser Solutions, Inc. (hereinafter referred to as "TLS") that
the interest arising from its loan in the amount of Forty Six Million Japanese Yen (JpY46,000,000.00)
from T & S, Inc. (hereinafter referred to as "T&S") to be financed by the Japan Bank for International
Cooperation (JBIC), a financial institution wholly owned by the Japanese government, is exempt from
Philippine income tax pursuant to Article 11(4) of the Philippines-Japan tax treaty.
It is represented that T&S is a nonresident foreign corporation duly organized and existing under the
laws of Japan with principal address at 256-1, Ukizuka, Yashio City, Saitama Pref. Japan; that T&S holds
99.97% of the total subscribed shares of TLS, a corporation duly organized and existing under the laws of
the Philippines with principal address at Lot-44 First St., First Philippine Industrial Park, Sta. Anastacia
Sto. Tomas, Batangas; that TLS is registered with the Philippine Economic Zone Authority (PEZA) as an
Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-62.
It is further represented that on October 13, 2005, T&S and TLS entered into a Loan Agreement
whereby the former granted to the latter the principal loan in the amount of Forty Six Million Japanese
Yen (JpY46,000,000.00) with an interest rate of One and 60/100 percent (1.6%) per annum; and that
sometime in December of 2005, a certification was issued by the JBIC to the effect that on October 28,
2005, T&S obtained a loan in the amount of JpY46,000,000.00 to be used to finance the loan that T&S as
lender, made available to TLS as borrower, per Loan Agreement dated October 13, 2005.
"Article 11
may be taxed in that other Contracting State. DHEACI
2. However, such interest may also be taxed in the Contracting State in which it arises, and
according to the laws of the Contracting State but if the recipient is the beneficial owner of
the interest the tax so charged shall not exceed:
a) 10 per cent of the gross amount of the interest if the interest is paid in respect
of Government securities, or bonds or debentures;
3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines
on the interest paid by a company, being a resident of the Philippines, registered with the
Board of Investments and engaged in preferred pioneer areas of investment under the
investment incentive laws of the Philippines to a resident of Japan, who is the beneficial
owner of the interest, shall not exceed 10 per cent of the gross amount of the interest.
4. Notwithstanding, the provisions of paragraphs (2) and (3), interest arising in a Contracting
State and derived by the Government of the other Contracting State including political
subdivisions and local authorities thereof, the Central Bank of that other Contracting State or
any financial institution wholly owned by that Government, or by any resident of the other
Contracting State with respect to debt-claims guaranteed or indirectly financed by the
Government of that other Contracting State including political subdivisions and local
authorities thereof, the Central Bank of that other Contracting State or any financial
institution wholly owned by that Government shall be exempt from tax in the
first-mentioned Contracting State. (Emphasis supplied)
For the purposes of this paragraph, the term 'financial institution wholly owned by the Government'
means:
(a) In the case of Japan, the Export-Import Bank of Japan, the Overseas
Economic Cooperation Fund and the Japan International Cooperation
Agency;
(b) In the case of the Philippines, the Development Bank of the Philippines; and
(c) Any such financial institution the capital of which is wholly owned by the
Government of either Contracting State, other than those referred to in
sub-paragraphs (a) and (b) above, as may be agreed from time to time
between the Governments of the two Contracting States.
5. The term "interest" as used in this Article means income derived from debt-claims of every
kind, whether or not secured by mortgage and whether or not carrying a right to participate
in the debtor's profits, and in particular, income from Government securities and income
from bonds or debentures, including premiums and prizes attaching to such securities, bonds
or debentures."
Based on the above provisions, interest derived in the Philippines by the Government of Japan
including its political subdivisions, local authorities and financial institutions; or from debt-claims
guaranteed or indirectly financed by a financial institution wholly owned by the Japanese government,
shall not be subject to Philippine income tax. TcEDHa
In the instant case, however, it should be noted that the Loan Agreement in the amount of
JpY46,000,000.00 from which the subject interest is derived is solely by and between T&S and TLS, and,
there is nothing therein which, as represented, provides that JBIC guarantees or shall finance indirectly,
the said loan of TLS. While it is true that the amount of JpY46,000,000.00 which T&S lent to TLS came
from JBIC, still, such amount was obtained by T&S through another loan agreement it executed with JBIC
on October 28, 2005. Therefore, it cannot be said that the subject interest is derived from a loan which was
indirectly financed/guaranteed by the JBIC. The second loan agreement between T&S and JBIC is a
separate and distinct loan agreement from that executed between T&S and TLS. This is so notwithstanding
a certification from JBIC that the amount of JpY46,000,000.00 borrowed by T&S shall be used by the
latter to finance a loan made by TLS.
In view of all the foregoing, this Office is of the opinion and so holds that the interest derived from
the Loan Agreement between T&S and TLS dated October 13, 2005 is subject to the preferential tax rate of
15% of its gross amount, pursuant to Article 11(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No.
DA-ITAD-27-06 dated March 16, 2006)
Moreover, the said Loan Agreement is subject to documentary stamp tax imposed under Section
179 of the National Internal Revenue Code of 1997, as amended, at the rate of One Peso (P1.00) on each
Two Hundred Pesos (P200) or fractional part thereof, of the issue price of any such loan agreement.
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,
By:

Legal Service
November 8, 2006

Philippines-Germany tax treaty; BIR Ruling No. DA-ITAD 93-06

Law Offices
Ortigas, Pasig City

Atty. Rhodora Corcuera-Menzon
Gentlemen :
This refers to your letter dated August 10, 2006 on behalf of your client, Canon Information
Technologies Philippines, Inc. (Canon-Philippines), requesting a ruling on the tax implication of the
purchase of software by Canon-Philippines from Gentleware AG (Gentleware-Germany) pursuant to
Article 7 of the Philippine Germany tax treaty.
It is represented that Gentleware-Germany is a nonresident foreign corporation, organized and

existing under the laws of Germany, with principal office at Ludwigstr. 12, 20357 Hamburg, Germany;
that Gentleware-Germany is not registered either as a corporation or as a partnership in the Philippines as
confirmed by the Certification of Non-Registration of Corporation/Partnership dated August 9, 2006
issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly
organized and existing under the laws of the Philippines with office address at 2nd Floor Techno Plaza
One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and
software development involving imaging, communications and related technologies;
It is further represented that Canon-Philippines purchased a Poseidon for UML Standard Edition
4.x (software) from Gentleware-Germany; that under the Gentleware Single User License Terms and
Conditions (Agreement), Gentleware-Germany grants to Canon-Philippines a nonexclusive,
nontransferable, perpetual, limited right and license to:
a) permit Licensed Developers to install and use the Licensed Software, on per product or per
module basis, for the sole purpose of creating Applications;
b) copy or have copied the Licensed Software as necessary for the purpose of exercising the
rights granted under this Section 2 for back-up or disaster recovery purposes, provided, that
Gentleware's copyright notice and other proprietary rights notices are reproduced on each
copy.
That Canon-Philippines may not, nor may permit any other person or entity to use, copy, modify, or
distribute the Licensed Software (electronically or otherwise), or any copy, adaptation, transcription, or
merged portion thereof, or the Documentation except as expressly authorized by Gentleware-Germany;
that Canon-Philippines may not modify or port the Licensed Software to operate on platforms other than
those for which it has paid the appropriate fees; that Canon-Philippines may not, nor may permit any other
person or entity to, reverse assemble, reverse compile, or otherwise translate any binary forms of the
licensed Software, except to the extent applicable laws specifically prohibit such restriction; that
Canon-Philippines' rights may not be transferred, leased, assigned, or sublicensed except for a transfer of
the License Agreement in its entirety to (1) a successor in interest of Canon-Philippines' entire business
who assumes the obligations of this License Agreement or (2) any other party who is reasonably
acceptable to Gentleware-Germany, enters into a substitute version of this License Agreement, and pays
an administrative fee intended to cover attendant costs; that no service bureau work, multiple-user license,
or time-sharing arrangement is permitted, except as expressly authorized by Gentleware-Germany; that if
Canon-Philippines uses, copies, or modifies the Licensed Software or transfers possession of any copy,
adaptation, transcription, or merged portion thereof to any other party in any way not expressly authorized
by Gentleware-Germany, all licenses under this License Agreement are automatically terminated; that
Gentleware-Germany shall have the sole and exclusive ownership of all right, title, and interest in and to
the Licensed Software and all modifications and enhancements thereof (including ownership of all trade
secrets and copyrights pertaining thereto), subject only to the rights and privileges expressly granted to
Canon-Philippines; that this License Agreement does not provide Canon-Philippines with title or
ownership of the Licensed Software, but only a right of limited use; that the consideration for the purchase
of the software is $2,241.00; 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. DaHISE
In reply please be informed as follows:
Concerning software payments, the Human of Internal Revenue has issued two Revenue
77-2003 1(24)) covers software payments made as of November 18, 2003 and until the effectivity of the
second Circular and generally treats software payments as royalties, thus:
"The term "royalties" as generally used means payment of any kind received as a
commercial or scientific experience.
The term "use" as contained herein shall include the reselling or distribution of software.
"Software is generally assimilated as a literary, artistic or scientific work protected by the

royalties."
of which such payments are made. It provides:

a., Transfer of copyright rights. A transfer of software is classified as a transfer of a

described below:



"b. Transfer of copyrighted articles. A copyrighted article incorporating a software
If a person acquires a copy of a software but does not acquire any of the rights described
above (or only acquires a de minimis grant of such rights), and the transaction does not involve the
provision of services or of know-how, the transfer of the copy of the software is classified solely as
a transfer of a copyrighted article and payments for which constitute business income.
"xxx xxx xxx"
The fact that what is being transferred to Canon-Philippines is only a copyrighted article
incorporated in a software and there was no transfer of ownership thereto including pertinent rights
protected under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005,
Section 5b thereof, will apply in this case which states that "If a person acquires a copy of a software but
does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and
the transaction does not involve the provision of services or of know-how, the transfer of the copy of the
software is classified solely as a transfer of a copyrighted article and payments for which constitute
business income."
Thus, payments made by Canon-Philippines to Gentleware-Germany, being business income (or

business profits), is subject to income tax in the Philippines only if it is attributable to a permanent
establishment which Gentleware-Germany has in the Philippines, under paragraph 1, Article 7 in relation
to Article 5 of the Philippines-Germany tax treaty, to wit: ScAHTI
"Article 7
BUSINESS PROFITS
xxx xxx xxx"
"Article 5
1. For the purposes of this Agreement, 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' shall include specially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse, in relation to a person providing storage facilities for others;
g) a mine, quarry or other place of extraction of natural resources;
h) a building site or construction or assembly project or supervisory activities in

connection therewith, where such site, project or activity continues for a period of more than six
months;
xxx xxx xxx"
Based on the foregoing, in order for Gentleware-Germany to be considered to have a permanent

establishment to which said business profit may be attributed, it must satisfy the following conditions 3(26):
situated." (Paragraph 2)
Since it appears, based on the SEC Certificate that Gentleware-Germany is not registered either as
a corporation or as a partnership in the Philippines, that Gentleware-Germany does not have a place of
business at its disposal which is fixed or established at a distinct place with a certain degree of
permanence in the Philippines through which it may use for carrying on its business, Gentleware-Germany
is deemed as not having permanent establishment to which said business profits may be attributed to.
Thus, for as long as Gentleware-Germany is deemed not to have a permanent establishment in the
Philippines to which its profits may be attributable, income from its sale of software, such as that made to
Canon-Philippines in the instant case, shall be exempt from income tax and consequently withholding tax.
(BIR Ruling No. DA-ITAD 93-06 dated August 22, 2006)
However, the electronic transfer of software from the nonresident supplier is importation of
software and is subject to value-added tax (VAT) under Section 107 of the National Internal Revenue
Code, as amended by Republic Act No. 9337 and Revenue Memorandum Circular No. 7-2006.
Accordingly, Canon-Philippines being the direct importer of the downloadable software, is subject to 12%
VAT and is required to withhold 12% VAT from its payments before it telegraphically transfers it to the
account of the Gentleware-Germany.
With regard to the procedures for withholding and paying the VAT, Canon-Philippines shall be
responsible for the withholding of the 10 percent/(12 percent effective February 1, 2006) VAT on the
license fee before making any payment to Gentleware-Germany. In remitting to the Bureau of Internal
Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer,
Canon-Philippines may include as part of the cost of the purchased software provided to it by
Gentleware-Germany the VAT consequently shifted or passed on to it and may treat such VAT either as
expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in
quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first
three copies for Gentleware-Germany and the fourth copy for Canon-Philippines as its file copy. [Section
4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now
Section 4, 114-2(b), RR No. 16-05); Section 4.114(D), RR No. 2-98, as last amended by RR No. 28-03]
the herein parties are concerned. DIESaC
Very truly yours,
By:

Legal Service
Footnotes
85-91.
November 8, 2006
Arts. 5 & 7, Philippines-Japan tax treaty; BIR Ruling No.

DA-ITAD 145-05
Punongbayan & Araullo

20th Floor, Tower 1
The Enterprise Center
6766 Ayala Avenue
1200 Makati City
Attention: Romeo H. Duran

Tax Principal
Gentlemen :
This refers to your letter dated January 16, 2006 requesting confirmation that the service fees paid
by Creative Diecast Philippines Corporation (CDPC) to Creative Diecast Corporation (CDC) 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) and the Philippines-Japan tax treaty.
It is represented that CDC is a nonresident foreign corporation taxable under the laws of Japan with
business address at 3677-4 Ohata, Tsuru-shi, Yamanashi 402-0045, Japan and Tax Reference Number
00501271, as certified by the District Director of Ohtsuki Tax Office in Japan on October 5, 2005; that
CDC is not registered either as a corporation or as a partnership licensed to engaged in business in the
Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership issued by the
Securities and Exchange Commission on June 23, 2005; that CDPC, on the other hand, is a company
organized and existing under the laws of the Philippines with principal office at Block 7, Lot 5, Complex
Avenue, CCIE Compound, Maduya, Carmona, Cavite; that it is primarily engaged in the manufacture of
aluminum and zinc alloy diecast products, machine parts and other related products and merchandise, such
as, but not limited to, electric appliances, communication and office automation equipment; that CDPC is
registered with the Philippine Economic Zone Authority as an export enterprise per Certificate of
Registration No. 05-04 dated January 27, 2005.
It is further represented that CDPC and CDC entered into a Service Agreement dated December 29,
2003, pursuant to which CDC agreed to provide the following services to CDPC for a fee:
1. Procurement/sourcing qualified vendors residing overseas;
2. Marketing and sales promotion planning;
3. Customer relations and handling of product complaints, if any;
4. Periodic business and financial reviews, as may be requested;
5. Consultancy services; and
6. Related services.
that the foregoing services shall in no case involve the transfer of CDC's technology, know-how or other
intellectual property rights; that in general, CDC shall perform the aforementioned services in Japan or in
other countries outside the Philippines; that in cases where it would be necessary for CDC to send
employees to the Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed
90 days in any given 12-month period; and that in consideration for the services, CDPC shall pay CDC an
annual fee in the amount of Japanese Yen, Twenty Two Million Three Hundred Forty Thousand Nine
Hundred Forty Nine (JPY22,340,949.00) for a completed year of service; and that the Service Agreement
shall be effective for a period of one (1) year commencing on January 1, 2004 and ending December 31,
2004, subject to an automatic renewal for another twelve-month period, unless one party gives written
notice to the other of its intent not to renew at least thirty (30) days prior to the expiration of the initial or
renewed term. TEacSA
In reply, please be informed that paragraph 1 of Article 7 of the Philippines-Japan tax treaty
provides:
"Article 7

xxx xxx xxx"
In view of the foregoing, the profits of a Japanese enterprise shall be taxable only in Japan unless
such enterprise carries on business in the Philippines through a permanent establishment situated therein.
If the Japanese 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 CDC for the services rendered in the Philippines shall be
taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the
activities giving rise to such income.
"Article 5
xxx xxx xxx

establishment in the other Contracting State if it furnishes in the other Contracting State consultancy
services, or supervisory services in connection with a contract for a building, construction or
installation project through employees or other personnel-other than an agent of an independent
status to whom paragraph (7) applies-, provided that such activities continue (for the same project or
two or more connected projects) for a period or periods aggregating more than six months within
any taxable year. . . .
xxx xxx xxx."
Inasmuch as it has been represented that the services will generally be performed by CDC outside
the Philippines and that should it be necessary to send its employees to the Philippines, said employees
will not stay in the Philippines for more than ninety (90) days in any given 12-month period in their
rendition of services to CDPC, CDC may be considered as not having a permanent establishment in the
Philippines. In other words, CDC is deemed not to have a permanent establishment for as long as its
employees do not stay in the Philippines for a period or periods aggregating more than six months within
any taxable year in the course of their rendition of services to CDPC. (BIR Ruling No. DA-ITAD 145-05
dated November 23, 2005) In such a case, the income derived by CDC from services rendered to CDPC
shall not be subject to Philippine income tax and, consequently, to withholding tax. SaTAED
As regards the imposition of the VAT on the rendition of services of CDC, please be informed
further that Section 108 of the Tax Code of 1997 1(27) provides as follows:
Thus, in general, the VAT is imposed on services rendered by CDC in the Philippines. On every
payment of service fees, CDPC is required to withhold such VAT and treat the same as a "passed on"
VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section
xxx xxx xxx
xxx xxx xxx
law does not distinguish, we ought not to distinguish.
coming within the purview of the general rule. DScTaC
xxx xxx xxx"
Such being the case, the payment of services fees by CDPC, being a PEZA-registered enterprise, to
CDC under the above Service Agreement should be, as it is hereby confirmed to be, exempt from VAT.
Very truly yours,
By:
Legal Service
Footnotes
3. Referring to the old Section 109(q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No.
9337].
November 7, 2006
Paragraph 4 (a), Diplomatic Exchange of Notes dated May 6,

2002; Art 5, Agreement between the Govt. of the Federal Republic
of Germany and the Govt. of the Republic of the Philippines Sec
109 (K), National Internal Revenue Code of 1997, as amended;
Embassy of the Federal Republic of Germany

25th Floor, The RCBC Plaza, Tower 2
6819 Ayala Avenue
Makati City
Attention: Klaus Tesch

First Secretary
Gentlemen :
This has reference to your Note Verbale WZ 445.11/Auto KFZ No. 54/2006 dated September 11,
2006 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA),
Office of Protocol, requesting for exemption from payment of tax on the local purchase of two (2) motor
vehicles, for the official use of the Small & Medium Enterprise Development for Sustainable Employment
Program under the project of GDC-GTZ Office of the German Embassy, specifically described as follows:
Type of use: Official use

Organization: German Development Cooperation-German
Technical Cooperation (GDC-GTZ)
9/F, PDCP Bank Center, L.P. Leviste corner
V.A. Rufino Streets, Salcedo Village, Makati City
Make: two (2) units Toyota Innova 2.5E Diesel M/T
Model year: 2006
Color: Quick Silver
Engine No.: (1) 2KD-9681210 (2) 2KD-9682456
Frame No.: (1) KUN40-5010958 (2) KUN40-5010981
(NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides, viz:
xxx xxx xxx
Based on the Section 109 above, a transaction is exempt from VAT when a special law or an
international agreement to which the Philippines is a signatory provides for such exemption. The
Agreement between the Government of the Federal Republic of Germany and the Government of the
Republic of the Philippines Concerning Technical Co-operation 1(30) executed on September 7, 1971, with
Diplomatic Exchange Notes dated May 6, 2002 partakes the nature of an international agreement as
required under Section 109. Paragraph 4(a) of the Diplomatic Exchange of Notes dated May 6, 2002 and
which provides as follows, is, in effect, a grant of exemption from VAT:
"4. The Government of the Republic of the Philippines shall make the following
contributions:
It shall
(a) exempt the material and motor vehicles supplied for the Office from taxes,
licenses, harbour dues, import and export duties and other public charges, as
well as storage fees, and ensure that such material is cleared by customs
without delay. The aforementioned exemptions shall, with regard to
value-added tax (VAT), also apply to material and services (including
consulting services) procured in the Republic of the Philippines, as well as to
the renting of office premises and accommodation for seconded experts;
(Emphasis supplied)
In view thereof, this Office is of the opinion and so holds that the purchases made by GDC-GTZ of
materials and services in the Philippines under the Agreement between the Government of the Federal
Republic of Germany and the Government of the Republic of the Philippines Concerning Technical
Co-operation executed on September 7, 1971, with Diplomatic Exchange Notes dated May 6, 2002, are
exempt from VAT, pursuant to Sec. 109(K) of the NIRC of 1997, as amended.
Hence, your herein request for exemption from VAT on the local purchase of two (2) units Toyota
Innova E Diesel 2.5L M/T, for the official use of the Small & Medium Enterprise Development for
Sustainable Employment Program under the project of GDC-GTZ is hereby granted. (BIR Ruling No.
DA-ITAD-149-05 dated November 30, 2005 HTScEI
Very truly yours,

Legal Service
Footnotes
1. Article 1 of the Agreement states that the Contracting Parties "may conclude arrangements concerning
individual projects of technical co-operation."
November 6, 2006

Embassy of the Federal Republic of Nigeria

2211 Paraiso Street
Dasmariñas Village
Makati City
Attention: Mr. Sam Azuibike Dada Olisa

Charge d' Affaires and Head of Mission
Gentlemen :
This has reference to your Note No. NE/07/10/2006 dated October 11, 2006, referred to this Office
payment of taxes on the local purchase of a motor vehicle, for the personal use of Mr. Sam Azuibike Dada
Olisa, Charge d' Affaires and Head of Mission of the Embassy of the Federal Republic of Nigeria,

Make: Toyota Innova G Gas 2.0 M/T
Model Year: 2006
Chassis Number: TGN40-5007579
reads:
"ARTICLE 34
"(a) indirect taxes of a kind which are normally incorporated in the price of the goods and
services;
"xxx xxx xxx"
Revenue Code of 1997.
of the Federal Republic of Nigeria and its personnel on their local purchases of goods and/or services it
Government allows similar exemption to the Philippine Embassy and its personnel on their purchases of
goods and services in your country.
Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Gas 2.0 M/T, for the personal
use of Mr. Sam Azuibike Dada Olisa of the Embassy of the Federal Republic of Nigeria is exempt from
value-added tax. (BIR Ruling No. DA-ITAD-001-99 dated June 24, 1999)
the herein parties are concerned. ITScAE
Very truly yours,

Legal Service
October 31, 2006
Article 34, Vienna Convention; BIR Ruling No. ITAD-156-02
Delegation of European Commission in the Philippines

7th Floor, Salustiana D. Ty Tower
104 Paseo de Roxas
Legaspi Village
Makati City
Attention: Mr. Holger Rommen

First Secretary
Gentlemen :
This has reference to your Note No. 06-131 dated September 11, 2006 referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), Office of Protocol,
requesting for the exemption from payment value-added tax (VAT) on the local purchase of one (1) unit
motor vehicle for the personal use of Mr. Holger Rommen, First Secretary and Head of Contracts &
Finance of the Delegation of the European Commission, specifically described as follows:
Make: Hyundai Starex GRX Jumbo 2.5L CRDi MT

Model Year: 2006
Color: Noble White
Engine Number: D4CB6036171
Frame Number: KMJWWH7JP6U751056
"ARTICLE 34
services;
xxx xxx xxx"
from the VAT on its local purchases of goods and services. In other words, purchases by that Embassy of
goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108, both
of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant exemption to Mr. Holger
Rommen, a German national, and whose Embassy in the Philippines is included in the updated list of
diplomatic missions entitled to VAT exemption on purchase of locally-assembled motor vehicles on the
basis of reciprocity as confirmed by the Office of Protocol of the DFA in its letter dated October 18, 2005
that his Government allows similar exemption to Philippine Embassy personnel on their purchases of
Hence, the herein local purchase of one (1) unit of 2006 Hyundai Starex GRX Jumbo 2.5L CRDi
MT, for the personal use of Mr. Holger Rommen, First Secretary and Head of Contracts & Finance of the
Delegation of the European Commission in the Philippines is hereby granted. (BIR Ruling No.
ITAD-156-02 dated September 10, 2002) IDAEHT
Very truly yours,

Legal Service
October 27, 2006
Arts. 7 & 5, Philippines-Malaysia Tax Treaty;


6766 Ayala Avenue, 1200 Makati City
Attention: Atty. Fulvio D. Dawilan

Tax Partner
Gentlemen :
This refers to your letter dated December 28, 2005 requesting confirmation that the management
fees received by Metro Parking (M) Sdn Bhd (MPM) from Metro Parking Management (Philippines), Inc.
(MPMPI) are not subject to Philippine income tax and value-added tax (VAT) pursuant to the
Philippines-Malaysia tax treaty.
It is represented that MPM is a nonresident foreign corporation duly organized and existing under
the laws of Malaysia with business address at Lot 1-4, Level 5, Block B South, Pusat Bandar Damansara,
Damansara Height, 50490 Kuala Lumpur, Malaysia; that it is not registered either as a corporation or as a
partnership in the Philippines as confirmed by the Certification of Non-Registration issued by the
Securities and Exchange Commission on December 5, 2005; that MPMPI, a subsidiary of MPM, is a
corporation organized and existing under the laws of the Philippines with principal business address at
10/F Tower I, The Enterprise Center, 6766 Ayala Avenue, Makati City; that it is engaged in the business
of operating and managing one or more buildings for the purpose of renting or leasing property for use as
car park, and for the conduct of any lawful trade or business normally associated with the operation of a
car park.
It is further represented that on January 1, 2005, MPM and MPMPI entered into a Management
Consultancy Agreement (Agreement) whereby MPM agreed to render the following services and support
functions:
1) provision of management time, planning and training,
2) provision of financial support,
3) provision of review management accounting and audit report annually,
4) provision of car park survey data and analytical studies,
5) provision of car park management consultancy,
6) provision of training and recommendation for improvement on car park operational matters,
7) provision and recommendation of suitable car park equipment,
8) and others as may be required by the MPMPI from time to time.
That the above services shall be carried out by MPM from its home office in Malaysia; that for purposes of
better coordination to areas of concern that may arise, employees of MPM may visit the Philippines from
time to time, whenever necessary; that in consideration for the services to be performed by MPM to
MPMPI, the latter shall pay the agreed management consultancy fees in the total amount of P4,800,000.00
(fixed) plus either P3,000,000.00 or 6% of the total gross revenue per annum, whichever is higher, from
January 2005 onward; that the fee shall be inclusive of out-of-pocket or any incidental expenses such as
airline tickets, hotel accommodation, meal allowances, telecommunication expenses, travel expenses, and
the like, incurred by the MPM in coming to the Philippines from Malaysia to perform its duties under this
Agreement; that the Agreement shall commence on the 1st day of January 2005 and shall continue in force
under the same terms and conditions, unless either party gives written notice to the other, not later than
sixty (60) days before the end of the current financial year, of its desire to renegotiate the terms and
conditions hereof; and that the issue or transaction subject of the above application is not under
collection proceedings, or a judicial appeal. SHECcT
In reply, please be informed that Article 7 in relation to Article 5 of the Philippines-Malaysia tax
treaty provide:
"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 thereof as is attributable to
that permanent establishment.
xxx xxx xxx"
"Article 5
1. For the purposes of this Agreement, 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' shall include especially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, an oil or gas well, a quarry or other place of extraction of natural

resources including timber or other forest produce;
g) a farm or plantation;
h) a building site or construction, installation or assembly project which exists

for more than 6 months.
xxx xxx xxx"
Pursuant to Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty, the Philippines
is allowed to tax the business profits of an enterprise which is a resident of Malaysia if such enterprise has
a permanent establishment situated in the Philippines and only so much of such profit that is attributable to
that permanent establishment. Inasmuch as MPM does not have a fixed place of business in the
Philippines, and, as such, is deemed not to have a permanent establishment in the Philippines, the service
fees to be paid by MPMPI for the services rendered under the subject Agreement are not subject to
Philippine income tax. (BIR Ruling No. DA-ITAD 152-02 dated August 29, 2002)
However, inasmuch as it has been represented that MPM may send its personnel to the Philippines
to perform the abovementioned services for purposes of better coordination to areas of concern that may
arise, whenever necessary, please be informed that Section 25(A)(1) of the National Internal Revenue
Code (Tax Code) of 1997 provides:
"Sec. 25. Tax on Nonresident Alien Individual. —
(A) Non-resident Alien Engaged in Trade or Business Within the Philippines. —
(1) In general. — A nonresident alien individual engaged in trade or business in the

Philippines shall be subject to income tax in the same manner as an individual citizen and a resident
alien individual, on taxable income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines', Section 22(G) of this Code notwithstanding.
xxx xxx xxx"
Based on the foregoing provision, a nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines and therefore shall be subject to Philippines income tax
in the same manner as an individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines.
Applying this to the instant case, any income that would be received by the MPM's personnel in the
course of their rendition of the abovementioned services to MPMPI, shall be subject to Philippine income
tax if their aggregate period of stay in the Philippines exceeded 180 days. Otherwise, said income shall be
tax exempt.
As regards the deductibility of the management consultancy fee as an ordinary and necessary
business expense on the part of MPMPI, this Office declines to rule on the matter considering the factual
nature of the issue. However, this does not preclude the taxpayer from treating the same as a deductible
item, the allowability of which is subject to the findings of an investigation pursuant to the substantiation
requirements under Section 34(A)(1)(b) of the Tax Code of 1997. (BIR Ruling No. DA-ITAD 129-03
dated August 18, 2003)
Moreover, while the payments for services rendered outside the Philippines are not subject to VAT,
the fees paid for the services rendered for MPMPI within the Philippines are, however, subject to 10%
(12% effective February 1, 2006, under Republic Act No. 9337) 1(31) value-added tax (VAT) pursuant to
Section 108 of the Tax Code of 1997. Accordingly, MPMPI, being the resident withholding agent and
payor in control of payment shall be responsible for the withholding of the final VAT on such fees before
making any payment to MPI. In remitting the VAT withheld, MPMPI shall use 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 MPMPI if it is VAT-registered
taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the
cost of the service purchase or treated as an "expense" or as an "asset", whichever is applicable. In
addition, it 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 MPI and the fourth copy for
MPMPI 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)
Very truly yours,
By:

Legal Service
Footnotes
1. RMC 7-2006 Publishing the Full text of the Memorandum of Executive Secretary Eduardo R. Ermita dated
January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax Rate
from Ten Percent to Twelve Percent.
October 30, 2006
BIR Ruling No. ITAD-19-04
Makati City
Attention: Mr. Sam Paul Zappia

Counsellor
Gentlemen :
This has reference to your Note No. 341/06 and File No. MN94/00109 dated September 14, 2006
unit motor vehicle for the personal use of Mr. Sam Paul Zappia, Counsellor of the Embassy of Australia
Make: Toyota Innova G Gas 2.0 A/T

Model Year: 2006
Color: Light Green Mica Metallic
Frame Number: TGN40-5007982
Engine Number: ITR-6287620
reads:
"ARTICLE 34
"(a) indirect taxes of a kind which are normally incorporated in the price of goods
or services;
"xxx xxx xxx"
of 1997.
Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Gas 2.0 A/T for the personal use
of Mr. Sam Paul Zappia, Counsellor of the Embassy of Australia is exempt from VAT and ad valorem tax.
(BIR Ruling No. ITAD-19-04 dated February 23, 2004)
the herein parties are concerned. aHECST
Very truly yours,

Legal Service
October 27, 2006
Article 10 (2) (a), Philippines-Netherlands tax treaty;

ITAD Ruling No. 28-99; BIR Ruling No. 559-88
SyCip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City
Philippines
Attention: W.U. Villanueva

Gentlemen :
This refers to your application for relief from double taxation dated June 26, 2006, on behalf of
your client, Diageo Philippines, Inc. (DPI), requesting confirmation of your opinion that the dividend
payments of DPI to Selviac Nederland B.V. (Selviac) are subject to a 10% preferential withholding tax
rate, pursuant to Article 10(2) of the Philippines-Netherlands tax treaty.
It is represented that Selviac is a nonresident foreign corporation organized and existing under the
laws of The Netherlands with office address at Molenwerf 10-12, 1014 BG Amsterdam, The Netherlands;
that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated
June 23, 2006 issued by the Securities and Exchange Commission; that DPI is a corporation duly
organized and existing under laws of the Philippines, with principal office and place of business at 23rd
Floor, The Enterprise Center, Ayala Avenue, Makati City 1226, Philippines.
It is further represented that DPI has an authorized capital stock of Fifty Million Pesos
(P50,000,000.00) divided into Five Hundred Thousand (500,000) shares with a par value of One Hundred
Pesos (PhP100.00) per share; that out of 500,000 DPI shares, Two Hundred Eighty Two Thousand Five
Hundred (282,500) shares have been issued and outstanding; that Selviac is the registered owner of One
Hundred Forty Four Thousand Seventy Two (144,072) common shares of DPI with a par value of One
Hundred Pesos (PhP100.00) per share or an aggregate value of Fourteen Million Four Hundred Seven
Thousand Two Hundred Pesos (PhP14,407,200.00) representing 50.99% of the total amount subscribed
and paid up shares in DPI; that on February 15, 2006, the Board of Directors of DPI declared cash
dividends in the amount of Three Hundred Twenty Million Nine Hundred Thirty Four Thousand One
Hundred Twenty Five Pesos (PhP320,934,125.00), to be distributed among DPI's stockholders of record as
of December 30, 2005 pro-rata to the number of shares held by them as of December 30, 2005, payable on
a date not earlier than March 31, 2006 but not later than December 31, 2006; and that the issue/s or
transaction subject of the above request for ruling 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
of the taxpayer/s involved.
In reply, please be informed that Article 10 of the Philippines-Netherlands tax treaty provides as
follows, viz:
"Article 10
DIVIDENDS
1. Dividends paid by a company which is a resident of one of the States to a resident of the
other State may be taxed in that other State. EaISTD
2. However, such dividends may also be taxed in the State of which the company paying the
dividends is a resident and according to the laws of that 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 recipient is a company
the capital of which is wholly or partly divided into shares and which holds
directly at leas 10 per cent of the capital of the company paying the
dividends;
b) 15 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, 'jouissance' shares or
'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as
well as income from debt-claims participating in profits and income from other corporate
rights which is subjected to the same taxation treatment as income from shares by the
taxation law of the State of which the company making the distribution is a resident.
xxx xxx xxx"
Based on the above-cited provisions, the 10 percent preferential tax rate on dividends apply
whenever the beneficial owner of the dividend owns directly at least 10 percent of the capital of the paying
company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and
considering that Selviac holds more than 10% of the capital of DPI, this Office is of the opinion and so
holds that the dividend payments by DPI to Selviac shall be subject to the preferential tax rate of 10
percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Netherlands tax
treaty. (BIR Ruling No. DA-ITAD 28-99; see also BIR Ruling No. 559-88)
Very truly yours,
By:

Legal Service
October 27, 2006
Articles 7 & 5, Philippines-Switzerland tax treaty; Section 109,

NIRC of 1997, as amended by R.A. No. 9337; R.A. No. 7916

6760 Ayala Avenue
1226 Makati City
Attention: Emmanuel C. Alcantara

Co-Head, Tax Services
Gentlemen/Ladies :
This refers to your application for relief from double taxation dated October 21, 2005, on behalf of
your client, Philippine Associated Smelting and Refining Corporation (PASAR), requesting confirmation
of your opinion that the sale of goods by Glencore AG and Glencore International AG (collectively
referred to hereunder as "GLENCORE") shall not be taxable in the Philippines, pursuant to the
Philippines-Switzerland tax treaty.
It is represented that the PASAR is an enterprise registered with the Philippine Economic Zone
Authority (PEZA) under Certificate of Registration No. 82-40 dated September 23, 1982 as an Ecozone
Export Enterprise, with principal office at Leyte Industrial Development Estate, Isabel, Leyte; that PASAR
is entitled to the 5% on gross income tax incentive in lieu of all national and local taxes, per certification
issued by PEZA dated February 28, 2003; that it is also a VAT-registered taxpayer; that it is registered to
engaged in the manufacture of copper cathodes and its by-products namely: dore metal, sulfuric acid,
granulated slag, iron concentrate slag, tellurium, palladium, platinum, gypsum, EP dust, selenium powder,
and copper telluride; that PASAR has storage facilities at its plant site in Isabel, Leyte (the Warehouse),
where it stores copper concentrates for processing at its smelting and refining facilities; that Glencore AG
is a nonresident foreign corporation duly organized and existing under the laws of Switzerland with office
address at Baarermattstrasse 3, P.O. Box 666, CH-6341 Baar, Switzerland; that it is engaged in the
business of trading in raw materials of all kinds on an international scale; that it is not registered either as
a corporation or a partnership in the Philippines per certification dated October 7, 2005 issued by the SEC;
that Glencore International AG is also a nonresident foreign corporation duly organized and existing
under the laws of Switzerland with office address at Baarermattstrasse 3, P.O. Box 777, CH-6341 Baar,
Switzerland.
It is further represented that on August 29, 2005, PASAR entered into separate Consignment
Agreements ("Agreements") with GLENCORE for the deposit and storage of copper concentrates
("Concentrates"); that such Agreements have been duly approved by the PEZA in its letter dated October
12, 2005; that under the Agreements, it is the primary concern of PASAR to reduce the accumulation of
inventory, reduce order scheduling, production and delivery leadtime, ensure continuous supply for its
continuous operations/production even in times of global shortages of Concentrates and improve over-all
efficiency in production; that GLENCORE wishes to ensure timely supply and delivery of the
Concentrates to PASAR; and that to achieve these objectives, GLENCORE and PASAR intend to deposit
and store Concentrates in the Warehouse owned by PASAR subject to the following terms and
arrangements, to wit:
I. Upon arrival of Concentrates in the Philippines, PASAR will store the Concentrates
delivered by GLENCORE in separate lots. Each parcel of Concentrates will be segregated
from all other materials and will be clearly identified and marked as GLENCORE's property.
The Concentrates will be kept safe, secure and in good condition;
II. The storage area provided in the Warehouse must meet GLENCORE's reasonable
satisfaction. GLENCORE or its duly appointed representative will have the right to access
and inspect the storage area as well as the stored quantity of Concentrates at any time. Cost
of inspection to be at GLENCORE's expense. The stored Concentrates will furthermore be
kept at GLENCORE's irrevocable disposal until release of the material. In case PASAR
should need to transfer the Concentrates to another location, PASAR must get the prior
written consent of GLENCORE. PASAR shall bear the risk and expense of such transfer and
also the liability for storage and/or reduction in value as the result of the transfer of the
goods. GLENCORE shall have the right to access and inspect the new storage area as well as
the transferred Concentrates at any time;
III. PASAR will provide storage in the Warehouse for a monthly fee at the prevailing market
rate of US$ 0.20 per wet metric ton, to be paid by GLENCORE in US Dollars promptly after
receipt of the invoice for storage by telegraphic transfer. At the end of each month, PASAR
will undertake an inventory in the presence of a GLENCORE representative, which will be
submitted together with the invoice for storage fees. PASAR will undertake to issue a
Holding Certificate in such form as provided in the Schedule immediately upon arrival of
each shipment of Concentrates, countersigned by GLENCORE's independent inspector.
Each Holding Certificate will set out the exact point of stockpiling, confirm that the
Concentrates are stockpiled separately at the Warehouse and are clearly identified as the
property of GLENCORE, and show the wet weight and origin of the Concentrates stockpiled
in the Warehouse as evidenced in the weighing notes (as set out in clause VI below) upon
the arrival of the Concentrates at the port of discharge. If the Concentrates are not sold to
PASAR, but directed to another destination, all charges related to loading/handling from the
carrying vessel to the Warehouse and from the Warehouse to the new carrying vessel will be
at GLENCORE's expense. On such charges PASAR will recognize a mark-up of 10%;
IV. PASAR will make periodic withdrawals of Concentrates from the Warehouse. The parcel(s)
withdrawn by PASAR will be determined by GLENCORE subject to the technical
constraints of PASAR. Withdrawal by PASAR shall be made in line with the instructions
given by GLENCORE and only upon receipt of GLENCORE's prior consent to such release.
After the sales of the Concentrates and the issuance of the invoice for such Concentrates,
GLENCORE will release the corresponding quantity of Concentrates to PASAR by means of
a fax or e-mail (the "Release") as soon as PASAR has made provisional payment to
GLENCORE as agreed in the corresponding contract;
V. As long as the title to the Concentrates has not passed to PASAR as per the corresponding
Sales Contract, GLENCORE has unconditional property in the Concentrates as set out in the
Holding Certificate and PASAR confirms not to part with possession, charge or otherwise
encumber the Concentrates or prejudice GLENCORE's rights to it or give any third party any
rights (whether possessory or legal) to the Concentrates;
VI. GLENCORE will not recognize any sale upon delivery of the Concentrates to the
Warehouse. It will only recognize the sale and issue the invoice upon withdrawal by PASAR
of the Concentrates for production purposes. On the other hand, PASAR will not recognize
the Concentrates stored in its Warehouse as part of its inventory until GLENCORE's
Release. ADSTCI
It is further represented that PASAR is a custom smelter of Concentrates; that it smelts the
Concentrates to produce copper anodes; that these anodes are in turn processed in the refinery to produce
copper cathodes which are then sold to the export market; that the smelter is fed a mix of Concentrates
with an average copper content of between 29-32%; that PASAR purchases Concentrates with a copper
content ranging from 25-37%; that raw materials with content below 25% are considered too low a quality
to be able to blend with higher grade material (to produce 29-32%) due to the scarcity of high grade
(32%+) raw materials; that PASAR, with the consent of GLENCORE, may transfer the Concentrates to
another storage area also within PASAR's plant site in Isabel, Leyte, if the existing storage area will be
required by PASAR for other purposes; that the Concentrates may not be sold to PASAR should the
Concentrates' physical and chemical composition differ significantly from the required specifications or
should the Concentrates not be of the quality and/or quantity specified by PASAR for the copper smelting
process. Further, if due to production limitations, PASAR is unable to consume the raw materials within
reasonable time, GLENCORE has the option to ship the materials to another customer outside the
Philippines; possibly to any custom smelter in the world, but most likely one in South East Asia; that as
spelled out in the Agreements, the Concentrates are owned by GLENCORE and PASAR cannot (i) part
with the possession, (ii) charge or otherwise encumber the Concentrates, (iii) prejudice GLENCORE's
right to it, or (iv) give any third party any rights (whether possessory or legal) to the Concentrates; and that
in no instance may a third party acquire any possessory or legal rights to the Concentrates since PASAR is
specifically prohibited from giving any third party such right.
In reply, please be informed that Article 7 (1) of the Philippines-Switzerland tax treaty provides as
follows, viz:
"Article 7
BUSINESS PROFITS
permanent establishment."
Applying the foregoing provision, the income payments to GLENCORE by PASAR in case
the Concentrates are sold to PASAR are subject to Philippine income tax if such payments are
attributable to a permanent establishment which GLENCORE has or might have in the Philippines.
A permanent establishment, as defined in the paragraph 1, Article 5 (Permanent Establishment) of
the same tax treaty, means "a fixed place of business through which the business of the enterprise is
wholly or partly carried on".
In the instant case, the warehouse which will be utilized (in whole or in part) by
GLENCORE under its Agreement with PASAR for the deposit and storage of the Concentrates, can
be considered a permanent establishment if the general requisites of a permanent establishment are
determined to be attendant in the use of the warehouse.
The 2003 Organization for Economic Cooperation and Development (OECD) Model Tax
Convention Commentary (pages 85-91) give guidance as to when a facility such as a warehouse can
become a permanent establishment, as it explains:
"2. Paragraph 1 gives a general definition of the term 'permanent establishment' which
brings out its essential characteristics of a permanent establishment in the sense of the Convention
(tax treaty), i.e., a distinct 'situs', a 'fixed place of business'. The paragraph defines the term
'permanent establishment' as a fixed place of business, through which the business of an enterprise
is wholly or partly carried on. This definition, therefore, contains the following conditions:
— the existence of a 'place of business', i.e., a facility such as premises or, in

certain instances, machinery or equipment;
— this place of business must be 'fixed', i.e., it must be established at a distinct

place with a certain degree of permanence;
— the carrying on of the business of the enterprise through this fixed place of
business. This means usually that persons who, in one way or another, are
dependent on the enterprise (personnel) conduct the business of the enterprise
in the State in which the fixed place is situated.
xxx xxx xxx
4. The term 'place of business' covers any premises, facilities or installations used for
carrying on the business of the enterprise whether or not they are used exclusively for that purpose.
A place of business may also exist where no premises are available or required for carrying on the
business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial
whether the premises, facilities or installations are owned or rented or are otherwise at the disposal
of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a
certain permanently used area in a customs depot (e.g., for the storage of dutiable goods). Again the
place of business may be situated in the business facilities of another enterprise. This may be the
case for instance where the foreign enterprise has at its constant disposal certain premises or a part
thereof owned by the other enterprise.
4.1 As noted above, the mere fact that an enterprise has a certain of space at its
disposal which is used for business activities is sufficient to constitute a place
of business. No formal legal right to use that place is therefore required. Thus,
for instance, a permanent establishment could exist where an enterprise
illegally occupied a certain location where it carried on its business.
4.2 Whilst no formal legal right to use a particular place is required for that place
to constitute a permanent establishment, the mere presence of an enterprise at
a particular location does not necessarily mean that the location is at the
disposal of that enterprise. These principles are illustrated by the following
examples where representatives of one enterprise are present on the premises
of another enterprise. A first example is that of a salesman who regularly
visits a major customer to take orders and meets the purchasing director in his
office to do so. In that cases, the customer's premises are not at the disposal of
the enterprise for which the salesman is working and therefore do not
constitute a fixed place of business through which the business of that
enterprise is carried on . . . .
xxx xxx xxx
4.6 The words 'through which' must be given a wide meaning so as to apply to
any situation where business activities are carried on at a particular location
that is at the disposal of the enterprise for that purpose. Thus, for instance, an
enterprise engaged in paving a road will be considered to be carrying on its
business 'through' the location where this activity takes place.
5. According to the definition, the place of business has to be a 'fixed' one. Thus in the
normal way there has to be a link between the place of business and a specific geographical point. . .
. cTIESD
xxx xxx xxx
6. Since the place of business must be fixed, it also follows that a permanent
establishment can be deemed to exist only if the place of business has a certain degree of
permanency, i.e., if it is not of a purely temporary nature. . . .
xxx xxx xxx
7. For a place of business to constitute a permanent establishment the enterprise using it

must carry on its business wholly or partly through it. As stated in paragraph 3 above, he activity
need not be of a productive character. Furthermore, the activity need not be permanent in the sense
that there is no interruption of operation, but operations must be carried out on a regular basis.
xxx xxx xxx
10. The business of an enterprise is carried on mainly by the entrepreneur or persons who
are in paid-employment relationship with the enterprise (personnel). This personnel includes
employees and other persons receiving instructions from the enterprise (e.g. dependent agents). The
powers of such personnel in its relationship with third parties are irrelevant. It makes no difference
whether or not the dependent agent is authorized to conclude contacts if he works at the fixed place
of business. . . ."
Accordingly, the subject warehouse can constitute a permanent establishment if (1) it is a place of
business at the disposal of GLENCORE; (2) it is fixed, or established at a distinct place with a certain
degree of permanence; and (3) it is used for carrying on the business of GLENCORE where personnel
dependent on them conduct business on their behalf at the warehouse.
Concerning requirement number (1), the subject warehouse owned by PASAR can become a place
of business at the disposal of GLENCORE if the warehouse will be used for a sufficiently long period of
time and if the activities that will be performed in the warehouse go beyond preparatory and auxiliary
activities. As to whether or not the warehouse will be used for a sufficiently long period, the fact that the
relevant Agreements do not contain a fixed term of at most six months for GLENCORE to deliver the
Concentrates to PASAR and to use the warehouse to store the Concentrates shows that the warehouse will
be used for a sufficiently long period of time. As to whether or not the activities that will be performed in
the warehouse go beyond preparatory and auxiliary activities, it is noteworthy that the respective
subparagraphs (a) and (b), paragraph 3, Article 5 of the Philippines-Switzerland tax treaty provides that
"the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise
belonging to the enterprise" and "the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery" by themselves are activities of a
preparatory and auxiliary character. The fact that the activities of storing and delivering the Concentrates
are of a preparatory and auxiliary character shows that the warehouse for this purpose cannot be regarded
as a place of business that will constitute a permanent establishment of GLENCORE.
Concerning requirement number (2), the fact that the warehouse is established at a distinct place in
the Philippines with a certain degree of permanence constitutes the same as a fixed place of business.
Concerning requirement number (3), although not expressly mentioned in the relevant Consignment
Agreements, the fact that PASAR will store the Concentrates in its warehouse prior to its use thereof for
GLENCORE's account and that PASAR's personnel will be responsible for the storage, inventory and
security of the Concentrates, is sufficient to consider these personnel as dependent on GLENCORE who
conduct businesses on their behalf. AcICTS
In view of the foregoing, this Office is of the opinion and so holds that although the subject
warehouse can be considered a fixed place of business through which the business of Glencore can be
wholly or partly carried on, the same does not constitute a permanent establishment under the
Philippines-Switzerland tax treaty because the activities connected to such warehouse as embodied in the
subject Agreements are merely of a preparatory and auxiliary character. This is buttressed by the fact that
GLENCORE (i.e., Glencore AG and Glencore International AG) are not licensed to engaged in business
in the Philippines as confirmed by the relevant certificates issued by the SEC which support the
conclusion that GLENCORE do not have other fixed places of business in the Philippines which may be
constituted as their permanent establishments. Hence, payments received by GLENCORE from the sale of
their Concentrates to PASAR are exempt from Philippine income tax.
However, Section 107 of National Internal Revenue Code of 1997 (Tax Code) provides that the
importation of the Concentrates is subject to ten percent (10%) value-added tax (VAT), to wit:
"Section 107. Value-added Tax on Importation of Goods. —
(A) In General. — There shall be levied, assessed and collected on every importation of
goods a value-added tax equivalent to ten percent (10%) 1(32) based on the total value used by the
Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if
any, and other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody . . ."
For purposes of this provision, an "importer" refers to any person who brings goods into the
Philippines, whether or not made in the course of his trade or business (Section 4.107-1, Revenue
Regulations No. 16-2005).
GLENCORE is deemed to be the importer of the Concentrates because it retains it ownership over
such Concentrates until the time they reach the territorial jurisdiction of the Philippines and that PASAR
will acquire ownership over the Concentrates only when such have been sold to PASAR.
Section 24 of Republic Act No. (RA) 7916 (The Special Economic Zone Act of 1995), as amended
by RA 8748, provides as follows, viz:
"SEC. 24. Exemption from National and Local Taxes. — Except for real property taxes on
land owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross
income earned by all business enterprises within the ECOZONE shall be paid and remitted as
follows:
(a) Three percent (3%) to the National Government;
(b) Two percent (2%) which shall be directly remitted by the business establishments to
the treasurer's office of the municipality or city where the enterprise is located." (Emphasis
supplied)
Furthermore, Section 4(c) of the same law states that "(e)nterprises located in export processing
zones are allowed to import capital equipment and raw materials free from duties, taxes and other import
restrictions."
It is clear from the foregoing provisions, that the incentives given by RA 7916 such as tax
exemptions from payment of taxes pertain only to "business establishments operating within the
ECOZONE" or "(e)nterprises located in export processing zones".
Thus, it cannot be said that such incentives may extend to GLENCORE since statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the government. Otherwise
stated, any exemption from the payment of a tax must be clearly stated in the language of the law; it
cannot be merely implied therefrom. (Davao Gulf Lumber Corp. vs. Commissioner of Internal Revenue, et
al., G.R. No. 117359, July 23, 1998, 96 SCRA 527).
Such being the case, GLENCORE shall pay value-added tax prior to the release of the Concentrates
from customs custody.
It must be emphasized, however, that PASAR shall still be enjoying the incentives given to it by the
aforequoted Section 24 and jurisprudence for being a "Philippine Economic Zone Authority
(PEZA)-registered enterprise under Certificate of Registration No. 82-40 dated September 23, 1982 as
Ecozone Export Enterprise" in line with "the policies of the special law creating the zone".
In Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866,
February 11, 2005), the Supreme Court held, viz:
xxx xxx xxx
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the
ecozone within which it is registered is managed and operated by the PEZA as a separate customs
territory. This means that in such zone is created the legal fiction of foreign territory. Under the
cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no
VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and services from the Philippines to a foreign country
are free of the VAT, then the same rule holds for such exports from the national territory — except
specifically declared areas — to an ecozone.
. . . An ecozone — indubitably a geographical territory of the Philippines — is, however,

regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect to the
policies of the special law creating the zone. . . .
xxx xxx xxx"
It is clear from the foregoing pronouncement that no VAT may be passed on, whether directly or
indirectly, to PASAR, being a PEZA-registered enterprise. And GLENCORE, not being a VAT registered
taxpayer, cannot directly pass on VAT to PASAR. However, GLENCORE may still include the VAT
charged on the importation of Concentrates as part of its cost to sell and thereby indirectly passing VAT to
PASAR. Accordingly, to comply with the mandate of RA 7916 that no VAT may be passed on to business
establishments operating in the ECOZONE like PASAR, the importation of Concentrates by GLENCORE
which will ultimately be sold to PASAR is hereby considered exempt from VAT, pursuant to Section
109(q) 3(34) of the Tax Code, as amended.
To recapitulate, this Office is of the opinion and so holds that:
(a) the subject warehouse, although a fixed place of business through which the business of
GLENCORE can be wholly or partly carried on, is not a permanent establishment because
the activities that are performed therein are merely of a preparatory and auxiliary character.
Hence, income payments received by GLENCORE from the sale of the Concentrates to
PASAR are exempt from Philippine income tax, pursuant to Article 7 in relation to Article 5
of the Philippines-Switzerland tax treaty;
(b) The importation of the Concentrates by GLENCORE with a copper content ranging from
25% to 37% AND are ultimately sold to PASAR are exempt from VAT, pursuant to Section
109 of the Tax Code, as amended by RA 9337.
All rulings inconsistent herewith are therefore modified or amended accordingly.
be disclosed that the facts are different, then this ruling shall be considered to be without force and effect
insofar as the herein parties are concerned. DcTAIH
Very truly yours,

Commissioner
Footnotes
1. Effective February 1, 2006, the rate shall be twelve percent (12%).
9337]
3. SEC. 109. Exempt Transactions. — The following transactions shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree Nos. 66, 529, and 1590;
October 27, 2006
Art. 11, Philippines-Netherlands Tax Treaty;

BIR Ruling No. DA-ITAD-193-03;
Caltex (Philippines), Inc.

6F 6750 Ayala Avenue
Makati City
Attention: Mr. Nigel T. Avila

Tax Manager
Finance & Accounting Services
Gentlemen :
This refers to your letter dated June 14, 2004, requesting confirmation of your opinion that the
interest on refinancing loans to be extended by Chevron Texaco Finance B.V. (CTFBV) to your company,
Caltex (Philippines), Inc. (CPI), shall be subject to the preferential tax rate of 15% pursuant to the
Philippines-Netherlands tax treaty.
It is represented that CTFBV is a corporation organized and existing under the laws of the
Netherlands with principal address at Weena-Zuid 166 3012 NC Rotterdam, The Netherlands; that it is not
registered either as a corporation or as a partnership in the Philippines per certification issued by the
Securities and Exchange Commission dated November 17, 2003; that CPI is a corporation duly organized
and existing under the laws of the Philippines with principal address at 6/F 6750 Ayala Avenue, Makati
City; that on April 15, 2004, CTFBV and CPI entered into a Credit Agreement (Agreement) whereby
CTFBV agrees to make loans to CPI during the period covering the date of the Agreement up to and
including the Commitment Termination Date, in an aggregate principal amount of Four Hundred Million
US Dollars (US$400,000,000.00) at any one time outstanding up to but not exceeding CTFBV's
Commitment 1(35), as it is originally executed or as it may from time to time be supplemented, modified or
amended; that under the Agreement, CPI promises to pay CTFBV interest on the unpaid principal amount
of each loan for the period commencing on the date of the loan and continuing until the Final Maturity
Date at a rate equal to the Applicable Rate as determined with respect to each interest period, provided
that interest shall be payable at the Post-Default Rate on any loan or any installment thereof or any interest
thereon which shall not be paid in full when due for the period commencing on the due date thereof until
the same is paid in full; that during the period commencing on the date of the Agreement and terminating
on the Commitment Termination Date, CPI agrees to pay CTFBV a Commitment Fee, which shall be
payable quarterly on each Quarter day and at the rate of 0.05% per annum; that the Commitment Fee shall
be payable quarterly on each Quarter day and at the Final Maturity Date and shall be computed on the
basis of a 360-day year and actual days elapsed; that the Final Maturity Date of the said credit agreement
is on April 30, 2016.
follows:
"Article 11
INTEREST
1. Interest arising in one of the States and paid to a resident of the other State may be taxed in
that other State. aDSHCc
2. However, such interest may also be taxed in the State in which it arises and according to the
laws of that State, but if the recipient is the beneficial owner of the interest the tax so
charged shall not exceed:

institution,
xxx xxx xxx
profits and debt-claims of every kind as well as all other income assimilated to income from
money lent by the taxation law of the State in which the income arises. Penalty charges for
late payment shall not be regarded as interest for the purpose of this Article.
xxx xxx xxx"
Based on the aforequoted provisions, interest income arising in the Philippines and paid to a
resident of the Netherlands may be taxed in the Philippines at a preferential tax rate not exceeding ten
percent (10%) of the gross amount of interest if the interest is paid in connection with the sale on credit of
any industrial, commercial or scientific equipment, or on any loan of whatever kind granted by a bank, or
any other financial institution, or in respect of public issues of bonds, debentures or similar obligations;
and in all other cases, fifteen percent (15%) of the gross amount of the interest.
Such being the case, this Office hereby confirms your opinion that the interest payments by CPI to
CTFBV shall be subject to a preferential tax rate of fifteen percent (15%) based on the gross amount of the
interest, pursuant to the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD-193-03 dated
December 16, 2003)
In addition thereto and with regard to the Commitment Fee payable under the Agreement, please be
informed that the term "interest" refers to the payment for the use or forbearance or detention of money,
regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of the
money during the term of the loan, as well as for his detention of money after the due date for its
repayment. (Sec. 2(a), Revenue Regulations No. 13-00) Thus, payment for interest presupposes the use of
one person of another person's money. The commitment fee, however, constitutes payment for CTFBV's
undertaking to make available a credit line to CPI but which the latter failed to fully use or avail of. In fact,
the payment of the commitment fee assumes the non-use of the full credit line by CPI and for this reason,
could not be considered as interest payment. Therefore, the commitment fee, not being interest payment,
shall not be subject to the 10% final withholding tax.
Further, the commitment fee is considered as payment for services rendered by CTFBV outside the
Philippines, and thus the same shall not be subject to any Philippine income tax. (BIR Ruling No.
DA-ITAD-45-03 dated March 17, 2003) Moreover, even if considered as derived from Philippine sources,
the commitment fee is not taxable to CTFBV because the latter has no permanent establishment in the
Philippines as defined under the Philippines-Netherlands tax treaty, CTFBV not having a branch, or an
office in the Philippines.
Finally, the Credit Agreement executed by and between CTFBV and CPI shall be subject to the
documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended.
Very truly yours,
By:

Legal Service
Footnotes
1. "Commitment" shall mean the obligation of Lender to make Loans to the Borrower in an aggregate amount
equal to US$400,000,000.00 outstanding at any time, subject to the provisions of Section 3.02 hereof.
October 27, 2006
Arts. 5 & 7, Philippines-Singapore tax treaty;

6760 Ayala Avenue
1226 Makati City
Attention: Atty. Romulo S. Danao, Jr.

Partner, Tax Services
Gentlemen :
This refers to your letter dated June 28, 2006 requesting confirmation on the following Philippine
tax implications arising from the Service Level Agreement (Agreement) which your client, Sony
Philippines, Inc. (SPI) entered into with Sony Electronics Asia Pacific Pte. Ltd. (SEAP):
1. The income payments to be made by SPI to SEAP in consideration for the services to be
provided pursuant to the Agreement are service fees and not royalties as defined under
Article 12 paragraph 3 of the Philippines-Singapore tax treaty;
2. Since SEAP does not carry on business in the Philippines through a permanent establishment
as defined under Article 5 in relation to Article 7 of the Philippine-Singapore tax treaty, the
income payments it receives from SPI are business profits of SEAP which should not be
subject to Philippine income tax and consequently, to withholding tax;
3. The income payments are likewise not subject to value-added tax (VAT) since the services
will be performed by SEAP outside the Philippines, pursuant to Section 108(A) of the 1997
Tax Code, as amended.
It is represented that SEAP (formerly Sony Marketing Asia Pacific Pte. Ltd.) is a nonresident
foreign corporation organized and existing under the laws of Singapore with principal office address at
No. 2 International Business Park, #01-10 Tower One, The Strategy, Singapore 609930 as shown in the
Memorandum and Articles of Association of SEAP; that SEAP is not registered either as a corporation or
as a partnership in the Philippines as confirmed by the Certificate of Non-Registration of
Corporation/Partnership issued by the Securities and Exchange Commission on April 10, 2006; that SPI,
on the other hand, is a company organized and existing under the laws of the Philippines with principal
office at 26th Floor, The Enterprise Center, Tower 1, 6766 Ayala Avenue corner Paseo de Roxas Street,
Makati City.
It is further represented that on April 3, 2006, SEAP and SPI entered into a Service Level
Agreement (Agreement) whereby the former agreed to provide to the latter the following services: cSIADa
1. System Support
• Provide the SIMPLE system covering the following application modules SD, MM, FI
& Co.
2. Business Operation Support
• Maintain and upkeep common business process and Process Definition Document
(PDD);
• Maintain system user guide;
• Evaluate process and system change requests, co-ordinate process and system change
control;
3. Application Support and Maintenance
• Troubleshooting and resolution of 'application problems'. Note that "application

problems' refers to the failure of the application to provide correct output or correct
results in accordance with its intended design.
• Troubleshooting and resolution of Customer's on-line screen errors, output printing

errors and report errors;
• Troubleshoot data transmission and interface problems with EAI, local staging and
other linked systems
4. Daily System Operation Support
• Provide monthly/weekly system offline backup and daily online backup for
production server;
• Coordination with Customer and other sales companies on planned down-time to

minimize system and operation impact;
• Coordination and scheduling of registered production jobs. Preparation and

processing job parameter changes and Customer ad-hoc job requests for registered
jobs;
• System load balancing and performance monitoring;
• Perform user ID registration and system authorization changes;
5. Provision of Helpdesk Services
Helpdesk will be provided to the Customer as single point of contact. The Helpdesk will
provide the following services:
• An assigned resolution engineer will respond within 1 hour of the initial incident
logged. After Vendor official working hours, the response is within 4 hours;
• Vendor will apply established escalation processes and procedures to provide an

increased level of technical and management resources to resolve the problem in an
orderly and timely manner;
• Ensure all incidents are closed promptly;
• Monitoring, logging and management of all incidents raised; cTEICD
• Maintain knowledge database of frequent problems encountered.

That the Agreement covers the system application, support and maintenance services of the SIMPLE
system; that SIMPLE system is a shared SAP system that supports a few Sony sales companies in Pan Asia
region; that the system will automate certain back-office business functions of SPI such as sales and
distribution, materials management, financial management and controlling, so as to ensure the smooth
running of the critical business operations of SPI; that in consideration for the foregoing services, SPI will
pay SEAP service fees in accordance with the schedule provided in the Agreement; that the termination of
the contract should be carried out in writing and informed to Vendor one (1) month in advance; that the
services shall be performed outside the Philippines except in cases when it is necessary that SEAP shall
provide onsite services to SPI provided that such onsite services or related activities in the Philippines
shall not continue for a period or periods aggregating more than 183 days; 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.
The terms 'royalties' as generally used means payment of any kind received as a
commercial or scientific experience. The term 'use' as contained herein shall include the reselling or
distribution of software.

copyright laws of various countries including the Philippines; thus, payments in consideration for
the use of, or the right to use, a copy or a copyrighted article relating to software are generally
royalties."

a. Transfers of copyright rights. A transfer of software is classified as a transfer of a

copyright right if, as a result of the transaction, a person acquires any one or more of
the rights described below: EaHDcS
i. The right to make copies of the software for purposes of distribution

to the public by sale or other transfer of ownership, or by rental, lease
or lending;
v. Any other rights of the copyright owner, the exercise of which by

another without his authority shall constitute infringement of said
copyright.


includes a copy of a software from which the work can be perceived, reproduced, or
otherwise communicated, either directly or with the aid of a machine or device. The
copy of the software may be fixed in the magnetic medium of a floppy disk or a
CD-ROM, or in the main memory or hard drive of a computer, or in any other
medium.
xxx xxx xxx
c. After-Sales Service, Contracts for the use of software are often accompanied with the
provision of services (e.g., installation, maintenance, and customization of the
software) by personnel of the relevant foreign licensor/owner or of the relevant local
subsidiary, reseller, and distributor. Payments as consideration for after-sales service
in a mixed contract are not royalties alone, but will include income from services.
The appropriate course to take with such a contract is, in principle, to break down, on
the basis of the information contained in the contract or by means of a reasonable
apportionment, the whole amount of the stipulated payments according to the various
parts of what is being provided under the contract, and then to apply to each part of it
so determined the taxation treatment proper thereto. Thus, the part of the payments
representing the use of the software will be treated as royalties and taxable as such
and the other part of the payments representing the provision of services will be
treated as income from services and taxable as such. (Emphasis supplied) IASTDE
purchase of a copyrighted article incorporating a software, like the fee for the licensed software where the
licensee is merely granted access to and use of the Licensed Software and not readily the right to market or
exploit the licensed software. Under the first Circular, the license fee is treated as royalty and taxable as
such, while under the second Circular, the license fee is treated as business income (or business profits)
and taxable as such, as described above.
Thus, fees for the software and services made under the Agreement by SPI to SEAP are business
profits which will be taxed in the Philippines in accordance with Article 7 of the Philippine-Singapore tax
treaty, which provides:
"Article 7
BUSINESS PROFITS
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."
Based on 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 SEAP for the services rendered in the
Philippines under the Service Level Agreement shall be taxable in the Philippines in connection with the
activities giving rise to such income only if it has a permanent establishment in the Philippines.
In relation thereto, Article 5 of the Philippines-Singapore tax treaty provides:
"Article 5
1. For the purposes of this Convention, the term "permanent establishment" means a fixed
2. The term "permanent establishment" includes specially but is not limited to:
a) A seat of management,
b) A branch;
c) An office; DSAEIT
e) A factory;
f) A workshop;
g) A warehouse, in relation to a person providing storage facilities for others;

h) A mine, quarry, or outer 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 the Agreement does not expressly provide for a specific term, the whole of such
Agreement, including any continuance and renewal thereof, shall be regarded as being part of the "same or
connected project" for the purpose of counting the aggregate period of 183 days above. In other words, the
183 day period shall be counted based on the total number of days the services are rendered in the
Philippines beginning the effectivity of the Agreement, including all periods resulting from its continuance
and renewal. Accordingly, for as long as the employees or agents of SEAP 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 SPI
for the "same or connected project", then SEAP 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
Moreover, while the compensation for services rendered outside the Philippines is not subject to the
12% VAT, the fees paid for that portion of the services of SEAP which are rendered in the Philippines are,
however, subject to 12% VAT pursuant to Section 108 of the Tax Code of 1997, as amended by Republic
Act (RA) No. 9337. Accordingly, SPI, being the resident withholding agent and payor in control of
payment shall be responsible for the withholding of the 12% final VAT on such fees before making any
payment to SEAP. In remitting the VAT withheld, SEAP 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 SPI if it is a VAT-registered taxpayer. In case
SPI 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, SPI is
required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No.
2306), the first three copies for SEAP and the fourth copy for SPI as its file copy. [Section 4.110-3(b),
Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4,
114-2(b), RR No. 16-05); Section 4.114(D), RR No. 2-98, as last amended by RR No. 28-03]
the herein parties are concerned. SHEIDC
Very truly yours,

By:

Legal Service
Footnotes
October 23, 2006
Sec 109 (K) of the National Internal Revenue Code of 1997, as

amended;

6819 Ayala Avenue
Makati City

First Secretary
Gentlemen :
This has reference to your Note Verbale WZ 445.11/Auto KFZ No. 55/2006 dated September 11,
2006 indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA),
Office of Protocol, requesting for exemption from payment of tax on the local purchase of one (1) motor
vehicle, for the official use of GDC-GTZ Office of the German Embassy, specifically described as
follows:

Organization: German Development Cooperation-
German Technical Cooperation (GDC-GTZ)
Make: one (1) unit Toyota Innova 2.5E Diesel M/T
Model year: 2006
Color: Quick Silver
Engine No.: 2KD-9681586
Frame No.: KUN40-5010960
xxx xxx xxx
DAEICc
contributions:
It shall
(a) exempt the material and motor vehicles supplied for the Office from taxes, licenses,
harbour dues, import and export duties and other public charges, as well as storage fees, and ensure
that such material is cleared by customs without delay. The aforementioned exemptions shall, with
regard to value-added tax (VAT), also apply to material and services (including consulting services)
procured in the Republic of the Philippines, as well as to the renting of office premises and
accommodation for seconded experts; (Emphasis supplied)
Hence, your herein request for exemption from VAT on the local purchase of one (1) unit Toyota
Innova E Diesel 2.5L M/T, for the official use of GDC-GTZ is hereby granted. (BIR Ruling No.
Very truly yours,

Legal Service
Footnotes
October 23, 2006
Article 13 (Royalties) Philippines-United States of America

tax treaty; Sections 23(F), 42 (A) (3), 105, 108 (A) and 109
(q) National Internal Revenue Code of 1997

6760 Ayala Avenue
1226 Makati City
Attention: Atty. Emmanuel C. Alcantara

Gentlemen :
This refers to your letter dated August 19, 2005 requesting confirmation of the following:
1. That the payments for the Electronic Data Automation (EDA) Costs to be made by TI
Philippines Inc. (TI Philippines) to Texas Instruments Incorporated (Texas Instruments)
(originally, Geophysical Service Inc.) under an Information Technology Service Agreement
(Agreement) are payments for 'know-how', and, therefore, royalties, which are subject to
10% income tax under Article 13 of the Convention between the Government of the
Republic of the Philippines and the Government of the United States of America with
Respect to Taxes on Income (Philippines-United States tax treaty), in relation to Article 12
of the Agreement between the Government of the Republic of the Philippines and the
Government of the People's Republic of China for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-China tax
treaty);
2. That the payments for the Other Information Technology (IT) Costs to be made by TI
Philippines to Texas Instruments under the Agreement are payments for services and not
royalties; and
3. That the payments for the EDA costs and for the other IT costs are exempt from value-added
tax (VAT).
Basic facts
It is represented that Texas Instruments is a corporation organized and existing under the laws of
the United States of America, with registered office at 1209 Orange Street, City of Wilmington, County of
New Castle, State of Delaware, United States of America (as confirmed by its Restated Certificate of
Incorporation dated April 18, 1985), and with principal place of business at 12500 TI Boulevard, Dallas,
Texas 75423, United States of America (as indicated in the Information Technology Service Agreement
dated January 1, 2005); that Texas Instruments is not registered as a corporation or as a partnership in the
Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated May 27,
2005 issued by the Securities and Exchange Commission; that, on the other hand, TI Philippines is a
corporation organized and existing under the laws of the Philippines, with office address at Baguio City
Economic Zone, Loakan Road, Baguio City, Philippines; that TI Philippines is registered with the
Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Baguio City
Economic Zone under Certificate of Registration No. 01-010 dated March 1, 2001 and under the
Registration Agreement also dated March 1, 2001; and that TI Philippines' business activities consist in (1)
the manufacture, assembly and fabrication of products in the electronics industry and other articles of
kindred nature, upgrading of test and quality production processes, and production of Quad Flat Pack
"QFP", (2) the manufacture of Flip Chip-BGA package, and (3) the manufacture of Generic Ball Grid
Array (g-BGA). aTEHCc
It is further represented that on January 1, 2005, Texas Instruments and TI Philippines entered into
an Information Technology Service Agreement (Agreement), with an initial effectivity of one year from
January 1, 2005, and renewable automatically for succeeding one-year periods; that under the Agreement,
Texas Instruments agreed to grant to TI Philippines services relating to certain phases of its information
technology needs, including but not limited to, upgrades, maintenance, repair, modification, management,
coordination, security, and implementation of global information systems and computer software including
but not limited to SAP, ORACLE, Peoplesoft, Unix, and Electronic Design Automation software used for
product design and verification, information technology training on the use of systems employed by Texas
Instruments, and access to other Texas Instruments Information Technology services and support such as
batch processing, inquiring services, on-line system input/output services, off-line system input/output
services, magnetic tape service, disk storage service, data conversion service, data archiving and
applications programming; that Texas Instruments will assign such personnel to the execution of the
services as will ensure the expeditious and efficient performance of the services, and that Texas
Instruments may choose to subcontract such services to third parties at its discretion; that services
provided by Texas Instruments will be performed in the United States; that in consideration, TI Philippines
will pay Texas Instruments an amount, in United States dollars, allocated by the latter in the following
manner:
1. Electronic Data Automation (EDA) Costs. The EDA costs incurred by Texas Instruments and
subject to allocation and reimbursement will be allocated to TI Philippines based on the
number of seconds TI Philippines personnel (i.e., employees and subcontractors) are logged
on to any of the EDA software packages provided by Texas Instruments to TI Philippines.
2. Other IT Costs. Other IT costs will be allocated to TI Philippines on the basis of a fixed
activity based per person charge.
that any costs incurred by Texas Instruments not covered by the per-second of use charge or by the
per-person charge will be allocated to TI Philippines on a mutually agreed basis; AND that Texas
Instruments will periodically notify TI Philippines of the amounts of the cost per second and per person
charge used to determine the allocable charge.
In addition, it is represented that the payments for the EDA Costs are compensation for the
provision of information or 'know-how' by Texas Instruments to TI Philippines relating to the global
information systems and computer software including SAP, ORACLE, Peoplesoft, Unix, and Electronic
Design Automation used for product design and verification, and access to other Texas Instruments
Information Technology services and support such as batch processing, inquiring services, on-line system
input/output services, off-line system input/output services, magnetic tape service, disk storage service,
data conversion service, data archiving and applications programming; and that, on the other hand, the
payments for the Other IT Costs are compensation for the provision of services such as upgrades,
maintenance, repair, modification, management, coordination, security, training and implementation of the
global information systems; and that Texas Instruments' will provide the services in the United States
using its customary skills.
Finally, it is also represented that based on the letter of the Intellectual Property Office dated
February 18, 2005, the Agreement does not comply with certain provisions of Sections 87 and 88, Article
IX (Voluntary Licensing) of the Intellectual Property Code, particularly: AEDCHc
1. Section 88.1, which states that the Philippine laws shall govern the interpretation of the
Agreement and that in the event of litigation, the venue shall be the proper court in the place
where TI Philippines, the licensee, has its principal office; and
2. Section 88.4, which requires that the Philippine taxes on all payments relating to the
technology transfer arrangement shall be shouldered by Texas Instruments, the licensor.
Ruling
1. The payments for the EDA Costs are royalties.
With respect to the payments for the EDA Costs, inasmuch as they are compensation for the
provision of information or 'know-how' relating to the global information systems and computer software,
and access to other Texas Instruments Information Technology services and support, the payments for the
EDA Costs are royalties, such payments being considered payments for information concerning industrial,
commercial or scientific experience under paragraph 3, Article 13 of the Philippines-United States tax
treaty:
"Article 13
ROYALTIES
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid
by a corporation registered with the Philippine Board of Investments and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third State.
work, including cinematographic films or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or
other like right or property, or for information concerning industrial, commercial or
scientific experience. The term "royalties" also includes gains derived from the sale,
exchange or other disposition of any such right or property which are contingent on the
productivity, use, or disposition thereof." (emphasis supplied) DIETcH
In addition, because Texas Instruments will provide the subject information to TI Philippines
through Electronic Commerce (E-Commerce) means where the payments for the EDA Costs are computed
based on the number of seconds TI Philippines personnel are logged on to any of the EDA software
packages, such payments are characterized as royalties, based on the Report entitled 'Tax Treaty
Characterization Issues Arising from E-Commerce' and dated February 1, 2001, prepared by the Technical
Advisory Group on Treaty Characterisation of Electronic Commerce Payments of the Organisation for
Economic Co-operation and Development (OECD). The payments for the EDA Costs are under Category
19 of the Report, which provides:
"Category 19: Technical information
Definition
The customer is provided with undivulged technical information concerning a product or

process (e.g., narrative description and diagrams of a secret manufacturing process).
Analysis and conclusions:
33. The Group agrees that payments arising from this category of transactions constitute
royalties as they are made for the supply of know-how, i.e., 'for information concerning industrial,
commercial or scientific experience." (emphasis supplied)
Being royalties, the payments for the EDA Costs are subject to the income tax rates mentioned in
paragraph 2(b), Article 13 of the Philippines-United States tax treaty; subparagraph (iii) thereof provides
that the payments are subject to the lowest rate of income tax that may be imposed on the royalties of the
same kind paid under similar circumstances to a resident of a third State (commonly known as the
most-favored-nation tax treatment of royalties).
In relation to the most-favored-nation tax treatment of royalties, the Supreme Court, in

must be of the same kind as those derived by a resident of the third country which are subject to a
country. Secondly, the mechanism employed by the other country (the United States) in mitigating the
effects of double taxation of foreign-sourced income derived by its residents must be the same with that
country under their respective tax treaties with the Philippines.
In looking for a third country that grants a most-favored-nation tax treatment on royalties, you cited
China and, accordingly, the Philippines-China tax treaty whose Article 12 provides:
"Article 12
ROYALTIES
2. However, such royalties may also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the recipient is the beneficial owner of the
royalties, the tax so charged shall not exceed: ScaAET
a) 15 percent of the gross amount of royalties arising from the use of, or the right to use,
any copyright of literary, artistic or scientific work including cinematograph films or
tapes for television or broadcasting, or
b) 10 per cent of the gross amount of royalties arising from the use of, or the right to
use, any patent, trade mark, design, or model, plan, secret formula or process, or from
the use of, or the right to use, industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities."
Under Article 12 of the Philippines-China tax treaty, royalties for information concerning
industrial, commercial or scientific experience (to which payments for the EDA Costs are assimilated),
and even royalties for the use or the right to use of any patent, trade mark, design or model, plan, secret
formula or process, or any industrial, commercial, or scientific equipment, are subject to 10% income tax
based on the gross amount of the royalties. This is on the condition that the contracts that give rise to the
royalties are approved by the proper Philippine competent authority, namely, the Intellectual Property
Office of the Philippines.
As to the condition that the contracts that give rise to royalties are approved by the Intellectual
Property Office, we take note that based on the letter of the Intellectual Property Office dated February 18,
2005, the Information Technology Service Agreement between Texas Instruments and TI Philippines does
not comply with all of the provisions of Sections 87 and 88, Article IX (Voluntary Licensing) of the
Intellectual Property Code. This being so, we understand that the non-compliance of the Agreement means
that the same is not approved by the Intellectual Property Office, and, therefore, the desired 10% income
tax rate on the payments for the EDA Costs, using the Philippines-China tax treaty as a basis, cannot be
given due course.
Nonetheless, we are pleased to inform you that other than the Philippines-China tax treaty, the 10%
income tax rate on royalties is also available under the Convention between the Czech Republic and the
Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income (Philippines-Czech tax treaty), which entered into force recently on
September 23, 2003 and whose provisions on taxes apply on income derived or which accrued beginning
January 1, 2004. Unlike the Philippines-China tax treaty, the 10% rate under the Philippines-Czech tax
treaty can be availed of even without the approval by the Intellectual Property Office of the contract that
gives rise to the royalty payments, as such requirement is lacking in Article 12 of this tax treaty, to wit:
"Article 12
ROYALTIES
may be taxed in that other State. DETcAH
2. However, such royalties may also be taxed in the Contracting State in which they arise and
according to the laws of that State, but if the beneficial owner of the royalties is a resident of
the other Contracting State, the tax so charged shall not exceed:
a) 10 per cent of the gross amount of the royalties arising from the use of, or the right to
use, any copyright of literary, artistic or scientific work, other than that mentioned in
sub-paragraph (b), any patent, trade mark, design or model, plan, secret formula or
process, or from the use of, or the right to use, industrial, commercial or scientific
equipment, or for information concerning industrial, commercial or scientific
experience;
b) 15 per cent of the gross amount of the royalties arising from the use of, or the right to
use, any copyright of cinematograph films, and films or tapes for television or radio
broadcasting.
The competent authorities of the Contracting States shall by mutual agreement settle the
mode of application of these limitations."
Using the Philippines-Czech tax treaty as a basis for the grant of the 10% preferential tax rate, it is
noteworthy that for purposes of the first condition of the most-favored-nation tax treatment, under
paragraph 2(a), Article 12 of the tax treaty, royalties for information concerning industrial, commercial or
scientific experience (to which payments for the EDA Costs are assimilated), and even royalties for the
use or the right to use of any copyright of literary, artistic or scientific work (except copyright on
cinematograph films, and films or tapes for television or radio broadcasting), any patent, trade mark,
design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment, are
subject to 10% income tax based on the gross amount of the royalties. As mentioned previously, the 10%
rate can be availed of even without the approval by the Intellectual Property Office of the contract that
gives rise to the royalty payments.
As to the second condition for the most-favored-nation tax treatment, it is noteworthy that the
United States and Czech employ the same mechanism in mitigating the effects of double taxation of
foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under
United States:
"Article 23
1. In accordance with the provisions and subject to the limitations of the law of the United
States (as it may be amended from time to time without changing the general principle
hereof), the United States shall allow to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of taxes paid or accrued to the
Philippines and, in the case of a United States corporation owning at least 10 percent of the
voting stock of a Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines
by the Philippine corporation paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be based upon the amount of tax
paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the
purpose of limiting the credit to the United States tax on income from sources within the
Philippines or on income from sources outside the United States) provided by United States
law for the taxable year. For the purpose of applying the United States credit in relation to
taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income)
shall be applied to determine the source of income. For purposes of applying the United
paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes."
TCADEc
Czech:
"Article 22
ELIMINATION OF DOUBLE TAXATION
xxx xxx xxx
2. In the case of a resident of the Czech Republic, double taxation shall be eliminated as
follows:
a) The Czech Republic, when imposing taxes on its residents, may include in the tax
base upon which such taxes are imposed the items of income which according to the
provisions of this Convention may also be taxed in the Philippines, but shall allow as
a deduction from the amount of tax computed on such a base an amount equal to the
tax paid in the Philippines. Such deduction shall not, however, exceed that part of the
Czech tax, as computed before the deduction is given, which is appropriate to the
income which, in accordance with the provisions of this Convention, may be taxed in
the Philippines.
b) Where in accordance with any provision of the Convention income derived by a

resident of the Czech Republic is exempt from tax in the Czech Republic, the Czech
Republic may nevertheless, in calculating the amount of tax on the remaining income
of such resident, take into account the exempted income."
Under the ordinary credit method, the United States and Czech (as countries of residence) would
limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is
attributable to the income that is taxed in the Philippines (the country of source or country of situs). As a
result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the
United States and Czech on a particular income, the United States and Czech would not grant the taxpayer
a full credit for the income tax imposed by the Philippines on such income.
Under the article on Elimination of Double Taxation of the Philippines-Czech tax treaty, Czech
applies the ordinary credit method to all items of income derived by its residents from sources in the
Philippines and which may be taxed in the Philippines in accordance with the provisions of the tax treaty
(paragraph 2(a), Article 22 of the tax treaty). In addition, Czech retains the right to take the amount of
income exempted in Czech into consideration when determining the tax to be imposed on the rest of the
income (paragraph 2(b), Ibid.).
In fine, because the two conditions for the most-favored-nation tax treatment on royalties under the
Philippines-United States and the Philippines-Czech tax treaties are both satisfied, this Office is of the
opinion and so holds that the payments for the EDA Costs to be made by TI Philippines to Texas
Instruments under the Information Technology Service Agreement are subject to 10% income tax rate
based on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States
tax treaty in relation to paragraph 2(a), Article 12 of the Philippines-Czech tax treaty.
2. The payments for the Other IT Costs are payments for services.
Inasmuch as the payments for the Other IT Costs are compensation for services provided by Texas
Instruments to TI Philippines, including upgrades, maintenance, repair, modification, management,
coordination, security, training and implementation of the global information systems, and the services are
performed in the United States using Texas Instruments' customary skills, and the payments are computed
on the basis of a fixed activity based per person charge, the payments for the Other IT Costs are truly
payments for services and not royalties. DCaEAS
Being performed in the United States, the subject services are not considered as being derived from
sources within the Philippines, under Section 42(A)(3) of the National Internal Revenue Code of 1997
(Tax Code), and the payments for the services, being derived by a foreign corporation, are exempt from
income tax, based on Section 23(F) of the Tax Code, to wit:
"SEC 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;"
"SEC 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
In fine, because the services that give rise to the payments for the Other IT Costs are not derived
from sources within the Philippines and such payments are made to a foreign corporation, this Office is of
the opinion and so holds that the payments for the Other IT Costs to be made by TI Philippines to Texas
Instruments under the Information Technology Service Agreement are exempt from income tax, under
Sections 42(A)(3) and 23(F) of the Tax Code. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005)
3. The payments for the EDA Costs and for the Other IT Costs are exempt from VAT.
The payments for the EDA Costs, being compensation for the supply of know-how or information
concerning industrial, commercial or scientific experience, are generally subject to VAT, under Section
108(A)(3) of the Tax Code:
the Philippines for others for a fee, remuneration or consideration. . . The phrase 'sale or
exchange of services' shall likewise include:
xxx xxx xxx
(3) The supply of scientific, technical, industrial or commercial knowledge or

information;" 1(39) (emphasis added)
On the other hand, with respect to the payments for the Other IT Costs, pursuant to Section 108(A)
above, such payments are not subject to VAT because the services that give rise to the payments are not
performed in the Philippines. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005) IAcTaC
However, with respect to the payments for the EDA Costs, the same can be exempt from VAT
pursuant to Section 109(q) of the Tax Code, where the transaction that gives rise to the payments are
exempt under special laws:
"SEC. 109. Exempt Transactions. — The following shall be exempt from the value-added tax:
xxx xxx xxx
signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and
1590;" 2(40)
In relation thereto, Section 24 of Republic Act No. 7916 (An Act Providing for the Legal
Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special
Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority
(PEZA), and for Other Purposes) and Section 1, Rule XIV (Incentives to ECOZONE
Developers/Operators) of the Rules and Regulations to Implement this Act, provide VAT exemption,
among others, to TI Philippines and other PEZA-registered enterprises, to wit:
"Section 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision of
existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national,
shall be imposed on business establishments operating within the ECOZONE. In lieu of paying
taxes, five percent of the gross income earned by all business and enterprises within the ECOZONE
shall be remitted to the national government. . ."
"Section 1. ECOZONE Developers/Operators. — ECOZONE Developers/Operators shall be

entitled to the following incentives:
A. Exemption from National and Local Taxes and Licenses. — An ECOZONE

Developer/Operator shall to the extent of its construction and operation, be exempt from
payment of all national internal revenue taxes and local government impost, fees, licenses or
taxes, including but not limited to the following:
1. Internal revenue taxes such as gross receipts tax, value-added tax, ad valorem and
excise taxes;
2. Franchise, common carrier or value added taxes and other percentage taxes on public
and service utilities and enterprises."
Under Section 105 of the Tax Code, since VAT is an indirect tax, the VAT on the payments for the
EDA Costs may be shifted or passed on by Texas Instruments to TI Philippines:
"SEC 105. Persons Liable. — Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any person who imports goods
shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services . . ."
However, pursuant to Section 24 of Republic Act No. 7916 which provides that TI Philippines and
other PEZA-registered enterprises are exempt from VAT and other internal revenue taxes, Texas
Instruments cannot shift or pass on the VAT to TI Philippines; hence, the transaction that gives rise to the
payments for the EDA costs is exempt from VAT. (Commissioner of Internal Revenue vs. Seagate
Technology (Philippines), G.R. No. 153866 dated February 11, 2005) HSacEI
The same conclusion is reached in VAT Ruling No. 100-99 dated September 16, 1999, the
dispositive portion of which provides: "In the case of payment for royalties to a non-resident owner, the
responsibility for withholding the VAT and paying the same rests on the payor. However, since
PEZA-registered export enterprise may not be passed on with nor claim input VAT, then payment of
royalties to a non-resident lessor, . . . , should be as it is hereby confirmed to be, exempt from VAT." (BIR
Ruling Nos. DA-ITAD 112-05 dated September 30, 2005)
Very truly yours,

Commissioner
Footnotes
1. Section 108 was amended by 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, to read as:
The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration . . . The phrase 'sale or exchange of services'
shall likewise include:
xxx xxx xxx
(3) The supply of scientific, technical, industrial or commercial knowledge or information;"
2. Republic Act No. 9337 renumbered and amended Section 109(q) thus:
"SEC. 109. Exempt Transactions. — (1) Subject to the provisions of Subsection (2) hereof the following
transaction shall be exempt from the value-added tax:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the Philippines is a signatory
or under special laws, except those under Presidential Decree No. 529;"
October 23, 2006

British Embassy
17th Floor, LV Locsin Building
6752 Ayala Avenue
1226 Makati, Manila
Attention: Mr. Jon Huseyin Mustafa

Third Secretary
(Visa and Immigration)
Gentlemen :
This has reference to your Note No. 146-06 dated September 19, 2006, referred to this Office by the
Department of Finance and the Department of Foreign Affairs, requesting for a refund of value-added tax
(VAT) on the local purchase of a motor vehicle, for the personal use of Mr. Jon Huseyin Mustafa, Third
Secretary (Visa and Immigration) of the British Embassy, specifically described as follows:

Make: Isuzu Crosswind Wagon Sportivo A/T
Model Year: 2006
Chassis Number: PABTBR54F62037998
Engine Number: 4JA1-MOO535
reads:
"ARTICLE 34
xxx xxx xxx"
words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles shall in
Revenue Code of 1997. SCaEcD
However, applying the principle of reciprocity, this Office may grant exemption to the British
Embassy and its personnel on their local purchases of goods and/or services it appearing from the list
your country.
Hence, the local purchase of one (1) unit of 2006 Isuzu Crosswind Wagon Sportivo A/T, for the
personal use of Mr. Jon Huseyin Mustafa of the British Embassy is exempt from VAT. (BIR Ruling No.
DA-ITAD-150-04 dated December 20, 2004)
This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of
determining whether Mr. Jon Huseyin Mustafa of the British Embassy is entitled to VAT exemption on
the basis of reciprocity. The determination on whether your request for tax refund should be given due
course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket
pertaining thereto (including a copy of this ruling) shall be endorsed to the proper office for processing
and investigation.
Very truly yours,

Legal Service
October 17, 2006
DA-ITAD-120-05
Embassy of the Russian Federation

1245 Acacia Road
Dasmariñas Village
Makati City
Attention: Mr. Andrey Shumilov
Third Secretary
Gentlemen :
This has reference to your Note No. 129 dated September 21, 2006 referred to this Office by the
Department of Finance and the Department of Foreign Affairs, requesting for the exemption from payment
of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor vehicle, for the
personal use of Mr. Andrey Shumilov, Third Secretary of the Embassy of the Russian Federation,
Make: Nissan X-Trail 200 2.0L A/T

Model Year: 2006
Color: Gray X
Engine Number: QR20-650908A
Chassis Number: TDAALAAT30-A45864
reads:
"ARTICLE 34
services;
xxx xxx xxx"
words, purchases by that Embassy of goods and/or services shall in general, be subject to the value-added
tax prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National
Internal Revenue Code of 1997. ASTIED
of the Russian Federation and/or its personnel on their purchases of locally-assembled motor vehicles it
Hence, the local purchase of one (1) unit of 2006 Nissan X-Trail 2.0L A/T for the personal use of
Mr. Andrey Shumilov, Third Secretary of the Embassy of the Russian Federation is exempt from
value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-120-05 dated October 21, 2005)
Very truly yours,

Legal Service
October 13, 2006
DA-ITAD-122-02
Embassy of the Holy See (Apostolic Nunciature)

2140 Taft Avenue,
P.O. Box 3364
Manila
Gentlemen :
This has reference to your Note No. 174/06 dated September 6, 2006 referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption
from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the official use
of the Embassy of the Holy See (Apostolic Nunciature), specifically described as follows:
Make: Honda CRV 4X4 2.4 A/T

Model Year: 2006
Color: Shoreline Mist
Engine Number: RRMD5565400456
reads:
"ARTICLE 34
services;
xxx xxx xxx"
words, purchases by that Embassy and its diplomatic agents of goods and/or services shall in general, be
149, all of the National Internal Revenue Code of 1997. TAacIE
of the Holy See (Apostolic Nunciature) and/or its personnel on their purchases of locally-assembled motor
that the Holy See allows similar exemption to Philippine Embassy and/or its personnel on their purchase
of locally-assembled motor vehicles thereat.
Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4 A/T for the official use of
the Embassy of the Holy See (Apostolic Nunciature) is exempt from value-added tax. (BIR Ruling No.
DA-ITAD-122-02 dated July 3, 2002)
Very truly yours,

Legal Service
October 13, 2006
Articles 23 & 34, Vienna Convention on Diplomatic Relations;
BIR Ruling Nos. DA-ITAD-88-05 & 65-03
British Embassy
15th-17th Floors
L.V. Locsin Building
6752 Ayala Avenue cor. Makati Avenue
Makati City
Gentlemen :
This refers to your Note Verbale No. 162-05 dated December 20, 2005 indorsed to this Office by
the Department of Foreign Affairs (DFA), requesting the issuance of a certification exempting the British
Embassy from all national, regional and municipal dues and taxes, in respect of the new Embassy the
British Government intends to construct at McKinley Hall, Taguig, Metro Manila.
In reply, please be informed of Article 23 of the Vienna Convention on Diplomatic Relations

(Convention) adopted on April 18, 1961, pertinent portion of which reads:
"ARTICLE 23
1. The sending state and the head of mission shall be exempt from all national, regional or
municipal dues and taxes in respect of the premises of the mission, whether owned or leased,
other than such as represent payment for services rendered. (Emphasis supplied)
2. The exemption from taxation referred to in this article shall not apply to such dues and taxes
payable under the law of the receiving state by the person contracting with the sending state
or the head of the mission. cHAaEC
xxx xxx xxx"
It is clear from the aforequoted provisions of the Convention that the British Embassy is exempt
from all national, regional or municipal dues and taxes on the acquisition of real property for their new
Embassy, except those imposed on services rendered in connection with their intended construction
project on this property.
With respect to the services referred to in the preceding paragraph, this Office may confirm VAT
and ad valorem tax exemptions to a foreign Embassy in the Philippines upon favorable indorsement from
the DFA based on information that the same tax exemptions are enjoyed by the Philippine Embassy in the
home country of such Embassy. In relation to this, we note DFA's Undersecretary Franklin M. Ebdalin's
letter dated June 13, 2006, which states that VAT will be imposed on the acquisition and construction
activities of the British Embassy in Manila in relation to your new chancery. According to Undersecretary
Ebdalin's letter, "The Philippine Government has recently acquired a property in London for use as the
new chancery of the Philippine Embassy. The Philippine Government was required to pay VAT in the
amount of GBP 787,500.00 as a result of the property acquisition. VAT shall also be collected in relation
to the refurbishment of the property." Hence, we regret that the British Embassy cannot be exempted from
the payment of VAT on services related to its property acquisition at McKinley Hall.
As to documentary stamp taxes, please note that the National Internal Revenue Code of 1997 (Tax
Code), as amended 1(41), provides that whenever one party to the taxable document enjoys exemption from
the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the
tax. Accordingly, since the British Embassy is exempt from all taxes in respect of the premises of the
mission and, as such, is exempt from DST arising from its property acquisition for the new chancery in the
Philippines, the seller of the real property to the British Embassy shall be the party directly liable for the
payment of the documentary stamp tax thereon. (BIR Ruling No. DA-ITAD-88-05 dated August 30, 2005)
For your information and guidance.
Very truly yours,
By:

Legal Service
Footnotes
1. SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. — Upon documents,
instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the
obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of
the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the
following Sections of this title, by the person making, signing, issuing, accepting, or transferring the same
wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises
from Philippine sources or the property is situated in the Philippines, and at the same time such act is done
or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the
tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax.
October 13, 2006
Article 10, Philippines-Korea tax treaty;

KEPCO Ilijan Corporation

18/F Citibank Tower
8741 Paseo de Roxas
Makati City 1227
Philippines
Attention: Mr. Ricardo A. Galano III

Corporate Counsel
Gentlemen :
This refers to your application for relief from double taxation dated June 7, 2006, requesting
confirmation of your opinion that the dividends paid by KEPCO International Philippines, Inc. (KIPI) to
Korea Electric Power Corporation (KEPCO) are subject to the preferential tax rate of 10% pursuant to the
Philippines-Korea tax treaty.
It is represented that KEPCO is a nonresident foreign corporation duly organized and existing under
the laws of Korea with business address at 167 Samseong-Deong, Gangnam-Gu, Seoul 135-791, Korea;
that it is not registered either as a corporation or as a partnership in the Philippines per certification issued
by the Securities and Exchange Commission dated May 29, 2006; that KIPI is a domestic corporation with
office address at 18th Floor Citibank Tower, 8741 Paseo de Roxas, Makati City, Philippines; that as of
May 4, 2004, KEPCO is the registered owner of Eight Hundred Seven Thousand Three Hundred Ninety
Five (807,395) of the authorized, subscribed and paid-up shares of KIPI with a par value of Ten Pesos
(PhP10.00) representing a percentage ownership of 99.9% of the outstanding shares of KIPI as shown in
the certification issued by the Corporate Secretary of KIPI dated June 2, 2006; that on April 29, 2004 the
Board of Directors of KIPI declared cash dividends in the amount of Eight Million Two Hundred Sixty
Two Thousand Dollars ($8,262,000.00), net of 10% withholding of Nine Hundred Eighteen Thousand
Dollars ($918,000.00) to KEPCO, payable on May 4, 2004; and that the issue/s or transaction subject of
the above request for ruling 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 of the taxpayer/s
involved.
In reply, please be informed that Article 10 of the Philippines-Korea tax treaty provides as follows:
"Article 10
Dividends
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 State. cHDAIS
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 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 (other than a partnership) which holds directly at least 25 per cent of
the capital of the company paying the dividends; and
xxx xxx xxx
4) The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or
'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims,
participating in profit, as well as income from other corporate rights which is subjected to
the same taxation treatment as income from shares by the laws of the State of which the
xxx xxx xxx"
whenever the beneficial owner of the dividends owns directly at least 25 percent of the capital of the
paying company. In all other cases, the 25 percent preferential tax rate applies. Such being the case and
considering that KEPCO holds 99.9% of the authorized, subscribed and paid-up shares of KIPI, this Office
is of the opinion and so holds that the dividend payments by KIPI to KEPCO shall be subject to the
preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the
Philippines-Korea tax treaty. (BIR Ruling No. ITAD 114-00 dated August 29, 2000)
Very truly yours,
By:

Legal Service
October 12, 2006
DA-ITAD-37-04
Embassy of the People's Republic of Korea

Unit 1002 10th Floor,
Ayala Life FGU Center
Ayala Avenue
Makati City
Attention: Mr. Hong Chang Seok

Deputy Trade Commissioner of
Korea Trade Investment Promotion Agency (KOTRA)
Gentlemen :
This has reference to your Note No. 06-2187 dated August 31, 2006 referred to this Office by the
from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1) motor
vehicle, for the personal use of Mr. Hong Chang Seok, Deputy Trade Commissioner of Korea Trade
Investment Promotion Agency (KOTRA), specifically described as follows:
Make: Toyota Fortuner 4X2 G Diesel A/T

Model Year: 2006
Color: Lithium Silver Metallic
Chassis Number: MROZR69G7-00003270
reads:
"ARTICLE 34
services;
xxx xxx xxx"
words, purchases by that Embassy and its diplomatic agents of goods and/or services shall in general, be
149, all of the National Internal Revenue Code of 1997.
of the People's Republic of Korea and/or its personnel on their purchases of locally-assembled motor
purchase of locally-assembled motor vehicles in your country. CIHTac
Hence, the local purchase of one (1) unit of 2006 Toyota Fortuner 4X2 G Diesel A/T for the
personal use of Mr. Hong Chang Seok, Deputy Trade Commissioner of Korea Trade Investment
Promotion Agency is exempt from value-added tax. (BIR Ruling No. 37-04 DA-ITAD-dated April 20,
2004)
Very truly yours,

Legal Service
October 11, 2006
Articles 5 & 7, Philippines-Singapore tax treaty; BIR Ruling No.

DA-ITAD-160-02; BIR Ruling No. ITAD-16-05
Samsung Electro-Mechanics Philippines Corp.

Blk. 5 Calamba Premier International Park
Bgy. Batino, Prinza, Calamba Laguna
Attention: Mr. Hoseok Han

Finance Group Senior Manager
Gentlemen :
This refers to your letter dated January 6, 2006, requesting clarification on the taxability of
commissions received by Samsung Electro-Mechanics Pte., Ltd. (SEMPL) from Samsung
Electro-Mechanics Philippines Corporation (SEMPHIL) under a Commission Agreement.
It is represented that SEMPL is a nonresident foreign corporation with office address at 83

Clemenceau Ave., 09-01 UE Square, Singapore; that per certification issued by the Securities and
Exchange Commission dated October 26, 2005, SEMPL with SEC No. A200300008 was licensed to
establish a representative office in the Philippines on February 6, 2003 to carry out the following
activities: (a) to conduct a market survey of electronic components, appliances, apparatus, equipment,
workstation, facsimile machines and other business equipment, software products and all other related
works; (b) to act as communication link between its Head Office and the customers in the Philippines; and
(c) to conduct such other activities which will be purely coordination work and to act as the message
center between the Head Office and the affiliates of SEMPL; that SEMPHIL is a PEZA-registered
corporation organized and existing under the laws of the Philippines with principal address at Blk 5
Calamba Premier International Park, Bgy. Batino, Prinza, Calamba City, Laguna.
It is further represented that on January 1, 2006, SEMPL and SEMPHIL entered into a Commission
Agreement (Agreement) wherein SEMPHIL appoints SEMPL as non-exclusive and independent sales
representative to market and sell SEMPHIL's Products within the territory 1(42) upon the terms and
conditions under the said Agreement; that the services rendered by SEMPL to SEMPHIL under the said
Agreement are done outside the Philippines per Sworn Statement issued by SEMPHIL dated June 8, 2006;
and that SEMPL shall use its best efforts to perform and complete the following objectives: SCETHa
1. Customer Relation
SEMPL acknowledges that prompt, courteous and professional service to all customers and
fostering and maintenance of good relations with customers is of paramount importance to
SEMPHIL and the said Agreement, and SEMPL agrees to use its best effort to serve
customers and promote such relations with customers. SEMPL shall call upon customers
regularly, provide assistance and information to customers as requested by customers or
SEMPHIL, serve liaison between customers and SEMPHIL and comply with such policies
and procedures as SEMPHIL may from time to time communicate to SEMPL
2. SEMPL's Expertise
SEMPL shall take all necessary steps to ensure that it and all its sales personnel are fully
familiar with the Products, SEMPHIL then-current price list, and applicable SEMPHIL's
policies and procedures.
3. Delinquent Account
SEMPL shall, when requested by SEMPHIL, call upon customers with delinquent accounts
and use its best efforts to procure payment thereon.
4. Meetings and Conventions
SEMPL shall attend such sales meeting for, among other things the training and education of
its personnel, as SEMPHIL may request. SEMPL shall attend such conventions as SEMPL
deems necessary to meet its best efforts obligation hereunder. All expenses, including such
meeting shall be borne by SEMPL.
5. Reports
(a) SEMPL shall promptly furnish complete and detailed reports of every new potential
customers contact to enable SEMPHIL to make proper judgments for this new
potential business.
(b) SEMPL shall provide SEMPHIL in written form with as much as possible
information concerning change of business activity, strategy, change of personnel,
change in technology and potential new sales opportunities with all customers and
competing products, business activities of competitors and any proposal for product
improvement on an ongoing basis.
(c) SEMPL shall supply the following to SEMPHIL to assist SEMPHIL in maintaining
scheduled delivery dates, planning new production, maintaining customers quality
standards, and assist SEMPHIL in planning long term growth and expansion.
— a three month rolling forecast
— copies of all quotations made, negotiated and transmitted by SEMPL regarding

sales or potential sales of Products
— new market information, if any.
that SEMPHIL, at its expense, shall provide periodic sales and technical assistance to SEMPL and its
personnel to assist them in effective marketing of products, education of customers and relations with
customers, and may accompany SEMPL or its personnel from time to time on calls to customers; that
SEMPHIL, agrees to pay, as compensation for SEMPL's service, commission for Applicable Sales
Revenue (0.8%) as a Direct Sale per purchase order obtained from the customers in the territory; and that
the term of the said Agreement shall commence on the date first written and remain in full force until
December 31 of the same calendar year, and it shall be automatically renewed for successive terms of one
(1) year each unless either party notifies the other in writing of its intention not to renew at least sixty (60)
days prior to the expiration of the initial, or any extension thereof. TaDAHE
In reply, please be informed that Article 5 (Permanent Establishment) and, in relation thereto,
Article 7 (Business Profits) of the Philippines-Singapore tax treaty provides:
"Article 5
1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place
2. The term 'permanent establishment' includes specially but is not limited to:
a) A seat of arrangement;
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse, in relation to a person providing storage facilities for others;
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"
"Article 7
BUSINESS PROFITS
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"
According to paragraph 1 of Article 7, the service fees are subject to Philippine income tax only if
they are attributable to a permanent establishment which SEMPL has in the Philippines. ISDCaT
A permanent establishment, as defined in paragraphs 1 and 2, Article 5 (Permanent Establishment)

of the same tax treaty, means "a fixed place of business through which a resident of one of the Contracting
States engages in trade or business," and includes, for example, "a seat of management, a branch, an
office, a store or other sales outlet, a factory, and a workshop." It also includes "the furnishing of services,
including consultancy services, which continues for a period or periods aggregating more than 183 days."
In the first instance, where it is required that there be a fixed place of business and with respect to
the representation that SEMPL has an office in the Philippines (representative office), the same may
constitute a permanent establishment if the activities carried out therein are not preparatory and auxiliary
in character and if the representative office has a certain degree of permanency.
As regards examples of activities that have a preparatory and auxiliary character, paragraph 3,
Article 5 of the tax treaty mentions:
"3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed

not to include any one or more of the following:
a) The use of facilities solely for the purpose of storage, display, or

occasional delivery of goods or merchandise belonging to the resident;
b) The maintenance of a stock of goods or merchandise belonging to the

resident solely for the purpose of storage, display, or occasional delivery;
c) The maintenance of a stock of goods or merchandise belonging to the
resident solely for the purpose of processing by another person;
d) The maintenance of a fixed place of business solely for the purpose of

purchasing goods or merchandise, or for collecting information, for the resident;
e) The maintenance of a fixed place of business solely for the purpose of

advertising, for the supply of information, for scientific research, or for similar
activities which have a preparatory or auxiliary character, for the resident; or
f) The furnishing of services, including the provision of equipment, in one

of the Contracting States by a resident of the other Contracting State, including
consultancy firms, in accordance with, or in the implementation of an agreement
between the Contracting States regarding technical cooperation."
Where it is represented that the representative office's functions are to conduct a market survey, act
as communication link between its Head Office and the customers in the Philippines, and to conduct such
other activities which will be purely coordination work and to act as the message center between the Head
Office and the affiliates of SEMPL, the same may be considered as preparatory or auxiliary. However, if
such activities extend to negotiation and/or signing of contracts and/or after-sales services, the same are
regarded as being beyond preparatory and auxiliary and as such can deem the representative office a
permanent establishment. AaIDCS
As regards permanency, where it is represented that the representative office has been in existence
immediately after it was given license by the Securities and Exchange Commission on February 6, 2003
and it continues to be so at present or for more than three years now, the representative office is
considered as already having acquired a certain degree of permanency.
However, since the activities carried out by the representative office are merely preparatory and
auxiliary, the fact that it has, over time, already acquired a certain degree of permanency, still said
representative office does not yet constitute a permanent establishment of SEMPL. (BIR Ruling No.
ITAD-16-05 dated February 24, 2005)
Considering that the income derived by SEMPL under the Agreement is not attributable to its
representative office in the Philippines as the latter is not privy to the transaction, and that the
representative office of SEMPL is not deemed to be a permanent establishment in the Philippines to which
its business profits may be attributed to since it is merely performing preparatory and auxiliary activities,
the payments made by SEMPHIL to SEMPL are therefore, not subject to Philippine income tax. (BIR
Ruling No. DA-ITAD-160-02 dated September 13, 2002)
the Philippines for others for a fee, remuneration or consideration, . . ." (Emphasis supplied).
Thus, in general, the VAT should be imposed when SEMPL provides the above services in the
Philippines "for short durations and in no case shall exceed an aggregate of 3 months in any given
calendar year". SEMPHIL shall then be required to withhold such VAT and treat the same as a "passed
on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section
xxx xxx xxx
exports from the national territory — except specifically declared areas — to an ecozone. caIACE
xxx xxx xxx
xxx xxx xxx"
provision for exempt transactions under Section 109 (K) of the Tax Code of 1997, as amended which
provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916
or PEZA Law, is particularly applicable to the instant case.
Such being the case, the payment by SEMPHIL, being a PEZA-registered enterprise to SEMPL,
under the above Agreement should be as it is hereby confirmed to be exempt from VAT.
Very truly yours,
By:

Legal Service
Footnotes
1. The Territory shall be Asia and Oceania, excluding Korea, Japan, China, Hongkong, Taiwan, Turkey, Israel
and former Soviet Bloc countries.
9337].
October 10, 2006
Arts. 7 & 5, Philippines-Malaysia Tax Treaty; BIR Ruling No.

DA-ITAD 152-02
Romulo Mabanta Buenaventura

Sayoc & De Los Angeles
30th Floor, Citibank Tower
8741 Paseo de Roxas, Makati City
Attention: Atty. Priscilla B. Valer
Gentlemen :
This refers to your letter dated April 17, 2006 received by this Office on June 26, 2006, requesting
confirmation of your opinion that the payments for services rendered by BASF Asia-Pacific Service
Centre Sdn. Bhd. (BASC) to BASF Philippines, Inc. (BPI) are not subject to Philippine income tax
pursuant to the Philippines-Malaysia tax treaty and that the value added taxes and the payments are
deductible business expenses of BPI.
It is represented that BASC is a nonresident foreign corporation duly organized and existing under
the laws of Malaysia as confirmed by the Certification of Incorporation of Private Company issued by the
Registry of Companies of Malaysia on November 24, 2004; that its business address is located at Level 14,
Uptown 1, No. 1 Jalan SS21/58, Damansara Uptown, 47400 Petaling Jaya, Selangor Darul Ehsan,
Malaysia; that it is not registered either as a corporation or as a partnership in the Philippines as confirmed
by the Certification of Non-Registration issued by the Securities and Exchange Commission on March 20,
2006; that BPI is a domestic corporation with business address at 103 Progress Ave., Phase 1, GIZ,
Carmelray Industrial Park 1, Canlubang, Laguna.
It is further represented that on July 1, 2006, BPI and BASC entered into a Master Service
Agreement (MSA) whereby BASC agreed to render the following services:
• Finance & Accounting (F&A): Accounts Payable, Accounts Receivable, General

Accounting, Treasury and Financial Reporting, as set out in Annex 1;
• Human Resources (HR): payroll processing, salary payments and general ledger posting,
employee data administration and processing, training administration, compensation and
performance management administration, as set out in Annex 2; and ASTDCH
• Such other services as the parties may agree to in writing from time to time
That under the MSA, BASC will provide the foregoing services at its own business premises in
Malaysia; that in performing its obligations under the said MSA, BASC shall at all time:
a) provide such qualified and/or experienced personnel and all necessary equipment and other
resources as may be required to perform its obligations professionally, efficiently and safely;
b) exercise the degree of diligence, skill and care which could reasonably be expected of a
reasonably competent, skilled and experienced person engaged in the provision of services
similar to the Services;
c) to arrange and maintain at its own cost and expense all licenses, approvals and consents from
the government authorities, ministries, departments required under the applicable laws and
regulations necessary to perform its obligations and keep such licenses, approvals and
consents valid;
d) carry out its obligations promptly and in accordance with any time schedule agreed upon by
the parties; and
e) execute its obligations in a professional, safe and efficient manner in conformity with all
relevant laws and regulations.
That the documents and information required from BPI to enable BASC to render the service shall
be made available by BPI by fax, phone or email; that the MSA shall be valid from July 1, 2006 and shall
continue for eight (8) years (Initial Term) and indefinitely thereafter; that in consideration for the services,
BPI shall pay BASC for the full cost incurred for the provision of the services plus 5% mark-up; and that
the herein transaction subject of this request for ruling 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 Article 7 in relation to Article 5 of the Philippines-Malaysia tax
treaty provides:
"Article 7
BUSINESS PROFITS
the enterprise may be taxed in the other State but only on so much thereof as is attributable
to that permanent establishment. cESDCa
xxx xxx xxx"
"Article 5
1. For the purposes of this Agreement, the term 'permanent establishment' means a fixed place
2. The term 'permanent establishment' shall include especially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, an oil or gas well, a quarry or other place of extraction of natural

resources including timber or other forest produce;
g) a farm or plantation;
h) a building site or construction, installation or assembly project which exists
for more than 6 months."
Pursuant to Article 7 in relation to Article 5 of the Philippines-Malaysia tax treaty, the Philippines
is allowed to tax the business profits of an enterprise which is a resident of Malaysia if it has a permanent
establishment situated in the Philippines and only so much of such profit that is attributable to that
permanent establishment. Inasmuch as BASC cannot be deemed to have a permanent establishment in the
Philippines, as such, the service fees to be paid by BPI for the services performed are not subject to
As regards the deductibility of the service fees as an ordinary and necessary business expense on
the part of BPI, this Office declines to rule on the matter considering the factual nature of the issue.
However, this does not preclude the taxpayer to treat it as a deductible item, the allowability of which is
subject to the findings of an investigation pursuant to the substantiation requirements under Section
34(A)(1)(b) of the National Internal Revenue Code. (BIR Ruling No. DA-ITAD 129-03 dated August 18,
2003) DSCIEa
the fees paid for the services rendered for BPI within the Philippines are, however, subject to 10% (12%
effective February 1, 2006, under Republic Act No. 9337) 1(45) value-added tax (VAT) pursuant to Section
108 of the Tax Code of 1997. Accordingly, BPI, being the resident withholding agent and payor in control
of payment shall be responsible for the withholding of the final VAT on such fees before making any
payment to BASC. In remitting the VAT withheld, BPI shall use 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 BPI if it is VAT-registered taxpayer. In case it is
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, it 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 BASC and the fourth copy for BPI 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)
Very truly yours,
By:

Legal Service
Footnotes
1. RMC 7-2006 Publishing the Full text of the Memorandum from Executive Secretary Eduardo R. Ermita
dated January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax
Rate from Ten Percent to Twelve Percent.
October 10, 2006

C & E Corporation
Meralco Avenue
corner General Araneta St.
Pasig City, Metro Manila
Philippines 1603
Attention: Ms. Lourdes P. Reyes

Finance/Admin. Principal Manager and Treasurer
Gentlemen :
This refers to your application for tax treaty relief dated August 30, 2005, requesting confirmation
that the dividend payments of C & E Corporation to Chiyoda Corporation are subject to the 10%
preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty.
It is represented that Chiyoda Corporation is a nonresident foreign corporation organized and

existing under the laws of Japan with office address at 12-1 Tsurumichuo, 2-chome, Tsurumi-ku,
Yokohama, Japan 230-8601; that it was licensed to establish its regional or area headquarters in the
Philippines on April 29, 2004 per Certification dated August 26, 2005 issued by the Securities and
Exchange Commission; that the Chiyoda Corporation regional or area headquarters (RHQ) does not
participate in any manner in the management of C & E Corporation and its activities are limited to acting
as supervisory, communications and coordinating activities for C & E Corporation; that C & E
Corporation is a corporation organized and existing under the laws of the Philippines, with office address
at Meralco Avenue, corner General Araneta Street, Pasig City, Metro Manila, Philippines; that C & E
Corporation is duly registered with the Board of Investments as a New Service Exporter in the fields of
Design and Construction of Industrial Plants under Certificate of Registration No. 96-168 dated August 9,
1996 and as a New IT Service Export Service Firm in the Field of Engineering Plan and Design of
Industrial Plants under Certificate of Registration No. EP2002-112 dated August 27, 2002; that per
certification by the C & E Corporation's Corporate Secretary dated September 14, 2005, Chiyoda
Corporations' percentage of ownership of shares of stock in C & E Corporation is as follows: cDCaHA
February 15, 1995 to June 11, 2005 to

June 10, 2005 September 14, 2005
No. of shares 20,246 20,246
Par value per share PhP1,000.00 PhP1,000.00
Total Amount PhP20,246,000.00 PhP20,246,000.00
Authorized Cap. Stock PhP27,000,000.00 PhP31,153,000.00
% to total 75% 65%
It is further represented that during the meeting held on June 10, 2005, the Board of Directors of C
& E Corporation resolved and approved the declaration of cash dividends in the total amount of One
Hundred Sixty Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP165,013,271.00)
from its unrestricted retained earnings; and that payment of the cash dividends declared shall be Forty
Million Pesos (PhP40,000,000.00) in July 2005, Thirty Million Pesos (PhP30,000,000.00) in December
2005, and the balance of Ninety Five Million Thirteen Thousand Two Hundred Seventy One Pesos
(PhP95,013,271.00) payable in six (6) years beginning Year 2006.
"Article 10
1. Dividends paid by a company which is a resident of a Contracting State to a resident of

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;
The provisions of this paragraph shall not affect the taxation of the company in respect of
the profits out of which the dividends are paid. ESCcaT
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
5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the
dividends, being a resident of a Contracting State, carries on business in the other Contracting State
of which the company paying the dividends is a resident, through a permanent establishment
situated therein, or performs in that other Contracting State independent personal services from a
fixed base situated therein, and the holding in respect of which the dividends are paid is effectively
connected with such permanent establishment or fixed base. In such case the provisions of Article 7
or Article 14, as the case may be, shall apply.
xxx xxx xxx"
Based on the abovequoted provisions, the Philippines may tax the dividends paid by a Philippine
dividends if the latter holds directly at least 25 percent 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.
The preceding paragraph, however, does not apply if the recipient of the dividend, being a resident
of Japan, carries on business in the Philippines through a permanent establishment to which the dividend
income is attributable. Relative thereto, Article 5 of the Philippines-Japan tax treaty provides:
"Article 5
b) a branch;
c) an office;
d) a factory;
e) a workshop; TcIAHS
f) a warehouse;

resources.
3. A building site or construction or installation project constitutes a permanent

establishment only if it lasts more than six months.
4. Notwithstanding the preceding provisions of this Article, the term 'permanent

establishment' shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of

purchasing goods or merchandise, or of collecting information, for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of

carrying on, for the enterprise, any other activity of a preparatory or auxiliary
character;
f) the maintenance of a fixed place of business solely for any combination

of activities mentioned in subparagraphs (a) to (e), provided that the overall activity
of the fixed place of business resulting from this combination is of preparatory or
auxiliary character."
xxx xxx xxx"
Based on paragraph 2(c), Chiyoda Corporation may be considered as having a permanent

establishment in the Philippines since it maintains therein a representative office.
However, in the instant case, since it was shown that the function of the representative office in the
Philippines is limited only to acting as a supervisory, communications and coordinating activities for C &
E Corporation, then Chiyoda Corporation is not deemed to have a permanent establishment in the
Philippines. EaScHT
Therefore, considering that from February 15, 1995 to June 10, 2005, Chiyoda Corporation directly
held 75% of the total shares of C & E Corporation and that as of June 11, 2005 to date, Chiyoda
Corporation directly holds 65% of the total shares of C & E Corporation, dividends payable to Chiyoda
Corporation in July 2005 in the amount of Forty Million Pesos (PhP40,000,000.00), and in December
2005 in the amount of Thirty Million Pesos (PhP30,000,000.00), are subject to the 10% preferential tax
rate based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty
(BIR Ruling No. DA-ITAD-122-04 dated November 3, 2004; ITAD Ruling No. 16-05 dated February 24,
2005). Likewise, dividends declared in June 10, 2005 in the amount of Ninety Five Million Thirteen
Thousand Two Hundred Seventy One Pesos (PhP95,013,271.00) and payable to Chiyoda Corporation in
six (6) years beginning year 2006 are subject to such 10% preferential tax rate under the Philippines-Japan
tax treaty.
Very truly yours,
By:
Legal Service
October 6, 2006
Art. 5&7, Philippines-Singapore tax treaty;

Sec. 108 of the NIRC of 1997;
RPI Communications Inc.

2008 Herrera Tower, Herrera St.,
Salcedo Village, Makati City
Attention: A.S. Anderson
Gentlemen :
This refers to your letter dated July 22, 2005, applying for relief from double taxation on the
payment of RPI Communications Inc. (RPI) to Computer Printing Specialist Pte Ltd. (CPS-Singapore), for
the work carried out as their consultant, pursuant to their Service Agreement.
It is represented that CPS-Singapore is a nonresident foreign corporation duly organized and

existing under the laws of Singapore with office address at Level 31, 6 Battery Road, Singapore 049909 as
certified by the Accounting and Corporate Regulatory Authority of Singapore on September 6, 2005; that
it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by
the Securities and Exchange Commission dated August 17, 2005; that RPI is a corporation duly organized
and existing under the laws of the Philippines with principal address at Suite 2008 Herrera Tower, V.A.
Rufino cor. Valero Sts., Salcedo Village, Makati City.
It is further represented that RPI and CPS-Singapore entered into a Service Agreement for a project,
the duration of which is from June 15, 2005 to November 30, 2005; that under the Agreement. RPI has
agreed to get the service of CPS-Singapore through its subcontractor John Stanley-Critchlow for technical
management and consultancy services for RPI's forthcoming projects to include initial project appraisal,
evaluation, installation, documentation and commissioning oversight; that Mr. Critchlow visited the
Philippines to render the said services on May 29 to June 2, 2005 and in October 19 to October 21, 2005;
that in consideration for the said service, RPI agreed to pay CPS-Singapore the amount of One Hundred
Twenty Thousand Singapore Dollars (S$120,000.00) net of taxes and bank charges and exclusive of the
expenses incurred on behalf of RPI by the Project Manager or any representative of CPS-Singapore. HSAcaE
In reply, please be informed that Article 7(1) of the Philippines-Singapore tax treaty provides:
"Article 7
BUSINESS PROFITS
xxx xxx xxx"
In relation, thereto, paragraph (1), (2) and (3) of Article 5 of the same treaty provide, viz:
"Article 5
1. For the purpose of this Convention, the term "permanent establishment" means a fixed
2. The term "permanent establishment'' includes especially but is not limited to:
(a) A seat of management;
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse, in relation to a person providing storage facilities for

others;
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. (Emphasis ours) ITSacC
3. Notwithstanding paragraphs 1, 2, and 4, a permanent establishment shall be deemed
not to include:
a) the use of facilities solely for the purpose of storage, display or

occasional delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of storage, display or occasional delivery;
c) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of

purchasing goods or merchandise, or for collecting information, for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of

advertising, for the supply of information, for scientific research or for similar
activities which have a preparatory or auxiliary character, for the enterprise.
xxx xxx xxx"
Based on the foregoing, if a corporation which is a resident of Singapore does not carry on business
in the Philippines through a permanent establishment situated therein, the profits of the Singaporean
corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a
resident of Singapore may be deemed to have a permanent establishment in the Philippines if among
others, the furnishing of services through its employees or other personnel continue (for the same or
connected project) within the Philippines for a period or periods aggregating more than 183 days.
Considering that the services rendered by Mr. Critchlow on behalf of CPS-Singapore did not
exceed an aggregate 183 days, CPS-Singapore is deemed not to have a permanent establishment in the
Philippines. Hence, the service fees paid by RPI to CPS-Singapore under the subject Agreement are not
subject to Philippine income tax and consequently to withholding tax. (BIR Ruling No. 077-84 dated April
27, 1984)
However, the fees paid by RPI to CPS-Singapore for the services rendered in the Philippines
through its personnel are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code of
1997. Accordingly, RPI being the payor in control of the payment shall be responsible for the withholding
of VAT on such fees by filing a separate VAT return for and on behalf of CPS-Singapore using BIR Form
No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If RPI
is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and proof of payment thereof shall serve
as documentary substantiation for the claim of input VAT by RPI upon filing its own VAT return. If it is
not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the services
purchased which may be treated as an "expense" or "asset" on the part of RPI, whichever is applicable. In
addition, RPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, the first three copies for CPS-Singapore and the fourth copy for RPI as its file copy. caEIDA
Very truly yours,
By:

Legal Service
October 3, 2006
Sec 109 (K) of the National Internal Revenue Code of 1997, as

amended;

6819 Ayala Avenue
Makati City

First Secretary
Gentlemen :
This has reference to your Note Verbale KFZ No. 41/2006 dated August 16, 2006 indorsed to this
Office by the Department of Finance and the Department of Foreign Affairs (DFA), Office of Protocol,
requesting for exemption from payment of tax on the local purchase of one (1) motor vehicle, for the
official use of GDC-GTZ Office of the German Embassy, specifically described as follows:

Organization: German Development Cooperation-
German Technical Cooperation (GDC-GTZ)
Make: one (1) unit Honda Motorcycle XR200
Model year: 2006
Color: Red
Engine No.: KCNO4E000597
Frame No.: KCN0400597
xxx xxx xxx
CEcaTH
contributions:
It shall
(a) exempt the material and motor vehicles supplied for the Office from
taxes, licenses, harbour dues, import and export duties and other public charges, as
well as storage fees; and ensure that such material is cleared by customs without
delay. The aforementioned exemptions shall, with regard to value-added tax (VAT),
also apply to material and services (including consulting services) procured in the
Republic of the Philippines, as well as to the renting of office premises and
accommodation for seconded experts; (Emphasis supplied)
Hence, your herein request for exemption from VAT on the local purchase of one (1) unit Honda
XR200 Motorcycle, for the official use of GDC-GTZ is hereby granted. (BIR Ruling No.
Very truly yours,

Legal Service
Footnotes
September 27, 2006
Article 12, Philippines-Japan tax treaty

Section 109 (K) National Internal Revenue Code of 1997,
as amended;

CPA-Lawyers
Suite 5F JL Building
Don Jose Avila cor. Don Gil Garcia Streets
Cebu City, Philippines 6000
Attention: Atty. Rita A.S. Fernandez

Partner
Gentlemen :
This refers to your letter dated September 4, 2006 on behalf of your client, Yamashin Cebu Filter
Manufacturing Corporation (Yamashin Philippines), requesting confirmation that its payments to
Yamashin-Filter Corporation, formerly Yamashin Filter Manufacturing Corporation of Japan, are royalties
subject to the 25% preferential tax rate, pursuant to Article 12 of the Philippines-Japan tax treaty, and that
the said royalty payments are not subject to value-added tax (VAT) under Section 109(K) of the National
Internal Revenue Code of 1997, as amended (Tax Code of 1997).
It is represented that Yamashin-Filter Corporation (Yamashin Japan) is a nonresident foreign

corporation duly organized and existing under the laws of Japan, with office address at 1-11-5
Nishi-kanagawa, Kanagawa-ku, Yokohama, Japan; that is not registered either as a corporation or as a
partnership in the Philippines per certification issued by the Securities and Exchange Commission dated
August 22, 2006; that Yamashin Philippines is a domestic corporation with office address at Mactan
Economic Zone II, Lapulapu City, Philippines; that it is registered with the Export Processing Zone
Authority under Certificate of Registration No. 89-014 dated April 14, 1989 and is enjoying the tax regime
of 5% in lieu of all taxes.
It is further represented that on October 15, 2001, Yamashin Philippines and Yamashin Japan
entered into a Technical Support and Service Agreement which provides that since Yamashin Japan has
developed and holds certain technology and expertise involving the designing, development, manufacture
and production of advanced and state of the filters for industrial and other uses, and through its years of
experience and reputations, has built-up goodwill and markets for its products which it intends and plans
to transfer to exclusive right in the Philippines for the latter's technical advice, design cooperation,
information, experience, quality control, and business support for Yamashin Japan's own products which it
produces in the Philippines for export to Japan and other parts of the world; that by virtue thereof,
Yamashin Japan agrees to provide to Yamashin Philippines the following:
1. Full assistance and furnishing of its recent technical advise, design cooperation, and business
support for the production and development of filters;
2. Provide and accept access to its Japanese and worldwide intelligence system to carry out and
effect its production of up to date and state of the art filters and applications acceptable to
the market;
3. Allow and accept the availment of the following:
a. Training the production, quality control and administrative employees.
b. Seminars and conferences for training of Yamashin Philippines' employees AaHcIT
c. Materials for training
d. Engineers and professional who are experts in all disciplines necessary in the
implementation of advice to Yamashin Philippines as regards filter manufacture,
development and application, design development, and business support.
That, moreover, in consideration for the services under the Agreement, Yamashin Philippines shall
pay to Yamashin Japan a fee equivalent to Four Million Philippine Pesos (P4,000,000.00) each fiscal year
effective October 1, 2001 up to September 30, 2006.
"Article 12
may be taxed in that other Contracting State.
2. However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the laws of that Contracting State, but if the recipient is the beneficial owner of
the royalties the tax so charged shall not exceed:
a) 15 per cent of the gross amount of the royalties if the royalties are paid in
respect of the use of or the right to use cinematograph films and films or tapes
for radio or television broadcasting;
3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the
Philippines on the royalties paid by a company, being a resident of the Philippines,
registered with the Board of Investments and engaged in preferred pioneer areas of registered
with the Board of Investments and engaged in preferred pioneer areas of investment under
the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial
owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties.
work including cinematograph films and films or tapes for radio or television broadcasting,
any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or
the right to use, industrial commercial or scientific equipment, or for information concerning
industrial, commercial or scientific experience.
xxx xxx xxx"
Based on the above provision, royalty payments will be taxed at a preferential rate of ten percent
(10%), if the payor is a BOI-registered enterprise and engaged in preferred areas of investment; fifteen
percent (15) if the payments are in respect of the use of or right to use cinematograph films and films or
tapes for radio or television broadcasting; and in all other cases, twenty-five (25%) of the gross amount of
the royalties.
Considering that Yamashin Philippines is not a BOI-registered enterprise engaged in preferred

pioneer areas of investment and the subject royalties are not payments in respect of the use or right to use
cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion
and so holds that the said payments are royalty payments in consideration for information concerning
industrial, commercial or scientific experience and as such are subject to the preferential tax rate of 25%
of the gross amount of royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR
Ruling No. DA-ITAD-82-05 dated July 28, 2006)
As regards the imposition of VAT on royalties, Section 106 of the Tax Code of 1997, provides that:
"SEC. 106 1(47) . Value-added Tax on Sale of Goods or Properties. —
"(A) Rate and Based of Tax. — There shall be levied, assessed and collected
on every sale, barter or exchange of goods or properties, a value-added tax equivalent
to ten percent (10%) of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchange, such tax to be paid by the seller or
transferor.
"(1) The term 'goods or properties' shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:
xxx xxx xxx
"(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right; HTSAEa
xxx xxx xxx
"Special laws may certainly exempt transactions from the VAT 2(48) . However, the Tax
Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the
special law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
No. 7916 or PEZA Law, is particularly applicable to the instant case. AIECSD
Such being the case, the royalty payment of Yamashin Philippines, being an EPZA-registered
enterprise, now PEZA, to Yamashin Japan under the subject Agreement should be, as it is hereby
confirmed to be, exempt from VAT.
Very truly yours,
By:

Legal Service
Footnotes
1. Amended by Republic Act No. 9337, effective November 1, 2005, to read as follows:
xxx xxx xxx
"(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or
price or gross value in money of goods or properties sold, bartered or exchange, such tax to be paid by the
seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance,
xxx xxx xxx
"(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable
of pecuniary estimation and shall include:
xxx xxx xxx
"(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
xxx xxx xxx
9337].
September 27, 2006
Article 20, Philippines-Germany tax treaty;


75 Swaziland Street, Better Living Subdivision
1711 Parañaque City
Metro Manila, Philippines

Administrator
Gentlemen :
This refers to your letter dated February 7, 2000, requesting confirmation of your opinion that the
salaries and/or other remunerations received by a teacher engaged to teach in Deutsche Schule Manila
(German School Manila) (hereinafter, DSM) namely, Mr. Florian Rudolf Simmelbauer, for a period not
exceeding two (2) years, are exempt from Philippine taxation pursuant to Article 20 of the
Philippines-Germany tax treaty.
principal address at No. 75 Swaziland St., Better Living, Subd., Parañaque City; that Mr. Florian Rudolf
Simmelbauer was a resident of Germany before coming to the Philippines; that Mr. Florian Rudolf
Simmelbauer is engaged to teach at the European International School for the Deutsche Schule Manila for
the school year 2005-2008 from February 1, 2006 to January 31, 2008; and that his employment with the
school ends on the 31st of January 2008 without requiring a written termination of contract of resignation
and is renewable per agreement of both parties.
In reply, please be informed that Article 20 (Teachers and Researchers) of the Philippines-Germany
tax treaty provides as follows:
"Article 20
1. Remuneration which a professor or teacher, who is or immediately before was a resident of a

Contracting State and who visits the other Contracting State for a period not exceeding two
years for the purpose of carrying out advanced study or research or for teaching at a
university, college, school or other educational institution, receives for such work shall not
be taxed in that Contracting State.
2. This Article shall not apply to income from research if such research is undertaken not in the
general interest but primarily for the private benefit of a specific person or persons." DCSTAH
Based on the aforequoted provision, it is clear that the remuneration paid to the teachers, who are or
immediately before, were residents of Germany and who stay in the Philippines for the purpose of
teaching for a period not exceeding two years shall not be subject to Philippine income tax. In view
thereof, this Office is of the opinion and so holds that the subject remuneration of Mr. Florian Rudolf
Simmelbauer for teaching in DSM for a period not exceeding two (2) years shall not be subject to
Philippine income tax. (BIR Ruling No. DA-ITAD-85-05 dated August 23, 2005)
Very truly yours,
By:

Legal Service
September 27, 2006
Article 10, Philippines-Singapore Tax Treaty; Article 10,
Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD-26-06;
Fujitsu Ten Corporation of the Philippines

100 South Science Ave.
Laguna Technopark
Don Jose, Sta. Rosa, Laguna
Attention: Ms. Mary Jane H. Go

Accounting Dept. Manager
Gentlemen :
This refers to your application for relief from double taxation dated November 7, 2005, requesting
confirmation of your opinion that the dividends paid by Fujitsu Ten Corporation of the Philippines (FTCP)
are subject to the preferential tax rates of 10% and 15%, pursuant to the Philippines-Japan and
Philippines-Singapore tax treaties, respectively.
It is represented that Fujitsu Ten (Singapore) Pte., Ltd. (FTSL) is a nonresident foreign company
duly organized and existing under the laws of Singapore with office address at 20 Science Park, Road
#02-01/03, Teletech Park, Singapore Science Park II, Singapore 117674; that it is engaged in trading of
raw materials; that FTSL is not registered either as corporation or as a partnership in the Philippines per
Certification issued by the Securities & Exchange Commission dated August 22, 2005; that Fujitsu Ten
Limited. (FTL) is a nonresident foreign company duly organized and existing under the laws of Japan with
office address at 2-28 Gosho-Dori, 1-Chome, Hyogo-ku, Kobe, Japan; that FTL is not registered either as
corporation or as a partnership in the Philippines per Certification issued by the Securities & Exchange
Commission dated August 19, 2005; that FTCP is a corporation duly organized and existing under and by
virtue of the laws of the Philippines with office address at 100 South Science Ave., Laguna Technopark,
Don Jose, Sta. Rosa, Laguna, Philippines; that it is engaged in the manufacture of car audio and car
electronic products and is a Philippine Economic Zone Authority (PEZA) registered export enterprise
under Registration Certificate No. 01-063 dated October 29, 2001 issued by the PEZA.
It is also represented that FTCP has an authorized capital stock of Two Hundred Million Pesos
(PhP200,000,000.00) (divided into 2,000,000 common shares with a par value of PhP100 per share); that
out of such authorized capital stock, 1,300,000.00 shares have been subscribed by FTL, whose
stockholdings of 975,000 shares, with a total value of Ninety Seven Million Five Hundred Thousand Pesos
(P97,500,000.00), constitute seventy five percent (75%) of the total subscribed and paid up capital stock of
FTCP amounting to One Hundred Thirty Million Pesos (PhP130,000,000.00), and by FTSL, whose
stockholdings of 325,000 shares with a total value of Thirty Two Million Five Hundred Thousand Pesos
(PhP32,500,000.00) constitute twenty five percent (25%) of the total subscribed and paid up capital stock
of FTCP; that such stockholding of 325,000 shares is evidenced by a stock certificate issued to FTSL on
July 25, 1997; that on July 21, 2005, FTCP's Board of Directors declared cash dividends amounting to
Sixty Five Million Pesos (PhP65,000,000.00) out of the unappropriated retained earnings of Five Hundred
Thirty Million Three Hundred Twenty Nine Thousand One Hundred Sixty Nine Pesos
(PhP530,329,169.00) as of March 31, 2005, to be paid on or before August 31, 2005 to stockholders of
record as of July 21, 2005, at the rate of Fifty Pesos (PhP50.00) per share; that the amount of cash
dividends which pertains to FTL is Forty Eight Million Seven Hundred Fifty Thousand Pesos
(PhP48,750,000.00) and to FTSL, Sixteen Million Two Hundred Fifty Thousand Pesos
(PhP16,250,000.00); and that the issue/s or transaction subject of the above request for ruling is not under
investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance
of a tax credit certificate, collection proceedings nor a judicial appeal. DHaEAS
In reply, please be informed that dividends received by FTL and FTSL are subject to Philippine tax
as follows:
1. for FTSL
Article 10 of the Philippines-Singapore tax treaty provides as follows:
"Article 10
Dividends
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 State.
2. However, such dividends may be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the law of that State, but if the recipient
is the beneficial owner of the dividends the tax so charged shall not exceed:
(including partnership) and during the part of the paying company's taxable
year which precedes the date of payment of the dividend and during the
whole of its prior taxable year (if any), at least 15 per cent of the outstanding
shares of the voting stock of the paying company was owned by the recipient
company; and
b) in all other cases, 25 per cent of the gross amount of the dividends.
xxx xxx xxx
(4) The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or
jouissance rights, mining shares, founder's shares or other rights, not being debt-claims,
participating in profits, as well as income assimilated to income from shares by the taxation
law of the State of which the company making the distribution is a resident.
xxx xxx xxx"
Based on the aforequoted provisions, the 15% preferential tax rate on dividends applies whenever
the beneficial owner/recipient of the dividends owns at least 15% percent of the outstanding voting shares
of the paying company, which fifteen percent (15%) shareholdings should have existed during the part of
the paying company's taxable year immediately preceding the date of payment of the dividends and during
the whole of its prior taxable year, if any.
Since FTSL held 25% percent of the total outstanding capital stock of FTCP from July 25, 1997 as
evidenced by a stock certificate issued in favor of FTSL, dividends received by FTSL shall be subject to
the preferential tax rate of 15%, pursuant to Article 10(2)(a) of the Philippines-Singapore tax treaty. (BIR
Ruling No. DA-ITAD-26-06 dated March 16, 2006)
2. for FTL
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. ESDHCa
(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;
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
xxx xxx xxx"
dividends if the latter holds at least 25% either of the voting shares or of the total shares 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 July 21, 2005, FTL holds only 75% of the outstanding capital stocks of
FTCP, as shown in the Certification issued by the Corporate Secretary of FTCP dated August 17, 2005,
the dividends paid to FTL by FTCP are subject to 10% preferential tax rate pursuant to Article 10(2)(a) of
the Philippines-Japan tax treaty. (BIR Ruling No. 165-94 dated December 5, 1994)
Very truly yours,
By:
Legal Service
September 19, 2006
Sec 109 — National Internal Revenue Code 1997; Article III,

Section 10 — Vienna Convention on the Privileges and
Immunities of the Specialized Agencies of the United Nations
United Nations-World Food Programme (UN-WFP)

5th Floor, Jaka II Building
150 Legaspi Street, Legaspi Village
Makati City
Gentlemen :
This refers to your letter dated July 11, 2006, indorsed to this Office by the Department of Finance
(DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of
value-added tax (VAT) and ad valorem tax on the purchase of one (1) locally-produced motor vehicles, for
the official use of the United Nations-World Food Programme (UN-WFP), specifically described as
follows:
Make: Toyota Camry 2.4 V A/T
Model Year: 2006
Color: Quick Silver
Engine Number: 2AZ-2226612
Chassis Number: ACV30-9002175
(NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005 provides as follows:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws, except those under Presidential Decree No. 529;"
In relation, thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the
"Article III
xxx xxx xxx
Section 10
While the specialized agencies will not, as a general rule, claim exemption from excise duties
and from taxes on the sale of movable and immovable property which form part of the price to be
paid, nevertheless when the specialized agencies are making important purchases for official use of
property on which such duties and taxes have been charged or chargeable, States parties to this
Convention will, whenever possible, make appropriate administrative arrangements for the remission
or return of the amount of duty or tax.
"xxx xxx xxx"
Based on the above provisions, important purchases of goods and services in the Philippines for
official use of the specialized agencies of the United Nations (UN) are accorded exemption from indirect
taxes such as the VAT imposed under Section 107 of the NIRC.
Such being the case, and since the UN-WFP is a specialized agency of the UN 1(49), this Office is of
the opinion and so holds that aforementioned purchase of one (1) unit 2006 Toyota Camry 2.4 V A/T for
the official use of the UN-WFP, is exempt from ad valorem and value-added taxes.
United Nations Fund for Population Activities for its official use.
the herein parties are concerned. AScTaD
Very truly yours,
By:

Legal Service
Footnotes
1. VAT Ruling No. 146-90 dated May 24, 1990.
September 19, 2006
Arts. 5&7, Philippines-Japan tax treaty;

BIR Ruling No. DA-161-05;
VAT Ruling No. 004-04

20th Floor, Tower I, The Enterprise Center
6766 Ayala Avenue
1200 Makati City
Attention: Maria Victoria C. Españo

Tax Partner
Gentlemen :
This refers to your letter dated November 7, 2005 on behalf of your client, Ina Micro Opto
Corporation (IMO), requesting confirmation of your opinion that service fees paid by IMO to Masuda
Co., Ltd. (MCL) under the Management and Marketing Agreement are not subject to Philippine income
tax and to value-added tax (VAT), pursuant to the provisions of the Philippines-Japan tax treaty and the
National Internal Revenue Code of 1997 (Tax Code).
It is represented that MCL is a nonresident foreign corporation duly organized and existing under
the laws of Japan with office address at 6689-1 Miyada-Mura, Kamiina-Gun, Nagano-Ken, Japan; that it is
not registered either as a corporation or as a partnership in the Philippines per Certification of
Non-Registration issued by the Securities and Exchange Commission (SEC) dated December 15, 2005;
that, on the other hand, IMO is a corporation duly organized and existing under the laws of the Philippines
with office address at Mactan Economic Zone II, Basak, Lapu-Lapu City, Cebu; that IMO is registered
with the Philippine Economic Zone Authority (PEZA) with Certificate of Registration No. 00-007 dated
January 25, 2000.
It is further represented that, on April 1, 2004, MCL and IMO entered into a Management and
Marketing Service Agreement (Agreement) whereby MCL shall provide marketing and management
services to IMO in the following areas:
1. Administrative support, such as but not limited to the accounting, reconciliation and
administration of IMO's bank accounts maintained in Japan;
2. Support in the procurement and shipment of IMO's raw materials and supplies in and
their shipment in Japan;
3. Training of IMO's employees and managerial support in Japan;
4. Advertisement and promotion of the products manufactured by IMO in the Philippines

to potential clients in Japan and other countries outside the Philippines;
5. MCL may identify, contact and make presentations to potential buyers of IMO's
products;
6. MCL can participate in the initial stages of the negotiation of the terms and condition of
the contract by and between the potential buyer and IMO;
7. Development and maintenance of marketing strategies for IMO outside the Philippines;
and
8. Undertake such other incidental marketing services as may be required by IMO to

promote the latter's business in other countries;
that the above-described services shall in no case involve the transfer of MCL's technology, know-how or
other intellectual property rights; that the aforementioned services are to be performed in Japan or in other
countries outside the Philippines; that in case it would be necessary for MCL to send its employees to the
Philippines, the stay of these individuals in the Philippines shall not, in any case, exceed six (6) months;
that in consideration for the above services, IMO shall pay MCL a monthly fee of Three Million Five
Hundred Thousand Japanese Yen (JPY3,500,000) and a maximum of Five Million Japanese Yen
(JPY5,000,000) covering the period from April 1, 2004 to March 31, 2005; that thereafter, the monthly fee
shall be evaluated and agreed upon by IMO and MCL; and that the Agreement shall be subject to
automatic renewal for another twelve-month term unless one of the parties serves a written notice of
non-renewal to the other party not later than one (1) month prior to the expiration of the current term. DEcITS
In reply, please be informed that Article 7, and, in relation thereto, Article 5 of the
Philippines-Japan tax treaty provide that:
"Article 7
(1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting
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 that other Contracting State but only so much of
them as is attributable to that permanent establishment.
xxx xxx xxx"
"Article 5
(1) For the purposes of this Convention, the term 'permanent establishment' means a fixed place
of business through which the business of an enterprise is wholly or partly carried on.
(2) The term 'permanent establishment' includes especially:
(a) a store or other sales outlet;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a warehouse;
(g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources.
xxx xxx xxx
(6) An enterprise of a Contracting State shall be deemed to have a permanent establishment in

the other Contracting State if it furnishes in that other Contracting State consultancy
services, or supervisory services in connection with a contract for a building, construction or
installation project through employees or other personnel — other than an agent of an
independent status to whom paragraph (7) applies — provided that such activities continue
(for the same project or two or more connected projects) for a period or periods aggregating
more than six months within any taxable year. However, if the furnishing of such services is
effected under an agreement between the Governments of the two Contracting States
regarding economic or technical cooperation, that enterprise shall, notwithstanding any
provisions of this Article, not be deemed to have a permanent establishment in that other
Contracting State."
xxx xxx xxx"
Based on the abovementioned provisions and inasmuch as it has been represented that the services
will generally be performed by MCL outside the Philippines, and that if it be necessary to send its
employees to the Philippines, said employees will not stay in the Philippines for more than six months in
their rendition of services to IMO, MCL may be considered as not having a permanent establishment in the
Philippines. In other words, MCL is deemed not to have a permanent establishment for as long as its
employees do not stay in the Philippines for a period or periods aggregating more than six months in the
course of their rendition of services to IMO. Such being the case, the service fees to be paid by IMO to
MCL under Management and Marketing Agreement are not subject to Philippine income tax.
However, the service fees paid by IMO for the portion of the services to be rendered in the
Philippines are subject to VAT pursuant to Section 108 of the Tax Code 1(50). Accordingly, IMO, being the
resident withholding agent and payor in control of payment shall be responsible for the withholding of the
final VAT on such fees before making any payment to MCL. In remitting the VAT withheld, IMO 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 IMO if it
is a VAT-registered taxpayer. In case IMO 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, IMO is required to issue the Certificate of Creditable Tax Withheld at Source
(BIR Form No. 2307) in quadruplicate, the first three copies thereof be given to MCL and the fourth copy
to be retained by IMO. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No.
8-2002; Section 7 of RR No. 14-2002)
This ruling is issued on the basis on the facts as represented. However, if upon investigation it shall
herein parties are concerned. TIADCc
Very truly yours,
By:

Legal Service
Footnotes
1. Section 108 was amended by Republic Act No. 9337, which was signed into law on May 24, 2005 and
became effective on November 1, 2005, to read as:
A. Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipt derived from the sale or exchange of services, including the
use or lease of properties selling price of 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
percent (1 1/2%)
xxx xxx xxx
September 19, 2006
Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34,
Vienna Convention on Diplomatic Relations
Embassy of the Republic of Singapore

35th Floor Tower 1, The Enterprise Center
6766 Ayala Avenue, Makati City
Attention: Mr. Yogaindran Yogarajah

Counsellor
Gentlemen :
This has reference to your Note No. 06-1859 dated August 1, 2006 referred to this Office by the
vehicle, for the personal use of Mr. Yogaindran Yogarajah, Counsellor of the Embassy of the Republic of
Singapore, specifically described as follows:
Make: Toyota Innova G Diesel 2.5 M/T
Model Year: 2006
Color: Light Green Mica Metallic
Chassis Number: KUN40-5010974
reads:
"ARTICLE 34
A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional
or municipal, except:
(a) indirect taxes of a kind which are normally incorporated in the price of goods or services;
xxx xxx xxx"
Internal Revenue Code of 1997. DISaEA
of the Republic of Singapore and/or its personnel on their purchases of locally-assembled motor vehicles it
Government allows similar exemption to Philippine Embassy and its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2006 Toyota Innova G Diesel M/T for the personal use
of Mr. Yogaindran Yogarajah, Counsellor of the Embassy of the Republic of Singapore is exempt from
value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-057-01 dated July 2, 2001)
Very truly yours,

Legal Service
September 19, 2006
Article 34, Vienna Convention on Diplomatic Relations
Embassy of Switzerland
24/F Equitable Bank Tower
8751 Paseo de Roxas
Makati City
Attention: Ms. Irene Fluckiger
Counsellor/Deputy Head of Mission
Gentlemen :
This has reference to your Note No. 93/2006 dated August 7, 2006 referred to this Office by the
vehicle, for the personal use of Ms. Irene Fluckiger, Counsellor/Deputy Head of Mission of the Embassy
of Switzerland, specifically described as follows:
Make: Honda CRV 4X4 2.4L A/T
Model Year: 2006
Color: Night Hawk Black
Engine Number: RRMD55-6400537
reads:
"ARTICLE 34
xxx xxx xxx"
Internal Revenue Code of 1997. HEASaC
of Switzerland and/or its personnel on their purchases of locally-assembled motor vehicles it appearing
from the list submitted by the Department of Foreign Affairs as of October 18, 2005 that your Government
allows similar exemption to the Philippine Embassy and its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2006 Honda CRV 4X4 2.4L A/T for the personal use of
Ms. Irene Fluckiger, Counsellor/Deputy Head of Mission of the Embassy of Switzerland is exempt from
value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-18-05 dated March 18, 2005)
Very truly yours,

Legal Service
September 19, 2006
Article 10, Philippines-Japan tax treaty; BIR Ruling No.

DA-ITAD 063-01
MIYASAKA Polymer (Phils.), Inc.

20 Ampere Street, Light Industry &
Science Park of the Philippines (LISPPI)
Brgy. Diezmo, Cabuyao, Laguna
Philippines
Attention: Mr. Hiroki Itoh
Gentlemen :
This refers to your application for relief from double taxation dated April 17, 2006, on behalf of
Miyasaka Polymer (Phils.), Inc. (Miyasaka Phils), requesting for a preferential tax rate of ten percent
(10%) to be withheld on dividend remittances to Miyasaka Robber Co., Ltd. (Miyasaka Japan), pursuant to
the Philippines-Japan tax treaty.
It is represented that Miyasaka Japan with office address at 5350 Toyohira Chino-shi, Nagano-ken,
Japan and whose nature of business is the manufacture and sales of industrial rubber parts, is a resident of
Japan for tax purposes under Tax Reference Number 0621269 per Certificate of Status of Taxable Person
issued by the District Director of the Suwa Tax Office, Japan dated March 24, 2006; that it is not
registered either as a corporation or as a partnership per certification dated April 6, 2006 issued by the
Securities and Exchange Commission; that Miyasaka Phils is a corporation organized and existing under
the laws of the Philippines with office address at 20 Ampere Street, Light Industry & Science Park of the
Philippines (LISPPI), Brgy. Diezmo, Cabuyao, Laguna, Philippines.
It is further represented that Miyasaka Japan is the registered and the legal owner of One Million
Seven Hundred Forty Nine Thousand Nine Hundred Ninety Five (1,749,995) shares of stock representing
99.99% percent of the outstanding capital stock of Miyasaka Phils; that during the special meeting of the
stockholders of Miyasaka Phils held on March 10, 2006 it was resolved that Miyasaka be authorized to
declare a cash dividend for the period covering the fiscal year ending December 31, 2005 in the amount of
Eight Million Seven Hundred Fifty Thousand Pesos (P8,750,000.00) to be distributed in favor of all its
stockholders of record on July 1, 2006 in proportion to their respective equity holdings in the Corporation
as evidenced by its Corporate Secretary's Certificate dated March 16, 2006; and that Miyasaka Japan has
been holding the said shares of stock as of December 31, 2005. HSDaTC
In reply, please be informed that Article 10 of the Philippines-Japan Tax Treaty provides, viz:
"ARTICLE 10

company paying the dividends is a resident, and according to the laws of that Contracting State, but if
a) 10 per cent of the gross amount of the dividends if the beneficial owner is a
The provisions of this paragraph shall not affect the taxation of the company in respect of the
profits out of which the dividends are paid.
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"
It is clear under paragraph 2 above that a resident of Japan may avail of the preferential tax rate of
10% if such resident, which is the beneficial owner of the dividends, is a company holding at least 25%
either of the voting shares or of the total shares of the payor of the dividends during the period of six
months immediately preceding the date of the payment of the dividends.
In view thereof and since Miyasaka Japan holds directly 99.99% of the voting shares of Miyasaka
Phils for a period of six months before the latter declared dividends, said dividends to be paid by Miyasaka
Phils to Miyasaka Japan are subject to the 10% preferential withholding tax rate pursuant to the
Philippines-Japan tax treaty. (BIR ITAD Ruling No. 063-01 dated July 31, 2001)
This ruling is issued based on the foregoing 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. TcEaAS

Legal Service
September 15, 2006
Sec. 109 — National Internal Revenue Code 1997; Article

III, Section 10 — Vienna Convention on the Privileges and
Immunities of the Specialized Agencies of the United
Nations; BIR Ruling No. DA-ITAD-01-04
Food and Agriculture Organization of

the United Nations (FAO/UN)
29th Floor, Yuchengco Tower
RCBC Plaza 6819 Ayala Avenue
Makati City
Gentlemen :
This refers to your letter dated June 29, 2006, indorsed to this Office by the Department of Finance
(DOF) and the Department of Foreign Affairs (DFA), requesting exemption from payment of value-added
tax (VAT) and ad valorem tax on the purchase of one (1) locally-purchased motor vehicle, for the official
use of the Food and Agriculture Organization of the United Nations (FAO/UN), specifically described as
follows:
Make: Toyota Innova J. Diesel
Model Year: 2006
Color: Quick Silver
(NIRC), as amended by Section 7 of Republic Act No. 9337 which took effect on November 1, 2005,
provides as follows:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws, except those under Presidential Decree No. 529;
xxx xxx xxx" (Emphasis supplied)
In relation thereto, the November 2, 1977 letter of Ambassador Carlos J. Valdes to Director General
Edouard Saouma of the Food and Agriculture Organization, which is part of the Exchange of Letters
constituting the Agreement between the Government of the Republic of the Philippines and FAO,
provides:
"I have the honor to refer to the proposed appointment of an FAO representative to the
Philippines and the establishment of his office.
In this connection, we would like to present for your concurrence the following revised terms
and conditions . . .
To the extent that it is not already bound to do so, the Government agrees to apply to the
Organization, its staff, funds, property and assets, the provisions of the Convention on the Privileges
and Immunities of the Specialized Agencies. The FAO Representative shall be accorded the treatment
provided for in Section 21 of the said Convention. The Government also agrees to grant FAO, and to
the FAO Representative and his staff, privileges and immunities not less favourable than those
granted to a representative of any other specialized agency or similar United Nations body in the
Philippines. ICESTA
xxx xxx xxx"
Accordingly, Section 10, Article III of the Convention on the Privileges and Immunities of the
"Article III
xxx xxx xxx
Section 10
While the specialized agencies will not, as a general rule, claim exemption from excise duties
and from taxes on the sale of movable and immovable property which form part of the price to be
paid, nevertheless when the specialized agencies are making important purchases for official use of
property on which such duties and taxes have been charged or chargeable, States parties to this
Convention will, whenever possible, make appropriate administrative arrangements for the remission
or return of the amount of duty or tax.
"xxx xxx xxx"
taxes such as the ad valorem tax and VAT imposed under Section 107 of the NIRC.
In view of the foregoing, this Office is of the opinion and so holds that aforementioned purchase of
one (1) unit 2006 Toyota Innova J. Diesel, for the official use of the FAO/UN, is exempt from VAT,
pursuant to the Agreement between the Government of the Philippines and the Convention on the
Privileges and Immunities of the Specialized Agencies of the United Nations.
Food and Agriculture Organization of the United Nations for its official use.
herein parties are concerned. cEAIHa
Very truly yours,
By:

Legal Service
September 11, 2006
Sec 106 & 108, Sec 149 of the Tax Code 1997; Article 34,
Vienna Convention on Diplomatic Relations
Embassy of the People's Republic of China
4896 Pasay Road,
Dasmariñas Village
Makati City
Attention: Mr. Huang Li

Attaché
Gentlemen :
This has reference to your Note No. (06)PG-206 dated August 3, 2006 referred to this Office by the
vehicle, for the personal use of Mr. Huang Li, Attaché of Embassy of the People's Republic of China,
Make: Mazda3 1.6 L S
Model Year: 2006
Color: Techno Gray
Engine Number: AT8712
Chassis Number: PE3BVSV161ZG00897
reads:
"ARTICLE 34
xxx xxx xxx"
Internal Revenue Code of 1997.
of the People's Republic of China and/or its personnel on their purchases of locally-assembled motor
vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005
and as confirmed by the Office of the Protocol (DFA) in its Indorsement letter dated October 17, 2005,
that your Government allows similar exemption to Philippine Embassy and its personnel on their purchase
of locally-assembled motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2006 Mazda3 1.6 L S for the personal use of Mr.
Huang Li, Attaché of the Embassy of the People's Republic of China is exempt from value-added tax and
ad valorem tax. (BIR Ruling No. DA-ITAD-54-06 dated May 11, 2006)
herein parties are concerned. IEcDCa
Very truly yours,

Legal Service
September 12, 2006
DFA Indorsement dated September 7, 2006;

NICA letter dated February 21, 2006
Embassy of the Hashemite Kingdom of Jordan

Tokyo, Japan
Attention: Mr. Ali Mahmoud Ali-Al-Wishah

First Secretary
Gentlemen :
This has reference to your Note No. PH/2/365 dated June 6, 2006 referred to this Office by the
immunities and Privileges Division, Office of Protocol of the Department of Foreign Affairs (DFA),
requesting for the issuance of value added tax (VAT) exemption certificate for Mr. ALI MAHMOUD
ALI-AL-WISHAH, First Secretary of the Embassy of Jordan.
In reply, please be informed of Article 34 of the Vienna Convention on Diplomatic Relations,

pertinent portion of which reads:
"ARTICLE 34
"xxx xxx xxx"
from value added tax (VAT) and ad valorem taxes on their local purchases of goods and services. In other
words, purchases by that Embassy of goods and/or services shall generally be subject to the value added
tax prescribed under Sections 106 and 108, of the National Internal Revenue Code of 1997, as amended.
However, applying the principle of reciprocity, this Office may confirm entitlement to VAT
exemption of an Embassy and/or its personnel on their local purchases of goods and/or services if it
appears from the list submitted by the DFA that the Government of such Embassy or personnel allows
similar exemption to Philippine Embassy personnel on their purchase of goods and services in its country.
We note that the Hashemite Kingdom of Jordan has no Embassy in the Philippines. Nevertheless,
the DFA issued favorable endorsement of Mr. Ali Mahmoud Ali-Al-Wishah's request addressed to this
Office, dated September 7, 2006. In this indorsement, the DFA stated: "The Office of Protocol and State
Visits has the honor to request for the issuance of Value-added Tax Certificate in favor of Mr. Ali
Mahmoud Wishah, First Secretary of the Embassy of Jordan. In this regard, the Department received a
letter from National Intelligence Coordinating Agency (NICA) that this special arrangement between the
Philippines and Jordan was a product of the discussion between then Crown Prince Abdullah of Jordan
and her Excellency President Gloria Macapagal Arroyo sometime in early 2002. Furthermore, the grant of
VAT exemption privilege to the Jordanian Diplomat and his wife has been cleared by the Office of the
Secretary, Department of Foreign Affairs."
Furthermore, the February 21, 2006 letter of Director General Cesar P. Garcia, Jr. of the NICA,
Office of the President, stated that Mr. Virgilio Lacaba, our Filipino Liaison Officer in Jordan has been
issued a tax exemption certificate. In view thereof, this Office is of the opinion and so holds that the grant
of VAT exemption privileges in the instant case is in place.
Hence, Mr. ALI MAHMOUD ALI-AL-WISHAH, First Secretary of the Embassy of The Hashemite
Kingdom of Jordan is exempt from value added tax on his purchases of local goods and/or services. SHECcT
Very truly yours,

Commissioner
August 30, 2006
Article 11, Philippines-Japan, Philippines-Germany and

Philippines-Netherlands Tax Treaties; BIR Ruling No. DA-ITAD
195-03; BIR Ruling No. DA-ITAD 99-05; BIR Ruling No. 32-05;

6760 Ayala Avenue
1226 Makati City
Attention: C.P. Noel

Vice Chairman and
Deputy Managing Partner
Gentlemen :
This refers to your letter dated November 14, 2005 and February 23, 2006 requesting tax treaty
relief for the Nippon Export and Investment Insurance (NEXI) Loan Facility of STEAG State Power, Inc.
(SPI).
It is represented that SPI, (formerly, State Power Development Corporation as evidence by the
attached copy of its Certificate of Filing of Amended Articles of Incorporation), is a corporation organized
and existing under the laws of the Philippines with office address at 20/F Yuchengco Tower, RCBC Plaza,
6819, Ayala Avenue, Makati; that SPI and National Power Corporation (NAPOCOR) executed a Power
Purchase Agreement (PPA) on June 27, 1998, as amended, whereby SPI agreed to build, operate and
transfer to NAPOCOR a 200 MW coal-fired power plant, otherwise known as the Mindanao Power
Project ("Project") located at the Phividec Industrial Estate in Misamis Oriental, Mindanao; that under the
terms of the PPA, SPI will construct the power station and operate the same during an agreed cooperation
period of twenty-five (25) years ("Cooperation Period"); that the Project costs are currently estimated at
about US$305,000,000, which is funded by 75% debt and 25% equity; that on November 28, 2003, for
purposes of financing the said Project, SPI (as the Borrower) entered into an Omnibus Agreement, with
JBIC and commercial bank lenders, guaranteed by NEXI (as Lenders), which consists as follows:
A. Tranche A or the JBIC Loan Facility will be financed by the JBIC, an entity wholly owned
by the government of Japan in the amount of $60,600,000.00;
B. Tranche B or the NEXI Loan Facility will be financed by commercial banks/lenders and will
benefit from an Extended Political Risk Insurance ("Extended PRI") or guarantee to be
provided by NEXI, a Japanese export credit agency or financial institution, the capital of
which is wholly-owned and fully funded by the Japanese government through which
Ministry of Economy, Trade and Industry of Japan (METI) transferred some of its services
including trade insurance service, export credit agency and investment insurance service.
It is further represented that among the commercial banks/lenders under the NEXI Facility are
branch offices of Bayerische Hypo-und Vereinsbank AG (HVB-Germany), ING Bank N.V.
(ING-Netherlands) and UFJ Bank Limited Facility will enjoy the Extended PRI or guarantee of NEXI; that
Bayerische Hypo-und Verinsbank is a resident of Germany and is subject to corporate income tax of
Germany with tax identification number 800/82007 as shown in the Certificate of Residence issued by the
Tax Authority of Germany on July 5, 2005; that ING Bank N.V. is a nonresident corporation duly
organized and existing under the laws of The Netherlands with registered office in Amsterdam as
evidenced by its Articles of Association; that UFJ is a Japanese commercial bank with principal office
located in Nagoya, Japan; that the abovementioned international commercial banks are not registered
either as corporations or as partnerships in the Philippines as confirmed by the Certificates of
Non-Registration, all dated March 17, 2005 issued by the Securities and Exchange Commission. HCATEa
Finally, it is represented that under the terms of the JBIC and NEXI Loan Facilities, SPI will pay
interest to JBIC and the abovementioned commercial banks; that SPI will also pay service fees, namely,
Intercreditor Fee, JBIC Facility Agency Fee and the Lead Arranger Front End Fee to HVB, a non-resident
German commercial bank, for performing services as the appointed agent of the JBIC and NEXI Loan
Facility and for arranging the said credit facilities; and that the services of HVB as the appointed agent of
JBIC and NEXI Loan Facilities are being performed entirely outside the Philippines as well as its services
as the lead arranger of the said facilities.
Based on the foregoing, you request confirmation that:
(1) The interest income derived by Japan Bank for International Cooperation (JBIC) under the
JBIC Loan Facility arranged with Steag State Power, Inc. (SPI), is exempt from Philippine
income tax and consequently from withholding tax pursuant to Article 11(4)(a) of the
Philippines-Japan tax treaty;
(2) The interest payments derived by UFJ Bank, Limited (UFJ) from SPI under the NEXI Loan
Facility are also exempt from Philippine income tax pursuant to Article 11(4)(a) of the
Philippines-Japan tax treaty; and
(3) That the Philippines-Germany and Philippines-Netherlands tax treaties will apply to the
respective interest income that would be derived by HBV-Germany and ING-Netherlands in
the Philippines under the NEXI Loan Facility.
In reply, please be informed as follows:
1. On INTEREST on Tranche A or the JBIC Loan Facility
Article 11 of the Philippines-Japan tax treaty provides:
"Article 11
of the Government securities, or bonds or debentures;
xxx xxx xxx
3. Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a Contracting
State and derived by the Government of the other Contracting State including political
subdivisions and local authorities thereof, the Central Bank of that other Contracting State or
any financial institution wholly owned by that Government, or by any resident of the other
Contracting State with respect to debt-claims guaranteed or indirectly financed by the
Government of that other Contracting State including political subdivisions and local
authorities thereof, the Central Bank of that other Contracting State or any financial
institution wholly owned by that Government shall be exempt from tax in the
first-mentioned Contracting State.
For the purposes of this paragraph, the term 'financial institution wholly owned by the
Government' means:
a) In the case of Japan, the Export-Import Bank of Japan, the Overseas

Economic Cooperation Fund and the Japan International Cooperation
Agency;
b) In the case of the Philippines, the Development Bank of the Philippines; and
c) Any such financial institution the capital of which is wholly owned by the
Government of either Contracting State, other than those referred to in
subparagraphs (a) and (b) above, as may be agreed from time to time between
the Governments of the two Contracting States.
whether or not secured by mortgage and whether or not carrying a right to participate in the
debtor's profits, and in particular, income from Government securities and income from
bonds or debentures, including premiums and prizes attaching to such securities, bonds or
debentures.
xxx xxx xxx"
Based on the foregoing provisions, interest arising in the Philippines and derived by the
Government of Japan or any financial institution wholly owned by Japan, specifically the Overseas
Economic Cooperation Fund (OECF) and the Japan Cooperation Agency (JICA), shall be exempt from
income tax in the Philippines.
Considering that in BIR Ruling No. DA-ITAD 21-99 dated August 24, 1999, the JBIC was
recognized as a financial institution wholly owned by the Government of Japan when it took over the
factions of the OECF, which was dissolved as of the date of establishment of the JBIC, this Office is of the
opinion and so holds that the interest income derived by the JBIC from the JBIC Loan Facility it executed
with SPI is exempt from Philippine income tax pursuant to the Philippines-Japan tax treaty. (BIR Ruling
No. DA-ITAD 195-03 dated December 23, 2003)
2. On INTEREST on Tranche B or the NEXI Loan Facility
Pursuant to Article 11(4)(c) of the Philippines-Japan tax treaty, interest derived by other residents
of Japan will qualify for exemption from income tax provided it is arising from a debt claim that is
guaranteed or indirectly financed by the Japanese Government or any financial institution wholly owned
by the same and qualified entities referred to under the said treaty. Considering that NEXI is a Japanese
export credit agency, the capital of which is wholly owned and fully funded by the Japanese government
(as per letter dated may 17, 2004 of Mr. Masatsugu Asakawa, Director, International Tax Policy Division,
Ministry of Finance Japan), this Office is of the opinion and so holds that the interest income received by
UFJ-Japan from SPI on a loan guaranteed by NEXI is exempt from Philippine income tax and
consequently from withholding tax (BIR Ruling NO. DA-ITAD 164-05 dated December 22, 2005)
As regards the interest payments received by the branch office of HVB-Germany from SPI on the
loan guaranteed by NEXI, Article 11 of the Philippines-Germany tax treaty provides:
"Article 11
INTEREST
according to the law of that State, but the tax so charged shall not exceed;
a) 10 per cent if such interest is paid:
(i) in connection with the sale on credit any industrial, commercial or

b) 15 per cent of the gross amount of such interest in all other cases
xxx xxx xxx
participate in profits, and debt-claims of every kind as well as all other income from money
lent by the taxation of the State from which the income is derived.
xxx xxx xxx."
Based on the foregoing, and since the interest income derived by HVB-Germany in the Philippines
from the subject loan and paid to it by SPI is not in connection with any sale on credit of any industrial,
commercial or scientific equipment or paid on any loan of whatever kind granted by a bank, or any other
financial institution, or paid in respect of public issues of bonds debentures or similar obligations the same
is subject to the preferential tax rate of 15 per cent of the gross amount of the interest under paragraph
(2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No. 32-05 dated April 13, 2005) EHDCAI
Moreover, as regards interest income received by ING-Netherlands, Article 11 of the

Philippines-Netherlands tax treaty provides:
"Article 11
INTEREST
1. Interest arising in one of the States and paid to a resident of the other State may be taxable in
that other State.
2. However, such interest may be taxed in the State in which it arises and according to the laws
of that State, but if the recipient is the beneficial owner of the interest the tax so charged
shall not exceed:

institution.
b) 25 per cent of the gross amount of the interest in all other cases
xxx xxx xxx
profits, and debt-claims of every kind as well as all other income assimilated to income from
money lent by the taxation of the State in which the income arises. Penalty charges for late
payment shall not be regarded as interest for the purpose of this Article.
xxx xxx xxx."
Based on this, the interest income derived by ING-Netherlands in the Philippines do not fall under
the instances enumerated in Article 11(2)(a) of the Philippines-Netherlands that treaty since the interest to
be paid by SPI are not in connection with any sale on credit of any industrial, commercial or scientific
equipment or paid on any loan of whatever kind granted by a bank, or any other financial institution, or
paid in respect of public issues of bonds, debentures or similar obligations. Therefore, the interest income
of ING-Netherlands from the subject loan is subject to the preferential tax rate of 15 per cent of the gross
amount of the interest. (BIR Ruling No. 32-05 dated April 13, 2005)
Lastly, the Omnibus Agreement executed by SPI and JBIC and the commercial bank lenders
guaranteed by NEXI is subject to documentary stamp tax imposed under Section 179 of the Tax Code of
1997, as amended. cIADaC
Very truly yours,
By:

Legal Service
August 29, 2006

Philippines-United States of America tax treaty; BIR Ruling No.
14-06
Regalado Bautista & Menzon Law Offices

Ortigas, Pasig City.

Gentlemen :
This refers to your letter dated June 29, 2006 requesting a ruling on the tax implication of the
purchase of software by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from
Wind River Systems International Inc. pursuant to Article 8 in relation to Article 5 of the
Philippines-United States of America (US) tax treaty.
It is represented that Wind River Systems International Inc., a corporation which was formed or
incorporated in the United States of America is registered in Singapore as Wind River Systems
International Inc.-Singapore Branch (hereinafter, Wind River) per Certificate of Registration of Foreign
Company issued by Mrs. Ng-Lou Geok Choo, Assistant Registrar of Companies and Businesses,
Singapore; that Wind River office is located at 1, International Business Park, #03-01C, Tower Block, The
Synergy, S'pore 609917, Singapore; that Wind River is not registered either as a corporation or as a
partnership in the Philippines, as confirmed by the Certification of Non-Registration of
Corporation/Partnership dated August 9, 2006 issued by the Securities and Exchange Commission; that
Canon-Philippines is a corporation duly organized and existing under the laws of the Philippines with
office address at 2nd Floor Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is
engaged in the business of hardware design and software development involving imaging, communications
and related technologies.
It is further represented that Canon-Philippines purchased the Annual Support and Maintenance of
Tornado and Annual Support and Maintenance for VxWorks OEM License as renewal from Wind River;
that as part of the software support and maintenance services agreement, maintenance services shall
include the following:
1) Periodic maintenance releases; aDHCEA
2) Periodic patch release;
3) Customer support through Central Support and Field Support;
4) Access to windsurf web support site, Wind River's 24-hour online support, providing access
to known problems lists, frequently asked questions (FAQs), online publications, and
knowledge-based services;
5) Notification service for changes in product functionality or company information;
6) Proactive Alerts: Automatic reporting of changes to TSR/SPR status;
7) 1 to 1 exchange for hardware while on repair.
That all the software and training material delivered to Canon-Philippines under the Wind River Systems,
Inc. Software Support and Maintenance Services Agreement and any modification thereto shall be owned
by Wind River; and that the consideration for the purchase of the software shall be $1,104.00 for the
Annual Support and Maintenance for Tornado and $2,199.00 for Annual Support and Maintenance for
VxWorks OEM License.
In reply please be informed that Article 8 in relation to Article 5 of the Philippines-US tax treaty
provides:
"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"
"Article 5
of business through which a resident of one of the Contracting States engages in a trade or
business.
b) A branch;
c) An office;
d) A store or other sales outlet; aIcDCT
e) A factory;
f) A workshop;
g) A warehouse;
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 more than 183 days; and

days.
xxx xxx xxx."
Based on the foregoing, in order for Wind River to be considered to have a permanent
establishment to which said business profit may be attributed, it must satisfy the following conditions 1(51):
- the existence of a "place of business", i.e., a facility such as premises or, in certain instances,
- this place of business must be "fixed", i.e., it must be established at a distinct place with a
- the carrying on of the business of the enterprise through this fixed place of business. This
(personnel) conduct the business of the enterprise in the State in which the fixed placed is
Since it appears, based on the SEC Certificate that Wind River is not registered either as a
corporation or as a partnership in the Philippines and that Wind River does not have a place of business at
its disposal which is fixed or established at a distinct place with a certain degree of permanence in the
Philippines through which it may use for carrying on its business, Wind River is deemed as not having a
permanent establishment to which said business profit may be attributed to.
Thus, for as long as Wind River is deemed not to have a permanent establishment in the Philippines
to which profits may be attributable, income from its sale of software or services, such as that made to
software and is subject to value-added tax (VAT) under Section 107 of the NIRC, as amended by Republic
Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Cannon-Philippines being
the direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12%
from its payments before it telegraphically transfers it to the account of the Wind River.
With regard to the procedures for withholding and paying the VAT, pursuant to 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, Canon-Philippines shall be responsible for the withholding of the 10
percent/(12 percent effective February 1, 2006) VAT on the license fee before remitting it to Wind River.
In remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use
BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a
VAT-registered taxpayer, Canon-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, Canon-Philippines may include as part of the cost of the services provided
to it by Wind River the VAT consequently shifted or passed on it and may treat such VAT either as
expense or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in
three copies for Wind River and the fourth copy for Canon-Philippines as its file copy. ECTIHa
Very truly yours,
By:

Legal Service
Footnotes
85-91.
August 28, 2006
Article 11 & 12, Philippines-Japan tax treaty;

Nihon Garter Philippines, Inc.

Lot 12 Block 8, Cavite Economic Zone
Rosario, 4106 Cavite, Philippines
Attention: Mr. Tsunehiro Takami

VP/General Manager
Gentlemen :
This refers to your letter dated April 19, 2005, requesting confirmation that the "Goodwill charges",
which constitute royalties, and the interest payments made by your company to your parent company,
Nihon Garter Co., Ltd. (Nikon-Japan), are subject to ten percent (10%) and fifteen percent (15%) income
tax, respectively, pursuant to the Philippines-Japan tax treaty.
It is represented that Nihon-Japan is a nonresident foreign corporation duly organized and existing
under the laws of Japan with office address at 5-13, Imai 3-Chome, Ome-shi, Tokyo, Japan and is a
resident of Japan within the meaning of the Tax Convention between Japan and the Philippines, as
certified by the District Director of the Ome Tax Office on April 27, 2005; that it is not registered either as
a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange
Commission dated April 29, 2005; that Nihon Garter Philippines, Inc. (Nihon-Phil) is a corporation duly
organized and existing under the laws of the Philippines with office address at Lot 12, Blk 8, Main Ave.,
Rosario, Cavite; that it was registered with the then Export Processing Zone Authority (EPZA), now
Philippine Economic Zone Authority (PEZA) as a Zone Export Enterprise under Registration Certificate
No. 89-024 dated June 30, 1989.
It is further represented that on March 17, 2003, Nihon-Japan and Nihon-Phil entered into a
Memorandum of Loan Agreement wherein Nihon-Japan and Nihon-Phil agreed that the balance of the
trade credit of Nihon-Phil amounting to Seventy-Five Million Yen (Y75,000,000) be converted to Ten (10)
Year Term Loan; that the said loan has interest rate of 3 percent (3%) per annum, payable in forty (40)
equal quarterly amortizations and shall be paid per schedule of payment attached to the Agreement, with
the first quarterly amortization commencing on May 31, 2003 and on or before the first day of the
succeeding quarter for the year thereafter, until the loan shall have been fully paid. TDEASC
In addition, it is represented that on March 2005, Nihon-Japan and Nihon-Phil entered into a
Memorandum of Agreement wherein, upon written request of Nihon-Phil, Nihon-Japan shall provide
Nihon-Phil the following marketing support services:
(a) Souring of Slit PS Sheets, cover tapes and reels and manufacturing equipment;
(b) Promotion of Nihon-Phil and its products (including embossed plastic carrier tapes) in
world-wide trade chambers;
(c) Providing business development and leads pertaining to potential customers in Asia,
negotiation with buyers and suppliers;
(d) Procuring materials, equipment and allied services needed by Nihon-Phil; and
(e) Development and printing information materials, brochures, and other promotional
materials;
that Nihon-Japan shall provide the foregoing services outside the Philippines; that Nihon-Japan shall bill
Nihon-Phil annually depending on the extent of the work to be performed at a rate mutually agreed upon
prior to Nihon-Japan's performance of any marketing support services, provided that the amount shall not
exceed to Y3,000,000.00 in each month; that the said Memorandum of Agreement shall take effect on
April 1, 2005 and shall continue unless terminated by prior written sixty-day notice by one party to the
other.
In reply, please be informed that interest income and royalty payments received by Nihon-Japan are
subject to Philippine income tax as follows:
1. One the Memorandum of Loan Agreement
Article 11 of the Philippines-Japan tax treaty provides, viz:
"Article 11
may be taxed in that other Contracting State. IDaCcS
a) 10 percent of the gross amount of the interest if the interest is paid in respect
xxx xxx xxx
whether or not secured by mortgage and whether or not carrying a right to participate in the
debtor's profits, and in particular, income from Government securities and income from
bonds or debentures, including premiums and prizes attaching to such securities, bonds or
debentures.
xxx xxx xxx"
Based on the above, the preferential tax rate to be withheld by Nihon-Phil on its interest payments
to Nihon-Japan under their Memorandum of Loan Agreement shall be fifteen percent (15%) of the gross
amount of the interest since it is not paid in respect of Government securities or bonds and debentures.
Moreover, file Memorandum Loan Agreement between Nihon-Japan and Nihon-Phil dated March
17, 2003 is subject to (a) documentary stamp tax imposed under Section 180 of the National Internal
Revenue Code (NIRC) of 1997 at a rate of Thirty Centavos (P0.30) on each of Two Hundred Pesos
(P200), or fractional part thereof, of the face value of such contract.
2. On the Memorandum of Agreement for services
Article 12 of the Philippines-Japan tax treaty provides, viz:
"Article 12
the royalties the tax so charged shall not exceed. AaITCH
a) 15 percent of the gross amount of the royalties if the royalties are paid in
b) 25 per cent of the gross amount of royalties in all other cases
registered with the Board of Investment and engaged in preferred pioneer areas of
investment under the investment incentives laws of the Philippines to a resident of Japan,
who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount
of the royalties.
work including cinematography films and films or tapes for radio or television broadcasting,
the right to use, industrial, commercial or scientific equipment, or for information
concerning industrial, commercial or scientific experience.
xxx xxx xxx"
Based on the aforequoted provisions, royalties paid by a resident of the Philippines to a resident of
Japan may be taxed at a rate not exceeding 10% of the gross amount of the royalties if the payor is a Board
of Investments (BOI)-registered enterprise engaged in preferred pioneer areas of investment, 15% if it is
paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or
television broadcasting, and 25% in all other cases.
Such being the case, this Office is of the opinion and so holds that since Nihon-Phil is not a
BOI-registered enterprise engaged in preferred pioneer areas of investment, and that the subject royalty
payments are not paid in respect of the use of or the right to use cinematograph films and films or tapes for
radio or television broadcasting, said royalty payments made by Nihon-Phil to Nihon-Japan under the
above Agreement shall be subject to Philippine income tax at a rate of 25% of the gross amount of the
royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No.
DA-ITAD-40-05 dated May 9, 2005)
As regards the imposition of the VAT on the rendition of services of Nihon-Japan, please be
informed further that Section 108 of the NIRC of 1997 1(52) provides as follows, to wit:
''SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —
including the use of lease of properties. AHSEaD
the Philippines for others for a fee, remuneration or consideration. . . . (Emphasis supplied).
Thus, in general, the VAT should be imposed when Nihon-Japan provides the above services in the
Philippines "for short durations and in no case shall exceed on aggregate of 3 months in any given
calendar year". Nihon-Phil shall then be required to withhold such VAT and treat the same as a "passed
on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [Now Section
xxx xxx xxx
Internal Revenue (BIR), not VAT shall be imposed to form part of the cost of goods destined for
exports from the national territory — excepts specifically declared areas — to an ecozone.
xxx xxx xxx
equivalent VAT on its purchases. Ubi lex non distinguit, nee nos distinguere debemus. Where the
. . . RA 7916 states that 'no taxes, local and national, shall be imposed on business
prohibition, it is deemed included. Exceptio firmat regulam in casibus non exeptis. An exception
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded coming
within the purview of the general rule.
ecozone under RA 7916 also means that no VAT may be passed on the imposed indirectly. Quando
also prohibited indirectly. THEcAS
xxx xxx xxx"
provision for exempt transactions under Section 109(q) [now Section 109(K) of the NIRC of 1997 which
provides VAT exemption for transactions that are exempt under specials laws, e.g., RA 7916 or EPZA
Law], is particularly applicable, to the instant case.
Such being the case, the payment by Nihon-Phil, a PEZA-registered enterprise, to Nihon-Japan,
under the above Agreement should be as it is hereby confirmed to be exempt from VAT.
This ruling is issued on the basis of the facts as represented. However if upon investigation it shall
Very truly yours,
By:

Legal Service
Footnotes
1. Please not that this cited provision has been retained by Republic Act (RA) No. 9337, although with the
2. Referring to the old Section 109 (q) of the Tax Code of the 1997 [now Section 109(K), as amended by RA
No. 9337].
August 28, 2006
Philippines-Canada tax treaty;

SyCip Salazar Hernandez & Gatmaitan

SSHG Law Centre
105 Paseo De Roxas
Makati City
1226 Metro Manila
Philippines
Attention: Mr. Vicente D. Gerochi IV

Ms. Carmen Amparo P. Limgenco
Gentlemen :
This refers to your application for relief from double taxation dated January 4, 2006, on behalf of
your client, Catalyst Paper Corporation (CPC), formerly known as Norske Skog Canada Limited (NSCL),
requesting confirmation of your opinion that the dividends payable by NSC Holdings (Philippines), Inc.
(NSC Holdings) to CPC are subject to the preferential tax rate of 15%, pursuant to Article X(2)(a) of the
Philippines-Canada tax treaty.
It is represented that CPC is a corporation duly organized and existing under the laws of Canada,
with principal office address at 16th Floor, 250 Howe Street, Vancouver, British Columbia, Canada; that it
is not doing business in the Philippines; that CPC and NSCL are not registered either as corporations or as
partnerships in the Philippines per Certification dated December 29, 2005 and November 14, 2005,
respectively, issued by the Securities and Exchange Commission; that NSC Holdings is a corporation duly
organized and existing under the laws of the Philippines, with business address c/o 3rd Floor, SSHG Law
Centre, 105 Paseo de Roxas, Makati City, Philippines; that as evidenced by a Certification dated January
4, 2006, issued by the Assistant Corporate Secretary of NSC Holdings, CPC is the legal and beneficial
owner of Three Hundred Seven Thousand Nine Hundred Ninety Five (307,995) common shares and the
beneficial owner of Five (5) common shares of the capital stock of NSC Holdings, with a par value of
PhP100 per share or an aggregate par value of Thirty Million Eight Hundred Thousand Pesos
(PhP30,800,000.00); that the total issued and outstanding capital stock of NSC Holdings is Three Hundred
Eight Thousand (308,000) common shares.
It is further represented that CPC is the beneficial owner of 100% of the shares of NSC Holdings;
that at a special meeting held on November 15, 2002, the Board of Directors of NSC Holdings approved
the declaration of cash dividends in the amount of Forty Nine Million Pesos (PhP49,000,000.00) in favor
of all stockholders of record of NSC Holdings as of November 15, 2002, in proportion to their respective
stockholdings; and that the issue/s or transaction subject of the above request for ruling is not under
collection proceedings, or a judicial appeal of the taxpayer/s involved. SDHAEC
In reply, please be informed that Article X of the Philippines-Canada tax treaty provides as follows,
viz:
"Article X
Dividends
xxx xxx xxx
2. Dividends paid by a company which is a resident of the Philippines to a resident of Canada

may be taxed in Canada. However, such dividends may also be taxed in the Philippines, but
where the beneficial owner of the dividends is a resident of Canada the tax so charged shall
not exceed:
(a) 15 per cent of the gross amount of any dividend paid to a company which is a
resident of Canada which controls at least 10 per cent of the voting power to
the company paying the dividend; or
xxx xxx xxx
'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims,
participating in profits, as well as income assimilated to income from shares by the taxation
law of the State of which the company making the distribution is a resident.
xxx xxx xxx"
Based on the above-cited provisions, the 15 percent (15%) preferential tax rate on dividends apply
whenever the beneficial owner of the dividend controls at least 10 percent of the voting power of the
paying company. In all other cases, the 25 percent (25%) preferential tax rate applies. Such being the case
and considering that CPC is the owner of 100% percent of the voting shares of NSC Holdings, this Office
is of the opinion and so holds that the dividend payments by NSC Holdings to CPC shall be subject to the
preferential tax rate of 15 percent (15%), based on the gross amount of dividends, pursuant to Article
X(2)(a) of the Philippines-Canada tax treaty. (BIR Ruling No. 124-88 dated March 28, 1988)
Very truly yours,
By:

Legal Service
August 25, 2006
Article 10, Philippines-Netherlands tax treaty; BIR Ruling No.

ITAD-028-99
Transitions Optical Phils., Inc.

Block 4 Lot 1 Star Avenue,
Laguna International Industrial Park
Mamplasan, Biñan
Laguna 4024
Attention: Suzanne B. Mondoñedo

Finance Director (Asia Pacific)
Gentlemen/Ladies :
This refers to your application for relief from double taxation dated November 10, 2005, requesting
confirmation of your opinion that the payment of dividends by Transitions Optical Phils., Inc. (TOPI) to
Transitions Optical Holdings BV (TOH) is subject to final withholding tax at the preferential tax rate of
10 percent, pursuant to Article 10(2) of the Philippines-Netherlands tax treaty.
It is represented that TOH is a nonresident corporation duly organized and existing under the laws
of the Netherlands with principal office at Rijkaweg West 22, 9608 PC, Werterbroek, The Netherlands;
that TOH is a resident of The Netherlands within the meaning of Article 4 of the Convention for the
Avoidance of Double Taxable Between the Netherlands and the Republic of the Philippines
(Philippines-Netherlands tax treaty) per Declaration of Residence dated 8 November 2005 issued by the
Inspector of the Tax Administration Noord/kantoor Groningen Engelse Kamp, the Netherlands; that it is
not registered either as a corporation or a partnership in the Philippines per Certification dated 9
November 2005 issued by the Securities and Exchange Commission; that TOPI is a corporation duly
organized and existing under and by virtue of the laws of the Philippines with business address at Block 4
Lot 1 Star Avenue, Laguna International Park, Mamplasan, Biñan, Laguna 4024; and that it is engaged in
the manufacturing, distribution, selling and export (without, however, engaging in retail trade) of
photochromic ophthalmic lenses.
It is further represented that on 10 November 2005, TOPI's Board of Directors declared a cash
dividend out of its retained earnings amounting to US$5,000,000,000, to its stockholders of record as of 10
November 2005, payable on 25 November 2005; that as of 10 November 2005, TOH is the registered
owner of the 99.99% of the subscribed/outstanding capital stock of TOPI; and that the issue/s or
transaction subject of the above request is not under investigation, neither is it subject of an on-going
audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings
nor a judicial appeal. EacHCD
follows:
"Article 10
DIVIDENDS
other State may be taxed in that other State.
directly at least 10 per cent of the capital of the company paying the
dividends;
xxx xxx xxx
jouissance' rights, mining shares, founders' shares or other rights participating in profits, as
taxation law of the State of which the company making the distribution is a resident.
xxx xxx xxx"
Accordingly, your opinion that the cash dividends declared by TOPI in favor of TOH is subject to
the 10 percent preferential tax rate, pursuant to the Philippines-Netherlands tax treaty, is hereby confirmed
considering that recipient TOH is a beneficial owner of the dividends which holds directly 99.99% of the
outstanding capital stock of TOPI. (BIR Ruling No. 028-99)
effect insofar as the herein parties are concerned.
Very truly yours,

Legal Service
August 25, 2006

JGLaw
SOL Building, 112 Amorsolo Street
Legaspi Village, 1229 Makati City
Philippines
Attention: Ms. Mary Jane A. Delgado

Mr. Ramoncito T.F. Pacis
Gentlemen :
This refers to your application for tax treaty relief dated November 18, 2005, on behalf of your
client, United Steel Center Manila, Inc. (USCMI), requesting confirmation of your opinion that (1)
dividends paid to Sumitomo Corporation (Sumitomo) are subject to the preferential tax rate of 10%; and
(2) dividends paid to Mitsui & Co. Ltd. (Mitsui) are subject to the preferential tax rate of 25%, pursuant to
Article 10 of the Philippines-Japan tax treaty.
It is represented that Sumitomo, having its head office at 1-8-11, Harumi, Chuoku, Tokyo,
104-8610, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty, and is
subject to taxation in Japan per Residence Certificate dated September 21, 2005 issued by the District
Director of the Kyobashi Tax Office, Japan; that Sumitomo has a branch office in the Philippines; that
Sumitomo holds 89.99% of the total subscribed shares of USCMI; that Sumitomo's investment in USCMI
came directly from Japan; that Mitsui, having its head office at address at 2-1 Ohtemachi I-Chome,
Chiyoda-ku, Tokyo, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty,
and is subject to taxation in Japan per Residence Certificate dated November 4, 2005 issued by the District
Director of the Kojimachi Tax Office, Japan.
It is also represented that Mitsui was licensed to engaged in business in the Philippines on March
17, 1967 and that to date no withdrawal or cancellation of license appears to have been filed by the
corporation as certified by the Securities and Exchange Commission on October 11, 2005; that Mitsui's
branch in the Philippines is licensed (1) to export, import, and engage in the domestic sale of various
commodities, (2) to carry on an agency business, and (3) to manufacture all types of machines; that Mitsui
holds 9.99% of the total subscribed shares of USCMI; that Sumitomo and Mitsui's investments in USCMI
came directly from Japan and that such investments were made by Sumitomo and Mitsui independently of
their respective Philippines branches. aHSTID
It is further represented that on May 9, 2005, USCMI declared cash dividends in the amount of
Nine Million Pesos (PhP9,000,000.00) to all its stockholders of record as of May 9, 2005, payable on or
before June 8, 2005; that the total dividends allocated to Sumitomo is Eight Million Ninety Nine Thousand
Nine Hundred Ninety Seven (8,099,997.00); that the total dividends allocated to Mitsui is Eight Hundred
Ninety Nine Thousand Nine Hundred Ninety Seven (899,997.00); that 10% of the dividends received by
Sumitomo amounting to Eight Hundred Nine Thousand Nine Hundred Ninety Nine Pesos and Seventy
Cents (PhP809,999.70) was deducted and withheld by USCMI; that 25% of the dividends received by
Mitsui amounting to Two Hundred Twenty Four Thousand Nine Hundred Ninety Nine Pesos and Twenty
Five Cents (PhP224,999.25) was similarly deducted and withheld by USCMI; and that the issue/s or
transaction subject of the above request for ruling 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
of the taxpayer/s involved.
In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides:
"Article 10

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 law of that Contracting State, but if
xxx xxx xxx
company making the distribution is a resident. TCcDaE
xxx xxx xxx"
company to a company which is a resident in 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 paying
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.
In the instant case, it is represented that while Mitsui and Sumitomo are licensed to engaged in
business in the Philippines, the investments giving rise to the subject dividend income came directly from
Japan and that the same were made by Mitsui and Sumitomo independently of their respective Philippine
branches. Such being the case, any income derived by Mitsui and Sumitomo independently of their
respective Philippine branches shall be considered as income of Mitsui and Sumitomo alone, applying the
rule enunciated in the case of Marubeni vs CIR (G.R. No. 76573 dated September 14, 1989), pertinently
quoted hereunder:
"The general rule that a foreign corporation is the same juridical entity as its branch office in
the Philippines cannot apply here. This rule is based on the premise that the business of the foreign
corporation is conducted through its branch office, following the principal-agent relationship theory.
It is understood that the branch becomes its agent here. So that 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, not the branch or the resident foreign corporation. Corollary, if the
business transaction is conducted through the branch office, the latter becomes the taxpayer, and not
the foreign corporation." (italic ours)
In view thereof and considering that Sumitomo holds 89.99% of USCMI's shares of stock for the
period of six (6) months immediately preceding the date of payment of the dividends, per Certification
issued by the Corporate Secretary of USCMI dated April 25, 2006, this Office is of the opinion and hereby
holds that the dividend payments of USCMI to Sumitomo are subject to the 10% preferential tax rate
pursuant to the aforequoted Article 10(2)(a) of the Philippines-Japan tax treaty (BIR Ruling No. DA-ITAD
143-05 dated November 23, 2005)
Moreover, considering that as of May 9, 2005, Mitsui holds 9.99% of the shares of stock of
USCMI, as shown in the Certification issued by the Corporate Secretary of USCMI dated April 25, 2006,
that dividends paid to Mitsui by USCMI are subject to the 25% preferential tax rate pursuant to Article
10(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 143-05 dated November 23, 2005)
Very truly yours,
By:

Legal Service
August 25, 2006
Sections 105, 108 [(A) and (B) (3)] and 109 (q) National Internal
Revenue Code of 1997 Articles II and IV, Philippines-United
States of America Economic and Technical Cooperation
Agreement; BIR Ruling No. DA-ITAD 16-05

20th Floor, Tower 1
6766 Ayala Avenue
1200 Makati City
Attention: Atty. Maria Victoria C. Españo

Tax Partner
Gentlemen :
This refers to your letter dated February 3, 2006 requesting confirmation that the service fees to be
paid by the United States Agency for International Development (USAID) to Tetra Tech EM, Inc. (Tetra
Tech) (formerly, PRC-Environmental Management, Inc.) in connection with Philippine projects funded by
the USAID are not subject to value-added tax (VAT).
BASIC FACTS
It is represented that Tetra Tech is a corporation, organized and existing under the laws of the
United States of America, with address at 233 North Michigan Avenue, Suite 1621, Chicago, Illinois
60601, united States of America; that pursuant to an application approved by the Securities and Exchange
Commission, Tetra Tech is licensed to establish a branch office in the Philippines to engage in the
business of rendering technical support, preparation of feasibility studies, and project management in the
area of environment; that the branch office refers to Tetra Tech Philippine Branch with Registration No.
AF0930043, and with address at One Magnificent Mile, San Miguel Avenue, Ortigas Center, Pasig City,
Philippines; and that on July 9, 1992, February 21, 1996 and September 19, 2003, respectively, the USAID
granted Tetra Tech the Awards/Contracts to implement the following projects in the Philippines:
1. The Industrial Environmental Management (IEMP) Project (Contract No. AID

492-0465-C-00-2147-00)
2. The Natural Resources Management Program Coastal Resources Management (CRM)

Project (Contract No. 492-0444-C-6028-00), and
3. The Fisheries Improved for Sustainable Harvest (FISH) Project (Contract No.
492-C-00-03-00022-00).
a. The IEMP Project
That under the IEMP Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement
activities that will directly impact upon the Government of the Republic of the Philippines, Industry
Associations, public/private sector industrial firms and non-government organizations, by providing
services including technical assistance, support for policy studies, public/private sector dialogue, training
and commodity procurement; that Tetra Tech will deal with three project components; (1) Pollution
Reduction Initiative, (2) Policy Studies and Public/Private Dialogues, and (3) Capacity Building; and that
the service fee for the IEMP Project is US$10,358,525.00 (composed of project cost at US$9,591,227.00
and service fee at US$767,298.00).
b. The CRM Project
That under the CRM Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement
the following performance objectives: (1) effective management of coastal waters along 2,000 kilometers
of shoreline by communities for sustainable harvest, (2) increased public sector investment in CRM
activities and policy implementation, and (3) mechanisms for providing equity in access to coastal
resources, (4) sustainable management and an improved investment climate, and (5) other activities; and
that the service fee for the CRM Project is US$10,789,707.12 (composed of project cost at
US$10,083,838.43, fixed fee at US$201,676.77, and possible award fee at US($504,191.92). IAaCST
c. The FISH Project
That under the FISH Project, Tetra Tech, through Tetra Tech Philippine Branch, will implement a
wide range of activities it deems fit to achieve the Project's objective to conserve biological diversity in at
least four biologically important marine ecosystems in the Philippines, as measured by an increase in
targeted marine fish stocks and the maintenance of selected coastal resources that support them with
environmental services; that the project activities are expected to reverse current trends on fish stock
depletion and degradation of coastal resources in target areas and bring about more sustainable catch
levels of marine fish stocks the benefit productivity and stakeholders; that the Project is designed, and will
be implemented, to encourage the Bureau of Fish and Aquatic Resources of the Department of Agriculture
and Local Government Units to replicate this ecosystem management approach in other marine and coastal
ecosystems; that the service fee for the FISH Project for the base contract period (Years 1 to 5) is
US$8,860,476.00 (composed of project cost at US$8,242,303.00 and fixed fee at US$618,173.00); and
that if the option to extend the contract period (Years 6 to 7) is exercised, the service fee for the FISH
Project for the option period is US$3,266,488.00 (composed of project cost at US$3,038,556.00, fixed fee
at US$106,349.00, and possible performance/award fee at US$121,542.00).
That pursuant to the above-mentioned Awards/Contracts, the USAID will reimburse Tetra Tech for
project-related costs and pay it a fixed fee for its services; and that Tetra Tech Philippine Branch will
invoice the USAID for the projects costs and fixed fees in United States dollars, and the USAID will remit
the payments directly to Tetra Tech in the United States.
RULING
In reply, please be informed that under Section 108(A) of the National Internal Revenue Code of
1997 (Tax Code), the service fees to be paid by the USAID to Tetra Tech (composed of project costs, fixed
fees, and possible performance/award fees), being payments for the performance of services in the
Philippines, are generally subject to VAT:
the Philippines for others for a fee, remuneration or consideration . . . : 1(54)
Under Section 105 of the Tax Code, because the VAT is an indirect tax, it may be shifted or passed
on by Tetra Tech to the USAID:
"SEC. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods shall be
subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services . . ."
Additionally, Sections 109(q) and 108(B)(3) of the Tax Code provide:
"SEC. 109. Exempt Transactions. — The following shall be exempt from the value-added
tax:
xxx xxx xxx
1590; 2(55)
xxx xxx xxx
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
xxx xxx xxx
(3) Services rendered to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero percent (0%) rate."
Under the above-cited provisions, the transaction between Tetra Tech and the USAID may be treated either
as an exempt transaction or as one subject to zero percent (0%) VAT rate.
In an exempt transaction. Tetra Tech will not subject to VAT (output tax) the service fees paid to it
by the USAID and it is not allowed any tax credit on VAT (input tax) it previously paid. Tetra Tech will
not bill any output tax to the USAID because the said transaction is not subject to VAT. On the other hand,
Tetra Tech, if it is a VAT-registered purchaser of VAT-exempt goods/properties or services, it is not
entitled to any input tax on its purchases despite the issuance of a VAT invoice or receipt. (Section
4.103-1, Revenue Regulations 7-95) 3(56)
On the other hand, in a zero-rated transaction, which is a taxable transaction for VAT purposes, the
transaction which Tetra Tech has with the USAID, assuming Tetra Tech is a VAT-registered person, will
not result in any output tax. However, the input tax on Tetra Tech's purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund. (Section 4.102-2, Ibid.)
4(57) Further, in an effectively zero-rated transaction, which refers to the sale by a VAT-registered person to
a person or entity who was granted indirect tax exemption under special laws, or international agreements,
a prior application by Tetra Tech with the appropriate offices of the Bureau of Internal Revenue for
effective zero-rating is required. Without an approved application for effective zero-rating, the transaction
otherwise entitled to zero-rating shall be considered exempt. (Section 4.107-1, Ibid.) 5(58)
Relative thereto, based on paragraph 1, Article IV of the Economic and Technical Cooperation
Agreement between the Government of the United States of America and the Government of the Republic
of the Philippines (Agreement) (which was signed on of April 27, 1951 and entered into force on May 21,
1951), for purposes of according privileges and immunities to the Special Technical and Economic
Mission and its personnel of comparable diplomatic rank, the Philippine government shall, upon
appropriate notification by the Ambassador of the United States in the Philippines, consider the Special
Technical and Economic Mission and its personnel as part of Diplomatic Mission of the United States in
the Philippines, to wit:
"Article IV
Missions
1. The Government of the Philippines agrees to receive a Special Technical and Economic
Mission which will discharge the responsibilities of the Government of the United States of
America in the Philippines under this Agreement and the Government of the Philippines
will, upon appropriate notification from the Ambassador of the United States of America in
the Philippines, consider this Mission and its personnel as part of the Diplomatic Mission of
the United States of America for the purpose of enjoying privileges and immunities accorded
to that Mission and its personnel of comparable rank. Such Mission shall include but not be
limited to experts whose services are made available to implement Article II of this
Agreement."
The special Technical and Economic Mission will discharge the responsibilities of the United
States government to the Philippine government under the Agreement of providing economic and technical
assistance in the Philippines, and it is not limited to experts who provide services to implement Article II
of the Agreement, quoted hereunder:
"Article II
Undertakings
In order to further the objectives of economic and social well being and preserve free institutions for
the Philippine people and to achieve the maximum benefits through the employment of assistance
received from the Government of the United States of America, and the Government of the
Philippines will use its best efforts to:
1. Adopt and enforce measures necessary to ensure the efficient and practical use of all
resources available to it, including among other means; (a) such measures as may be
necessary to insure that the commodities or services furnished under this Agreement,
including commodities or services obtained from the funds deposited in the Special Account
under Section 1 of the Annex to this Agreement, are used only for purposes agreed upon by
the two Governments, and (b) the observation and review of the use of such commodities
and services through an effective follow-up system established in agreement with the
Government of the United States of America with precautions to prevent the diversion of
these commodities into illegal or irregular channels of trade. cTADCH
2. Initiate and further implement social, economic and technical programs based upon the
recommendations of the Economic Survey Mission and such other measures as will
strengthen democratic and free institutions in the Philippines."
On the matter of privileges and immunities, the Philippine government, being a signatory to the
Vienna Convention on Diplomatic Relations of April 18, 1961, accord to diplomatic missions in the
Philippines and their personnel those privileges and immunities set forth in the Vienna Convention. In
terms of taxation privileges, Articles 23 and 34 of the Convention mention:
"Article 23
1. The sending State and the head of the mission shall be exempt from all national, regional or
municipal dues and taxes in respect of the premises of the mission, whether owned or leased,
other than such as represent payment for specific services rendered.
2. The exemption from taxation referred to in this Article shall not apply to such dues and taxes
payable under the law of the receiving State by persons contracting with the sending State or
the head of the mission."
"Article 34
A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or
municipal, except:
(b) dues and taxes on private immovable property situated in the territory of the receiving State,
unless he holds it on behalf of the sending State for the purposes of the mission;
(c) estate, succession or inheritance duties levied by the receiving State, subject to the
provisions of paragraph 4 of Article 39;
(d) dues and taxes on private income having its source in the receiving State and capital taxes on
investments made in commercial undertakings in the receiving State;
(e) charges levied for specific services rendered;
(f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable
property, subject to the provisions of Article 23."
As far as VAT exemption is concerned, under Article 23, the sending State (represented by the
embassy) and the head of the mission are exempt from all dues and taxes relating to their premises only.
Under Article 34, diplomatic agents are generally exempt from all dues and taxes, except those
enumerated in Items (a) to (f) of the article like VAT since it is an indirect tax normally incorporated in
the price of goods or services (Section 105, Tax Code).
Nonetheless, although selectively, the VAT exemption privilege of diplomatic missions in the
Philippines and their personnel is made to rest on the principle of reciprocity. In BIR Ruling No. 246-92
dated September 3, 1992, the precursor ruling that cited reciprocity as a basis for the grant of VAT
exemption to diplomatic missions in the Philippines and their personnel, this Bureau ruled that the French
Embassy's purchase of a motor vehicle is exempt from VAT and from ad valorem tax on the basis of
reciprocity, if the French Embassy can submit to the Commissioner of Internal Revenue (or his duly
authorized representative) a copy of a special legislation or an international agreement that shows that the
French government allows similar tax exemption to the Philippine Embassy in France and its personnel on
their purchase of goods and services in France. The same requirement is invoked in the predecessor ruling,
BIR Ruling No. 206-93 dated May 11, 1993, where this Bureau ruled that the British Embassy's purchase
of a motor vehicle is exempt from VAT and ad valorem tax on the basis of reciprocity. Based on the
British Embassy's letter to the Commissioner of Internal Revenue dated April 7, 1993, the British
government allows similar tax exemption to the Philippine Embassy in the United Kingdom and its
personnel on their purchase of goods and services in the United Kingdom. From then on, the determination
of the existence of a special legislation or an international agreement that allows similar tax exemption to
Philippine Embassies abroad and their personnel now lies with the Office of Protocol and State Visits of
the Department of Foreign Affairs (DFA) who furnishes this Bureau, from to time, of an updated list of
diplomatic missions in the Philippines which may enjoy VAT exemption on the basis of reciprocity.
As far as the USAID is concerned, inasmuch as it discharges the responsibilities of the United
States government to the Philippine government under the 1951 Economic and Technical Cooperation
Agreement on the provision of economic and technical assistance in the Philippines, the USAID
constitutes as part of the Special Technical and Economic Mission mentioned in the Agreement. As it is,
the USAID is an agency of the United States government and is a part of and working dependently with the
United States Embassy in the Philippines. Hence, pursuant to Article IV of the Agreement, the Philippine
government will accord to the USAID and its personnel of comparable diplomatic rank those privileges
and immunities presently enjoyed by the United States Embassy in the Philippines and its (Embassy's)
personnel, including VAT exemption on the purchase of goods and services in the Philippines. SHTcDE
Thus, on the basis of reciprocity as has always been reiterated in all VAT exemption rulings, VECs
and VEICs issued by this Bureau to the United States Embassy and its personnel, this Office extends the
same exemption to the USAID and its personnel of comparable diplomatic rank. Thus, this Office is of the
opinion and so holds that the service fees to be paid by the USAID to Tetra Tech (composed of project
costs, fixed fees, and possible performance/award fees) in connection with the IEMP, CRM, and FISH
Projects funded by the USAID are exempt from VAT. (BIR Ruling No. DA-ITAD 16-05 dated February
24, 2005)
Very truly yours,
By:

Legal Service
Footnotes
equivalent to ten percent (10%) of gross receipts deprived from the sale or exchange of services, including
tax to twelve percent (12%), after any of the following conditions has been satisfied.
year exceeds one and one half percent (1 1/2%); or
(ii) National agreement 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' means the performance of all kinds of services in the
Philippine for others for a fee, remuneration or consideration . . ."
2. Section 109(q) was amended and renumbered by Republic Act 9337 to read as:
"SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following
shall be exempt from the value-added tax.
xxx xxx xxx
3. Now Section 4.109-1 of Revenue Regulations 16-2005, the accompanying regulations of Republic Act
9337.
4. Now Section 4.108-5 of Revenue Regulations 16-2005.
August 25, 2006
Section 28 (B) (5) (b) — NIRC of 1997;

BIR Ruling No. ITAD 88-04

20th Floor, Tower 1
6766 Ayala Avenue
1200 Makati City
Philippines
Attention: Atty. Benedicta Du-Baladad

Tax Partner
Gentlemen :
This refers to your letter dated February 10, 2006, on behalf of your client Hemisphere Leo Burnett,
Inc. (HLBI), requesting confirmation of your opinion that the dividends to be paid to Leo Burnet
Worldwide, Inc. (LBWI) by HLBI are subject to income tax at the rate of fifteen percent (15%) pursuant to
Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (NIRC of 1997).
It is represented that LBWI is a nonresident foreign corporation duly organized and existing under
the laws of the United States of America (USA) with principal office at Corporation Trust Center, 1209
Orange Center, Wilmington, County of New Castle, USA; that it is not registered either as a corporation or
as a partnership in the Philippines per certification issued by the Securities and Exchange Commission
dated December 5, 2005; that HLBI is corporation organized and existing under the laws of the Philippines
with principal office at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City.
It is further represented that LBWI holds Fifteen Thousand (15,000) common shares which
represents 30% of the outstanding capital stock of HLBI as of January 10, 2006; that HLBI has an
authorized capital stock of One Million Pesos (PhP1,000,000.00) divided into One Hundred Thousand
(100,000) common shares with a par value of Ten Pesos (PhP10.00) per share; that on December 22, 2005,
the Board of Directors of HLBI resolved and approved the declaration of cash dividends in the total
amount of One Hundred Million Pesos (PhP100,000,000.00), to be distributed among stockholders of
record as of December 31, 2004, pro rata to their respective shareholdings in HLBI as of December 31,
2004, payable as soon as possible and not later than April 28, 2006; and that the issue/s or transaction
subject of the above request for ruling 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 of the
taxpayer/s involved.
In reply, please be informed that Section 28(B)(5)(b) of the NIRC of 1997, as amended, provides:
Section 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax Nonresident Foreign Corporations. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
xxx xxx xxx
(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to
the condition that the country in which the nonresident foreign corporation is domiciled, shall allow
a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid
in the Philippine equivalent to twenty percent (20%), which represents the difference between the
regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as
provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax
due shall be equivalent to (15%), which represents the difference between the regular income tax of
thirty percent (30%) and the fifteen percent (15%) tax on dividends;" AICEDc
xxx xxx xxx"
Pursuant to Section 28(B)(5)(b), dividends to be paid by HLBI to LBWI, are subject to 15 percent
Philippine income tax if the latter's country of domicile, USA, shall allow LBWI a 20 percent deemed paid
tax credit against its USA income tax due on such dividends.
The Supreme Court (SC), on two separate occasions, had ruled on the applicability of the 15
percent income tax on dividends under then Section 24(b)(1), which was similarly worded as Section
28(B)(5)(b) as aforequoted, first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and
the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) and second, in Commissioner of Internal
Revenue vs. Procter & Gamble Philippines Manufacturing Corporation (G.R. No. 66838, December 2,
1991).
In the first SC decision, Wander Philippines, Inc. (Wander) a domestic corporation, remitted
dividends to Glaro S. A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under
Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income
tax. Given this, the SC ruled that the subject dividends were subject to 15 percent income tax by reason
that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required
(minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends.
In the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G
Philippines), a domestic corporation, remitted dividends to Procter and Gamble Company, Inc. (P&G
USA), a nonresident foreign corporation domiciled in the USA. But unlike in the Wander case where the
Swiss law exempts dividends derived by its residents from sources outside Switzerland, in this case, the
applicable US law (Section 902, US Tax Code) provides that dividends derived by P&G USA from
sources outside the US are allowed US tax credits equivalent to the sum of the Philippine income tax
actually paid on the dividend remittances to P&G USA and the deemed paid tax credit proportionate to the
corporate income tax actually paid by P&G Philippines. The SC declared that Section 902, US Tax Code,
specifically and clearly complies with the requirements of Section 24(b)(1), NIRC. Further, in deciding on
the issue of whether the reduced 15% tax rate is applicable based on Section 24(b)(1) of the NIRC, the SC
went on to say that ". . . Section 24(b)(1), NIRC, does not in fact require that the deemed paid tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times earlier, Section 24(b)(1), NIRC, merely requires, in
the case at bar, that the USA "shall allow a credit against the tax dues from [P&G-USA for] taxes deemed
to have been paid in the Philippines. . .". Given this, the SC pronounced that the subject dividends were
subject to the reduce income tax rate of 15%.
Therefore, in conformity with the aforementioned Supreme Court decision on the Procter &
Gamble case, your opinion that the dividends to be remitted by your company to LBWI are subject to the
preferential tax rate of 15 percent pursuant to the provisions of the NIRC of 1997, as amended, is hereby
confirmed, subject to compliance with the requirements set forth under Revenue Memorandum Circular
No. 80-91 as follows: (1) an authenticated certification issued by the USA tax authority showing the actual
amount credited by the USA Internal Revenue Service against the income tax due from LBWI on the
dividends received from HLBI; (2) an authenticated copy of the income tax return of LBWI for the taxable
year when the dividends were received; (3) an authenticated document issued by the USA tax authority
showing that it credited 20% of the tax deemed paid in the Philippine. Failure to submit these documents
within a reasonable time would result in the imposition of deficiency assessment for the twenty (20)
percentage points differential. (BIR Ruling No. ITAD-88-04 dated August 20, 2004)
investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force
and effect insofar as the herein parties are concerned. SCIacA
Very truly yours,
By:

Legal Service
August 22, 2006

ITAD-5-99

Certified Public Accountants & Management Consultants
22/F, Philamlife Tower
Attention: Francisco C. Tagao

Head, Tax & Corporate Services
Manuel P. Salvador III
Director, Tax & Corporate Services
Gentlemen :
This refers to your letter dated January 23, 2006, on behalf of your client TSPIC Corporation
(TSPIC), requesting confirmation that the interest payments by TSPIC to ATMEL Germany GmbH
(ATMEL) are subject to a 15% preferential tax rate pursuant to the Philippines-Germany tax treaty.
It is represented that ATMEL, with office address at Theresienstrasse 2, 74072 Heilbronn,

Germany, is a resident of the Federal Republic of Germany within the meaning of Article 11 of the
Philippines-Germany tax treaty; that it is not registered either as a corporation or as a partnership in
Philippines per certification issued by the Securities and Exchange Commission dated September 13,
2005; that TSPIC is a corporation registered with the Philippine Economic Zone Authority (PEZA) under
Certificate of Registration No. 04-60 with office address at Vishay Bldg., Bagsakan Road, FTI Complex,
Taguig, Metro Manila. TAECSD
It is further represented that on July 1, 2005, TSPIC and ATMEL entered into an Intercompany
Term Loan Agreement (Agreement) whereby ATMEL agreed to lend TSPIC the amount of One Million
Six Hundred Seventy Three Thousand Forty One and 09/100 US Dollars (US$1,673,041.09) as long-term
loan, with an interest rate on the principal balance of the loan equal to USD Libor 3,69 (6 months) +1%
rate in effect on the date of the said loan for interest payment in 2005, and interest payment for the
succeeding years (year 2006 onwards) will be based on USD Libor (1 year) +1%; that the interest rate
from year 2006 onwards shall be adjusted annually based on USD Libor rate at the beginning of the first
banking day of January, and will take effect beginning the first day of each year; and that the termination
date of the Agreement will be on December 31, 2010.
follows:
"Article 11
INTEREST
according to the law of that State, but the tax so charged shall not exceed:
a) 10 per cent if such interest is paid

b) 15 per cent of the gross amount of such interest in all other cases.
participate in profits, and debt-claims of every kind as well as all other income assimilated to
income from money lent by the taxation law of the State from which the income is derived."
Based on the aforequoted provisions, interest income by a corporation which is a resident of

Germany may be taxed in the Philippines at 10% if it is paid in connection with the sale on credit of any
industrial, commercial or scientific equipment; or if the loan is granted by a bank; or in respect of public
issues of bonds, debentures or similar obligation; and 15% in all other cases.
In view thereof, this Office is of the opinion and so holds that the interest payments to be remitted
pursuant to their Agreement shall be subject to the preferential tax rate of 15% based on the gross amount
of the interest pursuant to Article 11(2)(b) of the Philippines-Germany tax treaty. (BIR Ruling No.
ITAD-5-99 dated June 16, 1999)
Moreover, the Intercompany Term Loan Agreement between TSPIC and ATMEL is subject to the
documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No.
9243 1(59), at a rate of One peso (P1.00) on each Two Hundred Pesos (P200) or a fractional part thereof, of
the issue price of such loan agreement.
the herein parties are concerned. acHITE
Very truly yours,

By:

Legal Service
Footnotes
1. Republic Act No. 9243 — An Act Rationalizing the Provisions on The Documentary Stamp Tax of the
National Internal Revenue Code of 1997, as amended and for Other Purposes. (Effective date is March 20,
2004 per Revenue Regulations No. 13-2004).
August 22, 2006
Section 28(B)(5)(b) — NIRC of 1997; BIR Ruling No.

ITAD 88-04

20th Floor, Tower 1
6766 Ayala Avenue
1200 Makati City
Philippines
Tax Partner
Gentlemen :
This refers to your letter dated February 3, 2006, on behalf of your client Starcom Mediavest Group
Philippines, Inc. (Starcom-Philippines), requesting confirmation of your opinion that the dividends to be
paid to Starcom-Philippines to Starcom Mediavest Group, Inc. (Starcom-USA) are subject to fifteen
percent (15%) income tax pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997
(NIRC of 1997).
It is represented that Starcom-USA is a nonresident foreign corporation duly organized and existing
under the laws of the State of Delaware of the United States of America (USA) with principal office at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, USA as shown in its Certificate of
Incorporation certified by Harriet Smith Windsor, Secretary of State, Delaware; that it is not registered
either as a corporation or as a partnership in the Philippines per certification issued by the Securities and
Exchange Commission dated December 5, 2005; that Starcom-Philippines is a domestic corporation with
principal office at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City.
It is further represented that Starcom-USA holds Three Hundred Seventy Six Thousand One
Hundred Twenty Four (376,124) common shares of Starcom-Philippines, which constitutes thirty percent
(30%) of the outstanding capital stock of the latter; that Starcom-Philippines has an authorized capital
stock of Five Million Pesos (PhP5,000,000.00) divided into Five Million (5,000,000) common shares with
a par value of One Peso (PhP1.00) per share; and that on December 22, 2005, the Board of Directors of
Starcom-Philippines resolved and approved the declaration of cash dividends in the total amount of Sixty
Million Pesos (PhP60,000,000.00), to be distributed among stockholders of record as of December 31,
2004, pro rata to their respective shareholdings in as of December 31, 2004, payable as soon as possible
and not later than April 28, 2006.
In reply, please be informed that Section 28(B)(5)(b) of the NIRC of 1997, as amended, provides:
Section 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax Nonresident Foreign Corporations. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
xxx xxx xxx
(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent (15%)
is hereby imposed on the amount of cash and/or property dividends received from a domestic
the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a
credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in
the Philippine equivalent to twenty percent (20%), which represents the difference between the
regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as
provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due
shall be equivalent to (15%), which represents the difference between the regular income tax of thirty
percent (30%) and the fifteen percent (15%) tax on dividends;" TAaEIc
xxx xxx xxx"
Pursuant to Section 28(B)(5)(b), dividends to be paid by Starcom-Philippines to Starcom-USA, are

subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow
Starcom-USA a 20 percent deemed paid tax credit against its USA income tax due on such dividends.
The Supreme Court (SC), on two separate occasions, had ruled on the applicability of the 15
percent income tax on dividends under then Section 24(b)(1) which was similarly worded as Section
28(B)(5)(b), first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax
Appeals (G.R. No. L,-68375, April 15, 1988) and second, in Commissioner of Internal Revenue vs. Procter
& Gamble Philippines Manufacturing Corporation (G.R. No. 66838, December 2, 1991).
dividends to Glaro S. A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under
tax. Given this, the SC ruled that the subject dividends were subject to 15 percent income tax by reason
that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required
(minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends.
In the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G
USA), a nonresident foreign corporation domiciled in the USA. But unlike in the Wander case where the
Swiss law exempts dividends derived by its residents from sources outside Switzerland, in this case, the
applicable US law (Section 902, US Tax Code) provides that dividends derived by P&G USA from
sources outside the US are allowed US tax credits equivalent to the sum of the Philippine income tax
actually paid on the dividend remittances to P&G USA and the deemed paid tax credit proportionate to the
corporate income tax actually paid by P&G Philippines. The SC declared that Section 902, US Tax Code,
specifically and clearly complies with the requirements of Section 24(b)(1), NIRC. Further, in deciding on
the issue of whether the reduced 15% tax rate is applicable based on Section 24(b)(1) of the NIRC, the SC
went on to say that ". . . Section 24(b)(1), NIRC, does not in fact require that the deemed paid tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent
(35%) to fifteen percent (15%). As noted several times earlier, Section 24(b)(1), NIRC, merely requires, in
the case at bar, that the USA "shall allow a credit against the tax dues from [P&G-USA for] taxes deemed
to have been paid in the Philippines. . .". Given this, the SC pronounced that the subject dividends were
subject to the reduce income tax rate of 15%.
Therefore, in conformity with the aforementioned Supreme Court decision on the Procter &
Gamble case, your opinion that the dividends to be remitted by your company to Starcom-USA are subject
to the preferential tax rate of 15 percent pursuant to the provisions of the NIRC of 1997, as amended, is
hereby confirmed, subject to compliance with the requirements set forth under Revenue Memorandum
Circular No. 80-91 as follows: (1) an authenticated certification issued by the USA tax authority showing
the actual amount credited by the USA Internal Revenue Service against the income tax due from
Starcom-USA on the dividends received from Starcom-Philippines; (2) an authenticated Copy of the
income tax return of Starcom-USA for the taxable year when the dividends were received; (3) an
authenticated document issued by the USA tax authority showing that it credited 20% of the tax deemed
paid in the Philippines. Failure to submit these documents within a reasonable time would result in the
imposition of deficiency assessment for the twenty (20) percentage points differential. (BIR Ruling No.
ITAD-88-04 dated August 20, 2004)
investigation, it will be disclosed that the facts are different, then this ruling shall be without force and
effect insofar as the herein parties are concerned. HcTDSA
Very truly yours,
By:

Legal Service
August 22, 2006
Arts. 5 & 7, Philippines-India Tax Treaty;

Revenue Memorandum Circular No. 44-2005;
BIR Ruling No DA-ITAD 42-06
Bank of Makati, Inc.

44 Sen. Gil Puyat Avenue
Brgy. San Isidro, Makati City
Attention: Ponciano S. Carreon, Jr.

Controller
Gentlemen :
This refers to your letter dated April 10, 2006 applying for tax treaty relief for payments made by
Bank of Makati, Inc. (BMI) to Nucleus Software Exports Limited (Nucleus) based on the provisions of the
Philippines-India tax treaty and Revenue Memorandum Circular No. 44-2005.
From the documents submitted, it is represented that Nucleus is a nonresident foreign corporation
and a resident of India for tax purposes as certified by the Indian Income Tax Authorities; that Nucleus
registered office is located at 33-35 Thyagraj Nagar Market, New Delhi, India; that Nucleus is not
registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of
Non-Registration issued by the Securities and Exchange Commission on March 14, 2006; that BMI is a
domestic corporation with office address at 44 Sen. Gil Puyat Avenue, Makati City.
It is further represented that on December 29, 2005, BMI and Nucleus entered into a License
Agreement (Agreement) whereby Nucleus grants BMI a perpetual, non-exclusive, non-transferable license
to use its proprietary computer programs and associated materials listed under Exhibit A of the
Agreement, solely for BMI's own internal processing and computing needs and for no other purpose; that
BMI shall be entitled to use the software product in a productive mode only at installed site; that the
license is for the use of the object code (including updates provided or otherwise generally available to
Nucleus customers at no additional cost) and all related documentation, commencing upon its delivery to
BMI; that the Agreement also provides that BMI shall not use, copy, translate, print or display the
software products, in whole or in part, other than as expressly authorized; that BMI agrees not to reverse
engineer, assemble or recompile any software product or portion thereof, which Nucleus has not provided
in human-readable source code form; that BMI also agrees not to use the software products to provide
service bureau, time-sharing, or other computer services to third parties; that BMI shall use the software
products solely on computers owned or leased by it and for processing of data only for itself; that BMI
shall not directly or indirectly permit any other person or entity to have access or use of the software
products; that the software products contain or are based at least in part on software that is the valuable
property of Nucleus and contain copyright, patent and trade secrets of Nucleus; that Nucleus shall
continue to retain all title, copyright, patent and other propriety rights to such software and all copies
thereof and end user and that BMI agrees to include on any backup or archival copies notices of any
interests that appear therein; that no title to the software, or any intellectual property therein, is transferred
to the end user; that BMI agrees not to sell, assign or otherwise transfer the products or the license granted
hereunder, or sublicense the products to any third party except as otherwise provided in the Agreement;
and that BMI paid the amount of US$500,000 to Nucleus for the purchase of the software products; and
that the Agreement shall commence as of the Effective date and continue thereafter unless terminated as
provided under the Agreement.
of software.

royalties."

a. Transfers of copyright rights. A transfer of software is classified as a transfer of a copyright

right if, as a result of the transaction, a person acquires any one or more of the rights
described below:
i. The right to make copies of the software for purposes of distribution to the public by
sale or other transfer of ownership, or by rental, lease or lending; CDTSEI
ii. The right to prepare derivative computer programs based upon the copyrighted
software;
v. Any other rights of the copyright owner, the exercise of which by another without his
authority shall constitute infringement of said copyright.

consideration therefore are business income.
b. Transfer of copyrighted articles. A copyrighted article incorporating a software includes a

copy of a software from which the work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or device. The copy of the
software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the
main memory or hard drive of a computer, or in any other medium.
above (or only aquires a de minimis grant of such rights), and the transaction does not
involve the provision of services or of know-how, the transfer of the copy of the software is
classified solely as a transfer of a copyrighted article and payments for which constitute
business income.
xxx xxx xxx
where the licensee (BMI) is merely granted access to and use of the Licensed Software and not readily the
right to market or exploit the Licensed Software. under the first Circular, the license fee is treated as
royalties and taxable as such, while under the second Circular, the license fee is treated as business income
(or business profits) and taxable as such, as described above.
Since under the Agreement, Nucleus merely grants to BMI a non-exclusive, non-transferable
license to use the software and Nucleus retains its title and ownership, including pertinent rights protected
under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005, Section 5b
thereof, will apply in this case which states that "If a person acquires a copy of a software but does not
acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the
transaction does not involve the provision of services or of know-how, the transfer of the copy of the
business income."
Thus, payments (license fees) by BMI to Nucleus, being business income (or business profits), will
be subject to income tax in the Philippines only if it is attributable to a permanent establishment which
Nucleus has in the Philippines, under paragraph 1, Article 7 in relation to Article 5, both of the
Philippines-India tax treaty, to wit: CcEHaI
"Article 7
BUSINESS PROFITS
1. Business profits of an enterprise of a Contracting State shall be taxable only in that State
establishment situated therein. If the enterprise carries on as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as is attributable to the
xxx xxx xxx"
"Article 5
of business through which the business of the enterprise is wholly or partly carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
resources;
g) a place of exploration of natural resources;
h) a building site or construction project or supervisory activities in connection

therewith, where such site, project or activity continues for a period of more than six
months;
i) a warehouse, in relation to a person providing storage facilities for others.
xxx xxx xxx"
Based on the foregoing, in order for Nucleus to be considered to have a permanent establishment to
Since Nucleus, based on the documents submitted, does not have a place of business at its disposal
through which it may use for carrying on its business, Nucleus does not have a permanent establishment to
which its business profits may be attributed to. CHDTEA
in the Philippines.
Accordingly, for as long as Nucleus is deemed not to have a permanent establishment in the
Philippines to which it may attribute any profits it earned from the sale of the software to BMI, said profits
are not subject to Philippine income tax at 35% of the gross amount thereof under Section 28(B)(1) of the
National Internal Revenue Code (NIRC) of 1997, as amended. 4(63) (BIR Ruling No. DA ITAD 42-06 dated
April 11, 2006)
software and is subject to value-added tax (VAT) under Section 107 of the NIRC. Accordingly, BMI,
being the direct importer of the downloadable software, is subject to VAT and is required to withhold
VAT from its payments to BMI.
Regulations No. 14-2002, provide that BMI shall be responsible for the withholding of the VAT on the
license fee before remitting it to Nucleus. In remitting to the Bureau of Internal Revenue the VAT
withheld on such fee, BMI shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other
Percentage Taxes Withheld). If a VAT-registered taxpayer, BMI 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, BMI may include as part of the cost of the services provided to it by
Nucleus 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 Nucleus request, BMI is required to issue in
three copies for Nucleus and the fourth copy for BMI as its file copy.
Very truly yours,
By:

Legal Service
Footnotes
85-91.
4. 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, 236, 237 and 288 of the National Internal Revenue Code of 1997, As
Amended, And For Other Purposes.
August 22, 2006

Philippines-United States of America tax treaty;

Law Offices
Ortigas, Pasig City
Gentlemen :
This refers to your letter dated June 29, 2006 requesting a ruling on the tax implication of the
purchase of software by Canon Information Technologies Philippines, Inc. (Canon-Philippines) from
Averant, Incorporated (Averant) pursuant to Article 8 in relation to Article 5 of the Philippines-United
States of America (US) tax treaty.
It is represented that Averant is a nonresident foreign corporation organized and existing under the
laws of the United States of America with principal address at 1050 Marina Village Parkway #201
Alameda, CA 94501; that Averant is not registered either as a corporation or as a partnership in the
Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated May
26, 2006 issued by the Securities and Exchange Commission (SEC); that Canon-Philippines is a
Techno Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of
hardware design and software development involving imaging, communications and related technologies.
It is further represented that Canon-Philippines purchased a software product

(Solidify-Maintenance) from Averant in the amount of $8,000.00 under Averant, Inc. Software License
Agreement (Agreement); that Averant grants to Canon-Philippines a nonexclusive, non-transferable right
to use the software on one computer system or on a network computer system, using only the number of
nodes for which Canon-Philippines has a license and for which Canon-Philippines has the security key(s)
or authorization code(s) provided by Averant or its agents; that all software must be used within the
country for which the systems were licensed and must be located at a single site (within a one kilometer
radius); that in addition, all authorized person(s) who access and use the software must be within the
country for which the systems were licensed and must be located at a single site (within a three kilometer
radius from the location of the software); that Canon-Philippines shall not copy the software, in whole or
in part, except as necessary to archive such software in accordance with the terms and conditions
contained herein; that all copies of the software will be subject to all of the terms and conditions of the
Agreement; that whenever Canon-Philippines is permitted to copy all or any part of the software, all titles,
trademark symbols, copyright symbols and legends and other proprietary markings must be reproduced;
that Canon-Philippines may not copy any part of the documentation, nor modify, adopt, translate into any
language, or create derivative works based on the documentation without the prior written consent of
Averant; that Canon-Philippines shall not sublicense, transfer or assign this Agreement or any of the rights
or licenses granted under the Agreement without the prior written consent of Averant; and that the term of
the Agreement shall be for one year and shall be delivered through electronic keys. CSIcHA
77-2003 1(64)) covers software payments made as of November 18, 2003 and until the effectivity of the
second Circular and generally treats software payments as royalties, thus:
of software.

royalties."

a. Transfer of copyright rights. (emphasis supplied) A transfer of software is classified as a

transfer of a copyright right if, as a result of the transaction, a person acquires any one or
more of the rights described below:
i. The right to make copies of the software for purposes of distribution to the public by
sale or other transfer of ownership, or by rental, lease or lending;
software;

consideration therefore are business income.
"b. Transfer of copyrighted articles. (emphasis supplied) A copyrighted article incorporating a

software includes a copy of the software from which the work can be perceived, reproduced,
or otherwise communicated, either directly or with the aid of a machine or device. The copy
of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in
the main memory or hard drive of a computer, or in any other medium.
above (or only acquires a de minimis grant of such rights), and the transaction does not
involve the provision of services or of know-how, the transfer of the copy of the software is
classified solely as a transfer of a copyrighted article and payments for which constitute
business income. CSDTac
"xxx xxx xxx"
The fact that what is being transferred to Canon-Philippines is only a copyrighted article
incorporated in a software and there was no transfer of ownership thereto including, pertinent rights
protected under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005,
Section 5b thereof, will apply in this case which states That. "If a person acquires a copy of a software but
does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and
the transaction does not involve the provision of services or of know-how, the transfer of the copy of the
business income."
Thus, payments made by Canon-Philippines to Averant, being business income (or business
profits), is subject to income tax in the Philippines only if it is attributable to a permanent establishment
which Averant has in the Philippines, under paragraph 1, Article 8 in relation to Article 5 of the
Philippines-US tax treaty, to. wit:
"Article 8
BUSINESS PROFITS
them as are attributable to the permanent establishment.
xxx xxx xxx"
"Article 5
business.
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse;

connection therewith, provided such site, project or activity continues for a period of
more than 183 days; and

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, in order for Averant to be considered to have a permanent establishment to
which said business profit may be attributed, it must satisfy the following conditions 3(66):
Since it appears, based on the SEC Certificate that Averant is not registered either as a corporation
or as a partnership in the Philippines, that Averant does not have a place of business at its disposal which
is fixed or established at a distinct place with a certain degree of permanence in the Philippines through
which it may use for carrying on its business, Averant is deemed as not having permanent establishment to
which said business profit may be attributed.
Thus, for as long as Averant is deemed not to have a permanent establishment in the Philippines to
which its profits may be attributable, income from its sale of software, such as that made to
Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the
direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12%
VAT from its payments before it telegraphically transfers it to the account of the Averant.
With regard to the procedure for withholding and paying the VAT, pursuant to 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, Canon-Philippines shall be responsible for the withholding of the 10
percent/(12 percent effective February 1, 2006) VAT on the license fee before remitting it to Averant. In
remitting to the Bureau of Internal Revenue the VAT withheld on such fee, Canon-Philippines shall use
BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a
VAT-registered taxpayer, Canon-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, Canon-Philippines may include as part of the cost of the services provided
to it by Averant the VAT consequently shifted or passed on to it and may treat such VAT either as expense
or asset, whichever is applicable. In addition, Canon-Philippines is required to issue in quadruplicate the
relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for
Averant and the fourth copy for Canon-Philippines as its file copy. acEHSI
Very truly yours,
By:

Legal Service
Footnotes
85-91.
August 15, 2006
Sections 108 (B) (3) & 106 (A) (2) (c) of the National Internal
Revenue Code of 1997; Articles 5 & 7, Paragraph 1(a) of the
GADC between GOP and GOA ITAD Ruling No. 10-05
Philippines-Australia Human Resource Development Facility

3F JMT Bldg. Ortigas Center,
Pasig City
Gentlemen :
This refers to your Note Verbale No. 175/06 File No. MN94/00110 dated May 12, 2006, endorsed
to this Office by the Department of Foreign Affairs (DFA), requesting for tax-free local purchase of a
motor vehicle, for the official use of the Philippines-Australia Human Resource Development Facility
(PAHRDF), specifically described as follows:

Organization: Philippines-Australia Human Resource Development Facility
Make: One (1) 2006 Toyota Innova 2.0 G Gas A/T
Engine and ITR-6240333
Chassis Nos.: TGN40-5006614
In reply, please be informed that Section 106 (A)(2)(c) 1(67) and Section 108(B)(3) of the National
Internal Revenue Code of 1997 (NIRC), as amended, provide, viz:
such tax to be paid by the seller or transferor; . . . .
xxx xxx xxx
rate:
xxx xxx xxx
agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.
xxx xxx xxx"
xxx xxx xxx"
(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
xxx xxx xxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;
xxx xxx xxx"
In connection thereto, Article 5, paragraphs 1 and 2 of the General Agreement on Development

Cooperation (GADC) between the Government of the Republic of the Philippines (GRP) and the
Government of Australia (GOA) dated October 28, 1994 and entered into force on March 12, 1998
provides, viz:
"Article 5
organizations may conclude subsidiary arrangements in respect of specific activities. HcTIDC
xxx xxx xxx"
Moreover, Article 7, paragraph 1(a) of the above-mentioned GADC between GRP and GOA,
pertinently provides as follows:
"Article 7
(a) for direct supplies of domestic goods and services, subject them to zero rate for
purposes of Value Added Tax (VAT); exempt direct importation of goods from import duties. VAT
and other taxes imposed in the Philippines (or pay such duties thereon); and be responsible for
inspection fees, storage charges and all other levies, fees and charges;
xxx xxx xxx"
3. The disposal of vehicles provided for activities executed under this Agreement shall be
requirements of other activities assisted by the GOA under the program of development
cooperation."
Based on the abovequoted provisions, the terms of the GADC, unless otherwise stated, shall apply
to subsidiary arrangements with specific reference thereto. Article 7 of the GADC states that GRP shall
subject to zero percent rate, for purposes of VAT, direct supplies of domestic goods and services in
respect of project supplies and professional and technical material and services for the execution of
development activities under the GADC, while it shall exempt direct importation of goods from import
duties, VAT and other taxes imposed in the Philippines (or pay such duties thereon). Moreover, paragraph
3 of the same Article 7 provides for the disposal of vehicles acquired for the activities executed under the
GADC.
In relation thereto, a Subsidiary Arrangement (SA) between the GRP and the GOA relating to the
Philippines Australia Human Resource Development Facility (PAHRDF) was concluded pursuant to and
subject to the provisions of the GADC on August 20, 2004.
Such being the case, this Office is of the opinion and so holds that since the Subsidiary
Arrangement relating to PAHRDF is in accordance with the GADC between the GRP and GOA, an
international agreement to which the Philippines is a signatory, then direct supplies of domestic goods and
services of PAHRDF are subject to zero percent rate for purposes of VAT in respect of supplies, and
professional and technical material and services provided by the GOA, while direct importations of goods
are exempt from VAT. (DA-ITAD No. 14-03 dated January 27, 2003)
In view of the foregoing, the local purchase of PAHRDF of one (1) 2006 Toyota Innova 2.0 Gas
A/T, herein described and for its official use is subject to VAT at zero percent rate pursuant to Sections
108(B)(3) and 106(A)(2)(c) of the NIRC in relation to Article 7 of the GADC.
As regards the seller of goods and services to PAHRDF, the sales by a VAT-registered entity of
goods and services under the above circumstances shall be treated as effectively zero-rated transactions.
[Sec 4.100.3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would
mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the
PAHRDF. To enable local sellers to refund the amount of the tax inputted into the cost of goods and
view of the VAT-registered seller, although the sale of goods or services to PAHRDF is a taxable
transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of
the local supplier and the input tax on his own purchase of goods, properties or services related to such
effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated
February 7, 2000)
Treated as effectively zero-rated transactions, the VAT-registered seller of goods or services to

PAHRDF is required to file an application and secure prior approval for zero-rating to be able to claim tax
with the Large Taxpayer's Audit and Investigation Division II (LTAID II), if VAT-registered seller is a
large taxpayer, or with the Audit Information, Tax Exemption and Incentives Division (AITEID) of this
Bureau if the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for
12 months from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96).
Without prior approved application for effective zero-rating, the transaction which may otherwise be
treated as zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered
seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his
entitlement to claim tax credit/refund on the (VAT) input tax passed on to him. (Secs. 4.102-2, 4.103-1
and 4.107-1(d), Revenue Regulations No. 7-95)
This ruling is issued on the basis of facts as represented. However, if upon investigation it shall be
party is concerned. SHcDAI
Very truly yours,

Legal Service
Footnotes
August 14, 2006

Philippines-United States of America tax treaty;
BIR Ruling No. 14-06;

Ortigas, Pasig City

Atty. Rhodora J. Corcuera-Menzon
Gentlemen :
This refers to your letter dated April 20, 2006 requesting a ruling on the tax implication on the
purchase of Canon Information Technologies Philippines, Inc. (Canon-Philippines) from Atrenta, Inc.
(Atrenta) of the following software products namely:
1. SpyGlass Builder-Custom rule creation for VHDL/Verilog using Objects and C/C++);
2. SpyGlass Builder Maintenance; and
3. SpyGlass Predictive Analyzer Maintenance-VHDL
specified in a written purchase order (PO).
It is represented that Atrenta is a nonresident foreign corporation, organized and existing under the
laws of Delaware, with principal office at 2001 Gateway Place, Suite 440W, San Jose, California 95510 as
shown in the Certificate of Status Foreign Corporation issued by Mr. Bruce Mepherson, Secretary of State
of California on March 30, 2006; that Atrenta is not registered either as a corporation or as a partnership in
the Philippines, as confirmed by the Certification of Non-Registration of Corporation/Partnership dated
November 23, 2005 issued by the Securities and Exchange Commission; that Canon-Philippines is a
Plaza One, 18 Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design
and software development involving imaging, communications and related technologies; that
Canon-Philippines develops hardware designs for consumers and office products and in doing so it uses
RTL (register transfer logic); that to write RTL source code, a hardware description language (HDL) is
used; that one HDL used is Very High Speed Integrated Circuit (VHSIC) Hardware Description Language
or VHDL; that one of the key processes of the hardware design is lint-checking; that lint-checking is used
to analyze and debug RTL code syntax synthesizability, unsupported constructs, and port mismatches.
It is further represented that Canon-Philippines purchased a SpyGlass Builder-Custom rule creation

for VHDL/Verilog using Objects and C/C++, SpyGlass Builder Maintenance and the SpyGlass Predictive
Analyzer Maintenance — VHDL under a Software License Agreement (Agreement); that these software
programs are sophisticated integrated circuit design solutions which identify critical design issues; that the
Spyglass Predictive Analyzer is a powerful extendible tool for analyzing HDL; that the SpyGlass
Predictive analyzer works with SpyGlass Builder; that the SpyGlass Builder allows user to develop their
own set of register transfer logic (RTL) rules for lint-checking; that Canon-Philippines had already
acquired a perpetual license for SpyGlass Predictive Analyzer; that under the Agreement between Atrenta
and Canon-Philippines, the former grants to the latter a non-exclusive, non-transferable limited license,
without right to sublicense, to:
(a) copy and install software on the designated server (s) at the designated location and use such
installed software and the software keys, including use on licensee's local or wide area
network; to develop the licensee products, provided that the number of seats using the
software is no greater than the total number granted under the Agreement;
(b) make a reasonable number of copies of the documentation solely for licensee's internal
development purposes; and
(c) authorize the use of the software for the licensee's business activities by licensee's
subsidiaries and affiliates;
that under such Agreement, Canon-Philippines will not permit any third party to:
• install or use the Software on computer systems, servers or at locations not authorized in
accordance with this Agreement;
• use the Software other than as authorized under this Agreement;
• resell, lease, sublicense, assign, transfer, distribute or otherwise grant any rights in the
Software to any other party, including for any commercial time-sharing, rental, outsourcing
or service-bureau use;
• copy the Software except as authorized in this Agreement; or
• disclose to any other party, the capabilities, performance, capacity or any deficiencies in the
software;
• modify, adapt, translate, reverse engineer, disassemble, decompile or otherwise attempt to

derive source code from any of the materials provided by Atrenta to Licensee hereunder.
That ownership of all the right, title and interest in and to the Atrenta trademarks and service marks
and the software, documentation, in whole and in part, shall remain the exclusive property of Atrenta and
its licensor; that Atrenta shall provide Canon-Philippines with:
1. basic technical support in accordance with Atrenta's support policy set forth in Exhibit C;
2. error verification, analysis and correction to the extent possible by telephone; and
3. any Updates and Upgrades to the Software.
That under the Agreement, Atrenta shall provide Canon-Philippines with: (i) basic technical
support in accordance with Atrenta's support policy, (ii) error verification, analysis and correction to the
extent possible by telephone, and (iii) any Updates and Upgrades to the Software; that in order to be
eligible for Support Services, Canon-Philippines must provide to Atrenta a technically qualified single
point of contact for dealing with technical support; that in consideration of the licenses and rights granted
in this Agreement for the initial term and any renewal term, and the support services provided thereunder,
Canon-Philippines shall pay Atrenta the annual Subscription Fee.
It is also represented that, in addition, Canon-Philippines availed of separate support and

maintenance services of Atrenta under a Atrenta Support and Maintenance Agreement; that under the said
agreement, Atrenta will provide the following support and maintenance services:
1) Error Correction;
2) Support. Atrenta will make a member of its SMS staff available, in accordance with the
terms of the service plan;
3) Field Support. Upon request and subject to resource availability, Atrenta will provide field
SMS at any Licensee field site(s) at Atrenta's then currently hourly field SMS rates, together
with reimbursement of applicable travel, per diem and related expenditures, at Atrenta's cost.
And that the fees for the initial term of the support and maintenance services are outlined in the purchase
order.
The term 'royalties' as generally used means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work
commercial or scientific experience. The term 'use' as contained herein shall include the reselling or
distribution of software.

royalties."

a. Transfer of copyright rights. A transfer of software is classified as a transfer of a copyright

right if, as a result of the transaction, a person acquires any one or more of the rights
described below:
i. The right to make copies of the software for purpose of distribution to the public by
sale or other transfer of ownership, or by rental, lease or lending;
software:

circumstances, there has been a transfer of all substantial rights in the copyright. A
transaction that does not constitute a sale or exchange because not all substantial rights have
been transferred will be classified as a license generating royalty income.
When only copyright rights are transferred, payments made in consideration therefor
are royalties. On the other hand, when copyright ownership is transferred, payments made in
b. Transfer of copyrighted articles. A copyrighted article incorporating a software includes a

copy of a software from which the work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or device. The copy of the
software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the
main memory or hard drive of a computer, or in any other medium.
xxx xxx xxx
c. After Sales Service. Contracts for the use of software are often accompanied with the
provision of services (e.g., installation, maintenance, and customization of the software) by
personnel of the relevant foreign licensor/owner or of the relevant local subsidiary, reseller,
and distributor. Payments as consideration for after-sales service in a mixed contract are not
royalties alone, but will include income from services. The appropriate course to take with
such a contract is, in principle, to break down, on the basis of the information contained in
the contract or by means of a reasonable apportionment, the whole amount of the stipulated
payments according to the various parts of what is being provided under the contract, and
then to apply to each part of it so determined the taxation treatment proper thereto. Thus,
the part of the payments representing the use of the software will be treated as royalties and
taxable as such and the other part of the payments representing the provision of services
will be treated as income from services and taxable as such. (Emphasis supplied)
purchase of a copyrighted article incorporating a software, like the fee for the licensed software where the
licensee (Canon-Philippines) is merely granted access to and use of the Licensed Software and not readily
the right to market or exploit the licensed software. Under the first Circular, the license fee is treated as
royalty and taxable as such, while under the second Circular, the license fee is treated as business income
(or business profits) and taxable as such, as described above.
Since under the Agreement, Atrenta merely grants to Canon-Philippines a non-exclusive,

non-transferable license to use the software but not to resell, lease, sublicense, assign, transfer, distribute
or otherwise grant any rights in the Software to any other party, including for any commercial
time-sharing, rental, outsourcing or service-bureau use, the software, the payments of Canon-Philippines
for such non-exclusive, non-transferable license to use the software, to Atrenta shall be considered as
business profits.
In addition to the foregoing, it should be noted that under the same Software License Agreement,
Atrenta will also provide Canon-Philippines the necessary maintenance services. Accordingly, based on
the aforequoted Section 5(c) of the RMC No. 44-2005, the subject Software License Agreement should
generally be characterized by breaking down the same into the portion which represents the use of the
software and the portion which pertains to the provision of services. But if, as stated above, and as in this
case, one part of what is being provided constitutes by far the principal purpose of the contract and the
other parts stipulated therein are only of an ancillary and largely unimportant character, then the treatment
applicable to the principal part should generally be applied to the whole amount of the consideration.
Thus, the whole amount of the Subscription Fees to be paid by Canon-Philippines to Atrenta for the
Software License Agreement, which includes support services, are to be considered as business profits.
As business profits, the Subscription Fees paid by Canon-Philippines to Atrenta will be subject to
income tax in the Philippines only if is attributable to a permanent establishment which Atrenta has in the
Philippines, under paragraph 1, Article 8 in relation to Article 5 of the Philippines-United States tax treaty,
to wit:
"Article 8
BUSINESS PROFITS
attributable to the permanent establishment.
xxx xxx xxx"
"Article 5
or business.
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse;

connection therewith, provided such site, project or activity continues for a period of more than 183
days; and

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, in order for Atrenta to be considered to have a permanent establishment to
Since Atrenta, based on the documents submitted, does not have a place of business at its disposal
through which it may use for carrying on its business, Atrenta does not have a permanent establishment to
which its business profits may be attributed to.
in the Philippines.
Such being the case, since Atrenta does not have a permanent establishment to which it may
attribute any profits earned from the sales of the software and services to Canon-Philippines, then said
profits are not subject to Philippine income tax under Section 28(B)(1) of the National Internal Revenue
Code (NIRC) of 1997. 4(71)
Further, as regards the services to be rendered by Atrenta to Canon-Philippines under the Atrenta
Support and Maintenance Agreement, it should be emphasized that Atrenta is deemed not to have a
permanent establishment for as long as, in the course of the rendition of subject services, its employees do
not stay in the Philippines for a period or periods aggregating more them 183 days for the same or
connected project (and not in a given taxable year). Where the total number of days of stay in the
Philippines by personnel rendering subject services do not exceed 183 days, the income derived by Atrenta
from services rendered to Canon-Philippines shall not be subject to Philippine income tax and,
consequently, to withholding tax. (BIR Ruling No. DA-ITAD 5-06 dated January 24, 2006)
Act No. 9337 and Revenue Memorandum Circular No. 7-2006. Accordingly, Canon-Philippines being the
direct importer of the downloadable software, is subject to 12% VAT and is required to withhold 12%
VAT from its payments before it telegraphically transfers it to the account of the Atrenta.
10/12 percent VAT on the license fee before remitting it to Atrenta. In remitting to the Bureau of Internal
Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer.
Canon-Philippines may include as part of the cost of the services provided to it by Atrenta the VAT
applicable. In addition, Canon-Philippines is required to issue in quadruplicate the relevant Certificate of
Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Atrenta and the fourth copy
for Canon-Philippines as its file copy.
Very truly yours,
By:

Legal Service
Footnotes
85-91.
4. Republic Act No. 9337 — new rate.
August 14, 2006
Secs 106 & 109 of the National Internal Revenue Code of 1997;
Article VI, Articles of Agreement of the International Finance
Corporation
International Finance Corporation

11th Floor, Tower One
Ayala Triangle, Ayala Avenue.
Makati City, 1226
Attention: Mr. Vipul Bhagat

Chief of Mission & Country Manager
Philippines & Thailand, International Finance Corporation
Gentlemen :
This has reference to your letter dated March 2, 2006, indorsed to this Office by the Department of
Finance (DOF) and with favorable recommendation from the Department of Foreign Affairs (DFA),
requesting for the exemption from payment of value-added tax (VAT) and ad valorem tax on the purchase
of (2) locally-produced motor vehicles, for the official use of the International Finance
Corporation-Technical Assistance Facility, PEP-Philippines in Manila and Davao, specifically described
as follows:
Manila Davao
Type of Use: Official Use Type of Use: Official Use
Organization: International Finance Corporation Organization: International Finance Corporation
Make: Toyota Innova G AT 2.0 Make: Toyota Innova G AT 2.0
Model: 2006 Model: 2006
Color: Night Mist Color: Night Mist
Engine No.: ITR-6205382 Engine No.: ITR-6207571
Frame No.: TGN40-5005736 Frame No.: TGN40-5005738
It is represented that the International Finance Corporation (IFC) is a member of the World Bank
Group; that it is a fully accredited diplomatic organization with the Department of Foreign Affairs; and
that it is immune from taxation in accordance with Section 9(a), Article VI of the Articles of Agreement of
the International Finance Corporation.
In reply, please be informed of Section 109 of the National Internal Revenue Code of 1997 (NIRC),
as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, which provides, as follows:
xxx xxx xxx
Relative thereto, Section 9 (a), Article VI of the Articles of Agreement of the International Finance
Corporation provides that:
"Article VI
Status, Immunities and Privileges
xxx xxx xxx
Section 9. Immunities from Taxation
(a) The Corporation, its assets, property, income and its operations and transactions
authorized by this Agreement, shall be immune from all taxation and from all customs duties. The
Corporation shall also be immune from liability for the collection or payment of any tax or
duty."(Emphasis supplied)
In view of all the foregoing, the IFC shall be exempt from all taxes, including VAT. Hence, this
Office is of the opinion and so holds that the local purchases of two (2) units of 2006 Toyota Innova G AT
2.0 for the official use of the International Finance Corporation - Technical Assistance Facility,
PEP-Philippines in Manila and in Davao are exempt from VAT imposed under Section 106(A) of the
NIRC, as amended by Section 4, Republic Act. No. 9337. (ITAD Ruling No. 164-03 dated November 7,
2003)
It is hereby understood that this exemption applies only to vehicles purchased under the name of the
International Finance Corporation, for their official use.
Very truly yours,

Legal Service
August 11, 2006
Sec. 106 & 108 of the Tax Code 1997;

Embassy of Japan
2627 Roxas Boulevard
Pasay City, Manila
Attention: Mr. Akira Sugiyama

Minister-Counsellor
Gentlemen :
This has reference to your Note Verbale No. 304-06 dated July 6, 2006 referred to this Office by
the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a refund
of value-added tax (VAT) on the local purchase of a motor vehicle, for the personal use of Mr. Akira
Sugiyama, Minister-Counsellor of the Embassy of Japan, specifically described as follows:
Make: Toyota Camry 2.4E A/T
Model Year: 2006
reads:
"ARTICLE 34
"(a) indirect taxes of a kind which are normally incorporated in the price of the goods and
services;
"xxx xxx xxx"
Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include
exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words,
purchases by that Embassy and its diplomatic agents of goods and/or services shall be subject to the
value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant exemption to the Embassy of
Japan and its personnel on their local purchases of goods and/or services it appearing from the list
your country.
Hence, the local purchase of one (1) unit of 2006 Toyota Camry 2.4E A/T, for the personal use of
Mr. Akira Sugiyama of the Embassy of Japan is exempt from VAT. (BIR Ruling No. DA-ITAD-102-05
dated September 19, 2005)
This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of
determining whether Mr. Akira Sugiyama of the Embassy of Japan is entitled to VAT exemption on the
basis of reciprocity. The determination on whether your request for tax refund should be given due course
is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining
thereto (including a copy of this ruling) shall be endorsed to the proper office for processing and
investigation. DHacTC
Very truly yours,

Legal Service
August 2006
Secs. 108, 109 & 149 of the National Internal Revenue Code of
1997;
Article 34 of the Vienna Convention;
Embassy of the United States of America

Roxas Boulevard
Manila
Attention: Mr. Brian Rinaldi

Deputy Chief, Navy Programs of the Embassy (JUSMAG)
Gentlemen :
This has reference to your Note Verbale No. 06-1515 dated June 30, 2006 referred to this Office by
the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for a tax-free
purchase of one (1) locally assembled motor vehicle described hereunder, for the personal use of Mr.
Brian Rinaldi, Deputy Chief, Navy Programs (JUSMAG) of the Embassy of the United States of America:
Make: Ford Focus 1.8L AT (without skirts)

Model Year: 2006
Color: Platinum
VIN No.: PE163L0351AM00045
Engine No.: BD000079
"ARTICLE 34
"(a) indirect taxes of a kind which are normally incorporated in the price of goods or services;
"xxx xxx xxx"
exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words,
purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed
under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue
Code of 1997.
the United States of America or its personnel on their local purchases of goods and/or services it appearing
from the list submitted by the Department of Foreign Affairs that your Government allows similar
exemption to Philippine Embassy and/or its personnel on their purchases of goods and services in your
country.
Hence, the herein local purchase of one (1) unit of Ford Focus 1.8L AT for the personal use of Mr.
Brian Rinaldi, Deputy Chief, Navy Programs (JUSMAG) of the Embassy of the United States of America
is exempt from VAT and ad valorem taxes. (BIR Ruling No. DA-ITAD-34-99 dated October 18, 1999) cADaIH
Very truly yours,

Legal Service
August 7, 2006
Philippines-Denmark tax treaty;

Article 5 & 7;
SGV & Co.

6760 Ayala Avenue
1226 Makati City
Attention: Atty. Joel L. Tan-Torres

Gentlemen :
This refers to your letter dated May 19, 2006, on behalf of your client, ANHYDRO A/S
(ANHYDRO), requesting confirmation that the payments made by Alaska Milk Corporation (AMC),
pursuant to a machinery/equipment supply contract, are not subject to Philippine income tax pursuant to
Article 7 in relation to Article 5 of the Philippines-Denmark tax treaty.
It is represented that ANHYDRO is a nonresident foreign corporation duly organized and existing
under laws of Denmark, with registered Office at Oestmarken 7, DK-2860 Soeborg — Copenhagen,
Denmark; that ANHYDRO is not registered either as a corporation or as a partnership in the Philippines
per certification issued by Securities and Exchange Commission dated May 9, 2006. IATSHE
It is further represented that on December 8, 2005, ANHYDRO confirmed to supply AMC, a

domestic corporation with office address at 6th Floor, Corinthian Plaza, 121 Paseo de Roxas, Makati City,
a complete Instant Filled Milk Powder Processing Plant as per quotation no. PHI 0167-H/jih dated
November 16, 2005 consisting of an ANHYDRO Spray Drying Plant Type SBD 81, IFB 47, EFB 49 and
APV Recombined Milk Processing Plant specially designed for production of 2 tons per hour of Instant
Filled Milk Powder amounting to Five Million Eighty Nine Thousand Eighty Six US Dollars
(US$5,089,086) including technical documentation, installation and commissioning, delivered Cost,
Insurance and Freight (CIF Manila Port), including necessary packing under the machinery/equipment
supply contract; that per letter by Clause Madeen, Project Manager and Bent Kurastair, Commercial
Controller of ANHYDRO, dated July 11, 2006, it was confirmed that the actual number of days to be
spent in the installation and additional supervisory assistance by ANHYDRO under the
machinery/equipment supply contract will not exceed 183 days.
In reply, please be informed that Article 7 and, in relation thereto, Article 5 of the
Philippines-Denmark tax treaty provides:
"Article 7
Business Profits
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 through that permanent establishment.
xxx xxx xxx
"Article 5
Permanent Establishment
of business through which the business of an enterprise is wholly or partly carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, an oil or gas well, a quarry or any other place of preliminary surveys,
exploration or extraction of natural resources;
g) a building site, a construction, assembly or installation project or supervisory

activities within the country in connection therewith, but only where such site, project or activities
continue for a period of more than 183 days (emphasis supplied); cCDAHE
h) the furnishing of services, including consultancy services, by an enterprise through

employees or other personnel engaged by the enterprise for such purpose, but only where activities
of that nature continue (for the same or a connected project) within the country for a period or
periods aggregating more than 183 days within any twelve month period;
i) a drilling rig if its activities are carried on for a period or periods exceeding 365 days in
any 18 month period.
xxx xxx xxx"
Paragraph (g) of the foregoing provisions provides expressly that a building site, a construction,
assembly or installation project or supervisory activities in connection therewith constitutes a permanent
establishment only if it lasts more than 183 days. In other words, if the duration of a contract, until its
completion, in connection with an installation project or supervisory activities, exceeds 183 days, it will
constitute carrying on of business in the Philippines through a permanent establishment by the enterprise
engaging in such activities.
"The term 'building site or construction or installation project' includes not only the construction of
buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere
maintenance or redecoration) of buildings, roads, bridges or canals, the laying of pipe-lines and excavating
and dredging. Additionally, the term 'installation project' is not restricted to an installation related to a
construction project; it also includes the installation of new equipment, such as a complex machine, in an
existing building or outdoors." (Paragraph 16, Commentary on Article 5, OECD Model Tax Convention of
2005) (Emphasis ours)
In determining when ANHYDRO commenced the installation of the plant the OECD notes:
"A site exist from the date on which the contractor begins his work, including any preparatory
work, in the country where the construction is to be established, e.g. if he installs a planning office for the
construction. In general, it continues to exist until the work is completed or permanently abandoned. A site
should not be regarded as ceasing to exist when work is temporarily discontinued. Seasonal or other
temporary interruptions include interruptions due to bad weather. . . ." (Paragraph 19, Commentary on
Article 5, OECD Model Tax Convention of 2005)
Thus, by analogy, ANHYDRO commenced the installation of the plant when it begins its work.
including the preparatory work, in the Philippines. The installation activity continues to exist until the
installation is completed or permanently abandoned.
Based on the foregoing and on your representation that ANHYDRO will not perform the
installation activity in the Philippines for more than 183 days, this Office is of the opinion and so holds
that the installation fees (including the additional supervisory assistance fees) to be paid to ANHYDRO by
AMC are not subject to Philippine income tax.
Finally, the fees paid by AMC for the services to be rendered by ANHYDRO in the Philippines are
subject to the value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997 1.
Regulations No. 14-2002, provide that AMC shall be responsible for the withholding of the VAT on the
service fees before remitting them to ANHYDRO. In remitting to the Bureau of Internal Revenue the VAT
withheld on the service fees, AMC shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and
Other Percentage Taxes Withheld.). If a VAT-registered taxpayer, AMC may use as documentary
accompanying it. If a non-VAT-registered taxpayer, AMC may include as part of the cost of the services
furnished to it by ANHYDRO 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, AMC is required to issue the
Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies
thereof to be given to ANHYDRO upon its request, and the fourth copy to be retained by AMC as its file
copy. (BIR ITAD Ruling No. DA-ITAD-147-05 dated November 29, 2005)
parties are concerned. CSHDTE
Very truly yours,
By:

Legal Service
Footnotes
107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The
Philippines for others for a fee, remuneration or consideration . . ."
Memorandum Circular No. 7-2006 (Publishing the Full Text of the. Memorandum from Executive
Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31,
2006.
August 4, 2006
Articles 5 & 7, Philippines-United Kingdom tax treaty Sec. 108,

National Internal Revenue Code of 1997; BIR Ruling No.
ITAD-167-00

8741 Paseo de Roxas, City of Makati, Philippines
Gentlemen :
This refers to your letter dated April 27, 2006, requesting confirmation that the payments for
services by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt Benckiser Corporate Services
Limited (RBCL), are not subject to Philippine income tax pursuant to the Convention between the
Government of the Republic of the Philippines and the Government of the United Kingdom of Great
Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income and Capital Gains (Philippines-United Kingdom tax treaty).
From the documents submitted it is represented that RBCL is a corporation organized and existing
under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, Berkshire, SL1
3UH, UK as supported by the Residence Certificate issued by HM Revenue & Customs on February 13,
2006; that RBCL is not registered to do business in the Philippines as supported by the Certification of
Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April
26, 2006; that RBCL is a corporation organized and existing under the laws of the Philippines with
principal office at Unit 2601 The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City,
Metro Manila.
It is further represented that on January 1, 2005, RBCL and RBPI entered into a Services
Agreement whereby RBPI, as recipient, engages RBCL, as provider, to render services which cover all
head office services, which include, but are not limited to, the following specific services:
Area EVPs
— Overseeing the commercial operations of RBPI;
— Monitoring and assessing the investment needs of RBPI;
— Managing the launch of new products in the Philippines on behalf of RBPI.
Management Organisation
— Managing the global brand categories on behalf of RBPI;
— Carrying out product innovation on behalf of RBPI;
— Overseeing the supply function on behalf of RBPI;
— Carrying out HR and IS functions on behalf of RBPI.
Competitive Intelligence SaCDTA
— Providing a corporate view of key competitors and industry players to RBPI; and
— Producing reports by country and product for use by RBPI.
Supply — (Only for Manufacturers)
— Negotiating contracts for raw materials and packaging for RBPI;
— Seeking out cheaper sources of supply for RBPI;
— Optimising inventory levels for RBPI; and
— Introducing and establishing best practices for RBPI in matters relating to supply.
Chief Financial Officer
— Carrying out commercial reviews of RBPI's operations
Corporate Treasury
— Raising funds for RBPI;
— Negotiating facilities for RBPI with financial institutions;
— Managing foreign exchange risk, interest rate risk, credit risk and liquidity risk on behalf
of RBPI.
Group Tax
— Ensuring RBPI's tax returns are completed on time;
— Reviewing RBPI's tax returns;
— Developing best practice for tax compliance for RBPI; and
— Providing specialist tax advice for RBPI.
Insurance
— Negotiating, managing and monitoring insurance policies for RBPI;
Internal Audit
— Reviewing and appraising the effectiveness of control systems for RBPI;
— Identifying efficiency improvements for RBPI; and
— Assisting in ad-hoc projects as required by RBPI.
Information Systems
— Improving the effectiveness and efficiencies of Group IT products and services for RBPI;
— Providing an IT helpdesk for RBPI;
— Negotiating, purchasing and evaluating Group IT products and services for RBPI;
— Advising on, developing and managing IT projects for RBPI;
— Coordinating and managing global IT vendors on behalf of RBPI.
Legal
— Advising on new business opportunities and reviewing related agreements for RBPI;
— Negotiating contracts and advising on contract law on behalf of RBPI;
— Advising on competition law;
— Managing and administering trademarks and patents for RBPI;
— Carrying out patent searches for RBPI.
New Initiatives and the Internet
— Researching and identifying new products or business ventures to exploit the internet on
behalf of RBPI;
— Monitoring competitor activity for RBPI.
Media Buying
— Negotiating media purchases and liaising and co-ordinating all media relations on behalf
of RBPI;
Corporate Sales
— Developing training programmes for RBPI's sales staff
Human Relations
— Designing, specifying and implementing employment contracts, human resource policies
and procedures for RBPI;
— Performing the payroll function for companies and expats as required by RBPI;
— Performing the payroll function for companies and expats as required by RBPI;
— Assisting in the design of career development models for RBPI;
— Facilitating and advising in respect of overseas secondments on behalf of RBPI; and ESCDHA
— Developing, assisting with, and providing support for, training of the Recipient's
world-wide employees.
Professional Services
— Providing marketing assistance in the form of paying fees to certain dishwasher

manufacturers for the supply of dishwashing goods.
Documents show that activities which constitute shareholder or control services are excluded from
the coverage of the Service Agreement; it is further asserted that RBCL will perform the corporate
services at its own business premises in the United Kingdom; that, however, should the provision of the
corporate services require RBCL's employee to travel to the Philippines, such employee will stay in the
Philippines only for a few days of not exceeding 3 days in a month and the employees' aggregate stay in
the Philippines will not exceed 183 days within any twelve month period; that in consideration for the
services, RBPI agrees and undertakes to pay service fees to RBCL plus a mark-up ranging from 4% to 8%
depending on the type of service performed; and that the Service Agreement shall be effective as of
January 1, 2005 and for a period of at least two years unless terminated in accordance with provisions
thereof.
In reply, please be informed that Article 7(1) and, in relation thereto, Article 5 of the
Philippines-United Kingdom tax treaty provide:
"Article 7
Business Profits
enterprise may be taxed in the other State but only so much of them as is directly or indirectly
attributable to that permanent establishment."
"Article 5
fixed place of business in which the business of the enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, oil well, quarry or other place of extraction of natural resources;
g) an installation or structure used for the exploration of natural resources;
h) a building site or construction or assembly project which exists for more than 183 days.
3. An enterprise of a Contracting State shall likewise be deemed to have a permanent

establishment in the other Contracting State if:
a) it carries on supervisory activities within that other Contracting State for more than 183
days in connection with a building site, or a construction or assembly project which is being
undertaken, in that other Contracting State; or
b) it furnishes services, including consultancy services, in that other Contracting State

through its employees or other personnel (other than agents of an independent status within the
meaning of paragraph 7 of this Article) for a period exceeding in the aggregate 183 days within any
twelve-month period. (Emphasis supplied)
xxx xxx xxx"
Based on the foregoing, the service fee of RBPI to RBCL under the Service Agreement shall not be
subject to Philippine income tax if RBCL, being a resident of the United Kingdom, does not have a fixed
place of business in the Philippines; or if it has such a fixed place, said fee is not directly or indirectly
attributable to such fixed place. However, should employees of RBCL be required to render services in the
Philippines and such furnishing of services exceeds in the aggregate 183 days within any twelve-month
period, such shall be deemed to constitute as a permanent establishment of RBCL in the Philippines.
Accordingly, such service fee shall be subject to Philippine income tax.
From the representations herein, it can be ascertained that RBCL does not have a fixed place of
business in the Philippines and the duration of stay in the Philippines by its personnel in the rendition of
services under the subject Services Agreement shall not be more than 183 days in any twelve-month
period. In view thereof, the payment for services by RBPI to RBCL shall not be subject to Philippine
income tax, pursuant to Article 7 in relation to Article 5 of the Philippines-United Kingdom tax treaty.
(BIR Ruling No. ITAD-167-00) IHcSCA
However, as provided in Section 108 of the National Internal Revenue Code of 1997, the fee for
such services rendered in the Philippines is subject to value-added tax (VAT):
"SEC. 108 1. Value-added Tax on Sale of Services and Use or Lease of Properties. —
including the use or lease of properties.
the Philippines for others for a fee . . ." (Emphasis supplied)
With regard to the procedures for withholding and paying the VAT, RBPI, being the resident
withholding agent and payor in control of payment shall be responsible for the withholding of the final
VAT on such fees before making any payment to RBCL. In remitting the VAT withheld, RBPI shall use
BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes
Withheld). The duly filed BIR Form No. 1600 and the 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 RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the
passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as
an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in
quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the
first three copies for RBCL and the fourth copy for RBPI 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 is being issued on the basis of the foregoing facts as presented. However, if upon
investigation, it will be disclosed that the facts are different, then this ruling shall be without force and
Very truly yours,
By:

Legal Service
Footnotes
(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
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of file previous
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one
half percent (1 1/2%).1
xxx xxx xxx
August 4, 2006
Art. 11 RP-UK Tax Treaty;

Sec. 108 National Internal Revenue Code of 1997;
Sec. 4.108-3(a) Revenue Rulings No. 16-2005;
BIR Ruling ITAD No. 32-00, 25-99
BIR Ruling No. 096-95, 101-84, 046-80
Romulo Mabanta Buenaventura Sayoc & De Los Angeles

8741 Paseo de Roxas, City of Makati, Philippines
Attention: Ms. Priscilla B. Valer
Gentlemen :
This is in reference to your letter dated April 27, 2006, requesting confirmation of your opinion that
the royalties paid by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt & Colman
(Overseas) Limited (R&C), would be subjected to the preferential tax rate of 25% pursuant to the
Convention between the Government of the Republic of the Philippines and the Government of the United
Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (RP-UK Tax Treaty).
From the documents submitted it is represented that R&C is a corporation organized and existing
under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, SL13UH, UK
as supported by the Residence Certificate issued by HM Revenue & Customs on February 13, 2006, and
confirmed by the Philippine Embassy on February 24, 2006; that R&C is not registered either as a
corporation or partnership in the Philippines as supported by the Certification of Non-Registration of
Corporation/Partnership issued by the Securities and Exchange Commission on April 26, 2006; that RBPI
is a corporation organized and existing under the laws of the Philippines with principal office at Unit 2601
The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City, Metro Manila; that R&C and
RBPI entered into a License Agreement whereby R&C, as licensor, granted RBPI, as licensee, the right to
use the Intellectual Property Rights, defined in the License Agreement to mean the Trademarks (including
service marks), Patents, Design and Model Rights, Know-How and all current and future copyrights and
rights to databases relating to the design, production, distribution, marketing and sale of the household,
health, and personal care products developed and prepared for launch by the R&C and subsequently
launched and marketed by RBPI; that in consideration, RBPI shall pay R&C a royalty in the amount of: (i)
4% if the relevant trademark is not owned by RBPI and (ii) 3% of the net revenues of the products if the
relevant trademark is owned by RBPI; and that the License Agreement: shall commence on the
Commencement Date specified therein and shall continue for an indefinite period of time, unless
terminated earlier in accordance with the terms thereof.
In reply, please be informed that Article 11 of the RP-UK Tax Treaty provides:
"Article 11
ROYALTIES
1. Royalties arising in a Contracting State which are derived and beneficially owned by a
resident of the other Contracting State may be taxed in that other State.
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:
(i) by an enterprise registered with the Philippine Board of Investments and engaged in
preferred areas of activity or
(ii) in respect of cinematograph films or tapes for television or radio broadcasting.
b) in all other cases, 25 per cent of the gross amount of the royalties.
3. The term "royalties" as used in this Article means payment of any kind received as a
work (including cinematograph films, and films or tapes for radio or television
broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or
for the use of, or the right to use, industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific experience.
4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of
the royalties, being a resident of a Contracting State, carries on a trade or business in the
other Contracting State in which the royalties arise, through a permanent establishment
situated therein, or performs in that other State professional services from a fixed base
situated therein and the right or property in respect of which the royalties are paid is
effectively connected with such permanent establishment or fixed base. In such a case, the
provisions of Articles 7 or 13, as the case may be, shall apply.
5. Royalties shall be deemed to arise in a Contracting State where the payer is that State itself,
a political sub-division, a local authority or a resident of that State. Where, however, the
person paying the royalties, whether he is a resident of a Contracting State or not, has in a
Contracting State a permanent establishment or fixed base in connection with which the
obligation to pay the royalties was incurred and the royalties are borne by that permanent
establishment or fixed base, then the royalties shall be deemed to arise in the Contracting
State in which the permanent establishment or fixed base is situated.
6. Where, owing to the special relationship between the payer and the beneficial owner or
between both of them and some other person, the amount of the royalties paid, having regard
to the use, right or information for which they are paid, exceeds the amount which would
have been agreed upon by the payer and the beneficial owner in the absence of such
relationship, the provisions of this Article shall apply only to the last-mentioned amount. In
that case, the excess part of the payments shall remain taxable according to the law of each
Contracting State, due regard being had to the other provisions of this Convention."
This means that in order for R&C to claim the 25% preferential tax rate, the following requisites
must be proven to concur:
1. R&C is a resident of the United Kingdom;
2. R&C is not carrying on trade or business in the Philippines through a permanent

establishment situated in the Philippines;
3. RBPI is not registered with the Philippine Board of Investments and engaged in preferred
areas of activity; EaSCAH
4. R&C is not receiving royalty payments in respect of cinematograph films or tapes for
television or radio broadcasting.
From the facts as you have represented above it can be ascertained that R&C possesses all the
requisites necessary to qualify for the 25% preferential tax rate provided under Article 11 12(b) of the
RP-UK Tax Treaty.
It is important to note that as provided in Section 108 of the National Internal Revenue Code of
1997, as amended, the royalty payments to be remitted by RBPI will still subject to the twelve percent
(12%) Value-added Tax (VAT):
tax equivalent to . . . percent . . . of gross receipts derived from the sale or exchange of services. . .
The phrase 'sale or exchange of services' means . . . and . . . 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
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
xxx xxx xxx"
In connection with this, attention should also be taken of Sec. 4.108-3(a) of Revenue Regulations
No. 16-2005 dated September 1, 2005, which provides:
"The VAT on rental and/or royalties payable to non-resident foreign corporations or owners
for the sale of services and use or lease of properties in the Philippines shall be based on the
contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the
payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation
or owner in the manner prescribed in Sec. 4. 114-2(b) hereof."
In. view of the foregoing, this Office is of the opinion and so holds that the royalties paid by RBPI
to R&C under the License Agreement are subject to Philippine income tax at 25% of the gross amount of
the royalties, pursuant to the RP-UK tax treaty, and to VAT at 12% of the gross amount thereof.
With regard to the procedures for withholding and paying the VAT, RBPI, being the resident
withholding agent and payor in control of payment shall be responsible for the withholding of the final
VAT on such fees before making any payment to R&C. In remitting the VAT withheld, RBPI shall use
Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as
from RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the
passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as
an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in
quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the
first three copies for R&C and the fourth copy for RBPI 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 is being issued on the basis of the foregoing facts as presented. However, if upon
investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. DCASIT
Very truly yours,
By:

Legal Service
July 28, 2006
Articles 5 & 7 Philippines-Switzerland Tax Treaty; ITAD

Ruling No. 24-04
V.C. Mamalateo And Associates

Unit 6C, 20 Lansberge Place
170 T. Morato Avenue, Quezon City
Attention: Carmencita P. Victorino

Partner
Gentlemen :
This refers to your letter dated May 12, 2006, on behalf of your client, Electrowatt-Ekono Ltd.
("EEL" for brevity), requesting for a ruling that: CAaDTH
1. EEL does not have a permanent establishment in the Philippines pursuant to Article 5(2)(h)
of the Philippines-Switzerland tax treaty; and
2. Since EEL does not have a permanent establishment in the Philippines under the tax treaty,
the compensation paid by United Pulp and Paper Co., Inc. ("UPPC" for brevity), a domestic
corporation, to EEL, as consideration for engineering works and services under the
Engineering Services Contract for the Coal Fired Boiler Plant dated April 30, 2004 and the
Amendment to the Engineering Service Contract dated November 30, 2004, is exempt from
Philippine income tax and consequently from the withholding income tax pursuant to Article
7(1) in relation to Article 5(2)(h), both of the Philippines-Switzerland tax treaty.
It is represented that EEL is a nonresident foreign corporation organized and existing under the
laws of Switzerland with principal office at Hardturmstrasse 161, Postfach 8037 Zurich, Switzerland as
shown in the Certificate of Residence dated April 25, 2006; that EEL is not registered either as a
corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration
issued by the Securities and Exchange Commission on June 23, 2006; that, on the other hand, UPPC is a
corporation organized and existing under the laws of the Philippines with principal office at 5th Floor,
Phinma Plaza, 39 Plaza Drive, Rockwell Center, Makati City.
It is further represented that on April 30, 2004, EEL and UPPC entered into an Engineering and
Supervision Services Contract for Coal Fired Boiler Plant ("Contract" or brevity) to construct a new
circulating fluidized bed boiler at its compound at Calumpit, Bulacan; that under the Contract, EEL shall
provide UPPC documentation and drawings for the Balance of Plant (BOP) engineering, machinery
design, drawing services and Plant civil engineering and shall render supervisory services for the erection,
installation, commissioning, start up and performance test of the said plant for a consideration of USD
One Million Two Hundred Seventy Six Thousand Five Hundred Ninety Four (US$ 1,276,594.00); that on
April 26, 2005 (Amended Contract), EEL and UPPC agreed to amend the following Articles of the
Engineering and Supervision Services Contract for Coal Fired Boiler Plant:
1. The Definitions under Article 1 of the Contract;
2. The Obligations of the Engineer under Article 3 of the Contract;
3. UPPC's obligations under Article 4 of the Contract;
4. The Contract Price under Article 5 of the Contract; and
5. The Terms of Payment under Article 6, and Article 25 respectively of the Contract;
That the highlights of the foregoing amendments are as follows:
1. Amendment No. 1. to the Engineering and Supervision Services Contract: (effective

November 30, 2004)
a) The Contract is renamed as Engineering Services Contract;
b) The provisions of the Supervisory Services under Article 3 (Obligations of the

Engineer) of the amended contract are deleted;
c) The definition of the term "Supervisor" is deleted; and
d) The Contract Price is reduced to USD One Million Forty Four Thousand Two
Hundred (US$1,044,200.00)
It is also represented, based on a July 11, 2006 notarized Sworn Statement of Aurasa Jinawath,
Vice President/Finance & Treasurer of the UPPC, that EEL did not perform any construction, erection,
commissioning, start-up and performance test of the Plant under the Original and Amended Contract dated
April 31, 2004 and April 26, 2005 respectively; that a local company did the construction, erection,
commissioning, start-up and performance test of the subject Plant; that EEL did not perform any
supervision services under (i.e. including prior to, during or after the amendment thereof) the said Contract
for the erection, installation, commissioning, start up and performance test of the said plant; that pursuant
to Section 3.2(1) of both the original and Amended Contract EEL rendered only the following services to
UPPC:
"(1) Provision of the documentation, drawings and other necessary data of the BOP
engineering, material list, machinery design, Plant civil design and drawing services, in the form of
Technical Documents, so as to enable to successful erection, operation and maintenance of BOP as
well as Plant construction."
that EEL did not perform any supervision services under the Amended Contract dated April 26, 2005.
Moreover, it is represented that the two (2) employees of EEL, Mr. Peter Heizelmann and Mr.
Andreas Bacholen, who rendered engineering works under the above mentioned original and amended
Contracts, stayed in the Philippines for a total of forty-nine (49) days and twenty-three (23) days,
respectively, as shown in the certification dated June 15, 2006 issued by UPPC's Vice-President for
Finance and Treasurer, Aurasa Jinawath.
In reply, please be informed that Article 7 of the Philippines-Switzerland tax treaty provides, viz:
"Article 7
BUSINESS PROFITS
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 that permanent establishment.
xxx xxx xxx."
In relation thereto, Article 5 of the same tax treaty defines permanent establishment, as follows:
"Article 5
of business through which the business of the enterprise is wholly or partly carried on. aCcHEI
b) a branch;
c) an office;
d) a factory;
e) a workshop;
resources;
g) a building site, a construction, assembly or installation project or supervisory

activities in connection therewith, but only where such site, project or activity
continues for a period of more than six months;
h) the furnishing of services, including consultancy services, by an enterprise through

employees or other personnel engaged by the enterprise for such purpose, but only
where activities of that nature continue (for the same or a connected project) within
the country for a period or periods aggregating more than six months within any
twelve-month period.
xxx xxx xxx."
Based on the foregoing provisions, if a corporation which is a resident of Switzerland carries on

business in the Philippines through a permanent establishment situated therein, the profits of the said
Swiss corporation shall be subject to Philippine income tax but only so much of them as is attributable to
the permanent establishment. For this purpose, a corporation may be deemed to have a Permanent
Establishment in the Philippines if it furnishes services, including consultancy services through its
employees, where such rendition of services continues (for the same or connected project) within the
Philippines for a period or periods aggregating more than 6 months within any 12-month period. In other
words, if the duration of a contract until its completion in connection with furnishing services including
consultancy services exceeds more than six (6) months, an enterprise is already deemed carrying on
business in the Philippines through a permanent establishment.
Inasmuch as it has been represented that the EEL did not perform any supervisory services in the
erection, installation, commissioning, start up and performance test of the said plant and the engineering
works performed in the Philippines did not exceed 6 months or 183 days in any twelve-month period, EEL
considered as not having a permanent establishment in the Philippines. And is, therefore, not subject to
Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the same Code.
(BIR Ruling No. DA-ITAD 24-04 dated March 11, 2004)
Moreover, Section 108 of the Tax Code of 1997, as cited below, provides:
"Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services,
The phrase 'sale or exchange of services ' means the performance of all kinds of services in the
The aforementioned provisions state that the sale or exchange of services which are subject to VAT
include only those services that are performed in the Philippines. Accordingly, since the engineering
works are performed in the Philippines, the fees to be paid by UPPC to EEL in consideration thereof are
subject to the 10% VAT 1.
Very truly yours,

Legal Service
Footnotes
1. Effective January 1, 2006 the rate is increased to 12%, pursuant to Republic Act No. 9337 (An Act
Amending Section 27, 28, (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113,
1997, As Amended, And For Other Purpose)
July 28, 2006
Arts. 5 & 7, Philippines-United Kingdom of Great Britain

and Northern Ireland; BIR Ruling No. DA-ITAD 125-03

Certified Public Accountants and
Management Consultants
22F Philamlife Tower
Attention: Ma. Georgina J. Soberano

Principal, Tax & Corporate Services
Jonas L. Lasala
Assistant Manager, Tax & Corporate Services
Gentlemen :
This refers to your letter dated April 7, 2006 requesting confirmation of the following:
1. The consultant's fee received by De La Rue International (DLRI), formerly Thomas De La

Rue Limited, under its Contract for Consultancy Services for the Implementation of the
Master Plan for the Rehabilitation and Upgrading to a World Class Facility of the Security
Plant Complex, Bangko Sentral ng Pilipinas, Quezon City, Packages 3 & 4 (Contract) with
the Bangko Sentral ng Pilipinas (BSP) is exempt from income tax pursuant to the
Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty
(Philippines-UK tax treaty); and EACTSH
2. Only the payments for services actually rendered by DLRI in the Philippines are subject to
the final withholding value-added tax (VAT).
It is represented that DLRI is a nonresident foreign corporation organized and existing under the
laws of the United Kingdom with principal office at De La Rue House, Jay Close, Viables, Basingstoke,
Hampshire RG22 4BS, England and a resident of the United Kingdom for taxation purposes within the
meaning of Article 4 of the Philippines-UK tax treaty, as evidenced by the Certificate of Residence dated
February 7, 2006 under Ref 660/26600 53840 7393 issued by the Inspector of Taxes of Bristol Large
Business Service (CT) HM Revenue & Customs; that it is not registered either as a corporation or as a
partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the
Securities and Exchange Commission on March 15, 2006; that BSP is a government-owned
instrumentality organized and existing by authority of Republic Act No. 7653, otherwise known as the
New Central Bank Act with principal office address at Mabini corner Ocampo Street, Malate, Manila.
It is further represented that on May 26, 2004, DLRI and BSP entered into a Contract wherein
DLRI and BSP agreed that DLRI shall provide consultancy services for the latter; that the consultancy
services to be rendered by DLRI shall be for the implementation of the modules of packages 3 & 4 of the
SPC Master Plan; that these modules covered by the Contract pertain to the existing Security Systems,
Banknote Operations, Mint and Refining Operations, and General Services of the BSP; that the
consultancy services shall involve the review and appraisal of said systems as well as the production of
written reports or recommendation; that: to facilitate the review, DLRI representatives shall visit the
Philippines on varying periods depending on the modules being serviced; that the "terms of Reference"
attached to the Contract provides for the duration of visits of DLRI representatives in the Philippines for
each module as follows:
Module A, Security System 3 weeks

Module B, Banknote Operations 3 weeks
Module C, Mint and Refining Operations 1-2 weeks
Module D, General Services 1 week
that for and in consideration of the consultancy services provided, BSP will pay DLRI the total amount of
£372,600.00 (P39.123 million) as approved by Monetary Board Resolution No. 399 dated March 25, 2004;
and that DLRI will start work on the last module not later than twelve (12) months after issuance of Notice
to Proceed and that DLRI will complete the last module not later than eighteen (18) months from the said
date.
In reply, please be informed that Article 7 of the Philippines-UK tax treaty provides, viz:
"Article 7
BUSINESS PROFITS
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 directly or indirectly attributable to that permanent establishment.
xxx xxx xxx."
Based on the foregoing, the profits of an enterprise which is a resident of the United Kingdom shall
be taxable only in the United Kingdom unless such enterprise carries on business in the Philippines
through a permanent establishment situated therein. If the enterprise which is a resident of the United
Kingdom 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 consultancy fees received by DLRI for the services rendered in the Philippines shall be taxable in
the Philippines only if it has a permanent establishment in the Philippines in connection with the activities
giving rise to such income.
In relation thereto, Article 5 of the Philippines-UK tax treaty provides:
"Article 5
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.
xxx xxx xxx
3. An enterprise of a Contracting State shall likewise be deemed to have a permanent

establishment in the other Contracting State if:
a) it carries on supervisory activities within that other Contracting State for more
than 183 days in connection with a building site, or a construction or assembly
project which is being undertaken, in that other Contracting State; or
b) it furnishes services, including consultancy services, in that other Contracting

State through its employees or other personnel (other than agents of an
independent status within the meaning of paragraph 7 of this Article) for a
period exceeding in the aggregate 183 days within any twelve-month period.
IDSETA
xxx xxx xxx."
Inasmuch as it has been represented that the duration of stay of the personnel of DLRI in the
Philippines for the purpose of performing the consultancy services is less than an aggregate of 183 days
within any twelve-month period, as certified by the BSP in its letter dated March 9, 2006, DLRI is deemed
not to have a permanent establishment in the Philippines. (BIR Ruling DA-ITAD No. 125-03 dated August
11, 2003) Hence. the income derived by DLRI from the consultancy services rendered to BSP shall not be
subject to Philippine income tax and, consequently, to withholding tax.
VAT, the fees paid for that portion of services of DLRI which are rendered in the Philippines are,
however, subject to value-added tax (VAT) at the rate of 10% from May 26, 2004 and 12% 1 from
February 1, 2006 onwards pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly,
BSP, being the resident withholding agent and payor in control of payment shall be responsible for the
withholding of the final VAT on such fees before making any payment to DLRI. In remitting the VAT
withheld, BSP 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 BSP if it is a VAT-registered taxpayer. In case it 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, BSP 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 DLRI and the fourth copy for its file copy. (Sections 4 & 6, Revenue Regulations (RR) No.
4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002)
Very truly yours,
Commissioner of Internal Revenue By:

Legal Service
Footnotes
1. Per Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113,
114, 116, 119, 121, 148, 151, 236, 237 And 288 of the National Internal Revenue Code of 1997, as
amended, And For Other Purposes.)
July 28, 2006
Art. 12, Philippines-Japan tax treaty;


CPA-LAWYERS
Suite 5F JL Bldg., Don Jose Avila cor.
Don Gil Garcia Streets, Cebu City
Attention: Atty. Luna Mae F. Aguja

Partner
Gentlemen :
This refers to your letter dated June 26, 2006 requesting for confirmation that the payments of
Philippines Epson Optical, Inc. (EPSON-Phil.) to Pentax Corporation (PENTAX-Japan) under the Lease
Agreement (Agreement) are subject to the preferential tax rate of 25% pursuant to Article 12 of the
Philippines-Japan tax treaty and that the said payments are not subject to the value-added tax (VAT) under
Section 109(K) of the National Internal Revenue Code of 1997, as amended, (Tax Code of 1997).
It is represented that PENTAX-Japan is a nonresident foreign corporation organized and existing

under the laws of Japan as evidenced by The Certificate of All of the Present Matters of Pentax
Corporation and with principal office address at 2-36-9, Maeno-cho, Itabashi-ku, Tokyo 174-8639, Japan;
that it is engaged in the business of manufacture and sale of cameras, optical machines and instruments
and precision machines and instruments; measurement machines and instruments, equipment and material
for medical use, products made of fine ceramics, lenses, rims and other products relating to glasses,
computer-controlled automatic design and manufacturing systems, software, data processing machines and
instruments and communication machines and instruments; that it is not registered either as a corporation
or as a partnership in the Philippines as evidenced by the Certificate of Non-Registration dated June 6,
2006 issued by the Securities and Exchange Commission; on the other hand, EPSON-Phil. is a domestic
corporation with principal office address located at Special Export Processing Zone, Gateway Business
Park, Javalera General Trias, Cavite; that it is a PEZA-registered enterprise with Certificate of
Registration No. 05-11; that its business activity as an Ecozone Export Enterprise consists in the
manufacture of optical lenses and other optical related goods. AISHcD
It is further represented that on April 1, 2005. PENTAX-Japan and EPSON-Phil. executed an

Agreement whereby the former shall lease to the latter certain intangible assets (production/software
equipment) for a fee of US$9,500 per month for a period of one (1) year (and may be extended by either
party based on the notice to extend the Agreement in writing); and that on January 31, 2006, the parties
amended the said Agreement extending its enforceability until March 31, 2006.
"Article 12
2. However, such royalties may also be taxed in the Contracting State in which their arise,
and according to the laws of that Contracting State, but if the recipient is the beneficial
owner of the royalties the tax so charged shall not exceed:
a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of
the use of or the right to use cinematograph films and films or tapes for radio or
television broadcasting;
xxx xxx xxx
3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the

registered with the Board of Investments and engaged in preferred areas of investment
incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of
the royalties, shall not exceed 10 per cent of the gross amount of the royalties.
consideration for the use of, or the right to use, any copyright of literary, artistic or
scientific work including cinematograph films and films or tapes for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret formula or process,
or for the use of, or the right to use, industrial, commercial or scientific equipment, or
for information concerning industrial, commercial or scientific experience. EcDSHT
xxx xxx xxx."
Based on the foregoing, the royalty payments will be taxed at the preferential tax rate of 10 per cent
(10%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred pioneer
area of investment, 15 per cent (15%) if the payments are in respect of the use of or the right to use
cinematograph films and films or tapes for radio or television broadcasting, and in all other cases, 25 per
cent (25%) of the gross amount of the royalties.
The rental payments made by EPSON-Phil. to PENTAX-Japan for the lease of the assets
(production/software equipment) are considered payments for the "use of or the right to use industrial,
commercial or scientific experience" as defined under paragraph 4 of Article 12 of the Philippines-Japan
tax treaty.
Such being the case, this Office is of the opinion and so holds that since EPSON-Phil. is not a
BOI-registered enterprise engaged in preferred pioneer areas of investment, and, the subject royalty
payments are not paid in respect of the use of or the right to use cinematograph films and films or tapes for
radio or television broadcasting, the said royalty payments by EPSON-Phil. to PENTAX-Japan under the
said Agreement shall be subject to tax at the rate not exceeding 25% of the gross amount of the royalties
pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 20-04 dated
March 8, 2004)
As regards the imposition of the VAT on the lease of properties (assets) of PENTAX-Japan, please
be informed further that Section 108 of the Tax Code of 1997 1 provides as follows:
equivalent to ten percent (10%) 2 of gross receipts derived from the sale or exchange of services,
including the use or lease of properties. (Emphasis supplied)
xxx xxx xxx"
Thus, in general, the VAT is imposed on lease of properties (assets) by PENTAX-Japan in the
Philippines. On every payment of rental fees, EPSON-Phil. is required to withhold such VAT and treat the
same as a "passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended
[now Section 4.114-2(b) of Revenue Regulations No. 16-05].
153866, February 11, 2005), the Supreme Court held, viz: ITECSH
"Special laws may certainly exempt transactions from the VAT 3. However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the special law
under which respondent was registered. The purchase transaction it entered into are, therefore, not
VAT-exempt. These are subject to the VAT; respondent is required to register.
xxx xxx xxx
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate
because the ecozone within which it is registered is managed and operated by the PEZA as a separate
customs territory. This means that in such zone is created the legal fiction of foreign territory. Under
the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue
(BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of
the territorial border of the taxing authority. If exports of goods and services from the Philippines to a
foreign country are free of the VAT, then the same rule holds for such exports from the national
territory — except specifically declared areas — to an ecozone.
xxx xxx xxx
VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect
burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for
the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on
its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming
within the purview of the general rule. DSETcC
xxx xxx xxx"
Based on the foregoing, transactions exempt from. VAT by reason of PD 66 and RA 7916 and
Such being the case, the payment of rental fees by EPSON-Phil., being a PEZA-registered
enterprise, to PENTAX under the Agreement should be, as it is hereby confirmed to be, exempt from
VAT.
Very truly yours,
By:

Legal Service
Footnotes
9337]
July 25, 2006
Philippines-Japan Tax Treaty, Article 10; BIR Ruling No.

156-81
Follosco Morallos & Herce

Suite 1506, 15th Floor, 88 Corporate Center
141 Valero Street corner Sedeño Street
Salcedo Village, 1227 Makati City
Attention: Ms. Rachel P. Follosco

Legal Counsel
Gentlemen :
This refers to your letter dated August 12, 2005, on behalf of your client, Kyoshin (Philippines)
Corporation ("KPC"), requesting confirmation of your opinion that Kyoshin Co. Ltd. ("KCL"), is entitled
to the ten percent (10%) preferential tax rate on its dividend income from KPC, pursuant to Article
10(2)(a) of the Philippines-Japan tax treaty. HCacTI
It is represented that KCL is a non-resident foreign corporation duly organized and existing under
the laws of Japan with principal office at 7-go, 16-ban, Enokicho, Suita-Shi, Osaka Pref., Japan and with
Corporate No. 1209-01-001673 as certified by the Registrar, Kita-Osaka Branch, Osaka Legal Bureau; that
it is not registered either as a corporation or as a partnership in the Philippines per certification dated
August 2, 2005 issued by the Securities and Exchange Commission; that KPC is a corporation organized
and existing under the laws of the Philippines and a wholly owned subsidiary of KCL, with principal
address located at 108 Innovation Drive corner Reliance Drive, Carmelray Industrial Park 1, Canlubang,
Laguna; that as of June 15, 2005, KCL is a stockholder of KPC and owns One Hundred Six Thousand Five
Hundred Ninety Five (106,595) shares of KPC, with a par value of One Hundred Pesos (P100.00) per
share, equivalent to a total amount of Ten Million Six Hundred Fifty Nine Thousand Five Hundred Pesos
(P 10,659,500.00) representing 100% of the outstanding and issued shares of KPC as evidenced by the
Secretary Certificate issued by KPC's Corporate Secretary dated October 17, 2005; that in a Special
Meeting of the Board of Directors of KPC, the Board declared cash dividends amounting to Five Million
Seven Hundred Twenty Thousand Pesos (P 5,720,000.00) from its unrestricted retained earnings in favor
of its stockholders of record as of December 31, 2005 and payable on or before December 31, 2005; that
since KPC is a wholly owned subsidiary of KCL, the entire Five Million Seven Hundred Twenty
Thousand Pesos (P 5,720,000) will accrue in its favor: and that the dividends accruing in favor of the five
(5) directors of KPC who own one (1) share each shall likewise be payable to KCL being the beneficial
owner of the five (5) nominal shares recorded in the names of the nominee directors of KPC.
"Article 10

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:
payment of the dividends; (Emphasis supplied) cCDAHE
The provisions of this paragraph shall not affect the taxation of the company in respect
of the profits out of which the dividends are paid.
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 abovequoted provisions, the Philippines may tax the dividends paid by a Philippine
company to a Japanese company at a rate not exceeding ten percent (10%) if the latter holds directly at
least twenty-five percent (25%) either of the voting shares or of the total shares of the former for a period
of six (6) months immediately preceding the date of payment of the dividends.
Considering that KCL directly holds 100% of KPC's shares of stock as of June 15, 2005, which is
six (6) months immediately preceding the date of payment of the dividends, this Office is of the opinion
and hereby holds that the dividend payments of KPC to KCL are subject to the ten percent (10%)
preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. (BIR Ruling No.
156-81 dated July 12, 1981)
Very truly yours,
By:

Legal Service
July 25, 2006
DA-ITAD BIR RULING NO. 080-06
Article 12 of the Philippines-United States of America tax

treaty; BIR Ruling No. DA-ITAD-084-00
SGV & Co.

6760 Ayala Avenue
1226 Makati City
Attention: L.P. Ferrer
Gentlemen :
This refers to your letter dated October 24, 2005, received by this Office on February 2, 2006, on
behalf of your client GOLDEN ARCHES DEVELOPMENT CORPORATION (GADC), requesting
confirmation that the interest on loans paid by GADC to MCDONALD'S RESTAURANT OPERATIONS,
INC. (MRO), is subject to the preferential final withholding tax rate of 15% pursuant to Article 12(2) of
the Philippines-United States of America tax treaty.
It is represented that MRO is a corporation organized and existing under the laws of the United
States of America with principal address at 2711 Centerville Road, Suite 400, Wilmington, Delaware
19801; that it is not registered either as a corporation or as a partnership in the Philippines per certification
issued by the Securities and Exchange Commission dated November 10, 2005; that GADC is a corporation
organized and existing under the laws of the Philippines with principal address at 17th Floor, Citibank
Center Building, Paseo de Roxas Avenue, Makati City.
It is further represented that on March 17, 2005, GADC and MRO executed a Loan Agreement
(Agreement) whereby GADC was granted a loan by MRO in the amount of Twelve Million Dollars
($12,000,000.00) with interest at ten percent (10%) per annum payable in Philippine Peso equivalent
thereof; that the loan is evidenced by a Promissory Note issued by GADC in favor of MRO attached to the
Agreement; and that the transaction subject of the instant request for a ruling 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 of the taxpayers involved.
In reply, please be informed that Article 12 of the Philippines-United States of America tax treaty
"Article 12
Interest
1. Interest derived by a resident of one of the Contracting States from sources within the
other Contracting State shall not be taxed by the other Contracting State at a rate in
excess of 15 percent of the gross amount of such interest.
xxx xxx xxx"
5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within
one Contracting States, being a resident of the other Contracting State, carries on
business in the first-mentioned Contracting State through a permanent establishment
situated therein or performs in that other State independent personal services from a
fixed base situated therein and the debt claim in respect of which the interest is paid is
effectively connected with such permanent establishment or fixed base. In such a case,
the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal
Services), as the case may be, shall apply. TSIDaH
xxx xxx xxx
7. The term 'interest' as used in this Convention means income from debt-claims of every
kind, whether or not secured by mortgage and whether or not carrying a right to
participate in the debtor's profits, and in particular, income from government securities
and income from bonds or debentures, including premiums and prizes attaching to
such securities, bonds or debentures as well as income assimilated to income from
money lent by the taxation law of the Contracting State in which the income arises,
including interest on deferred payment sales."
xxx xxx xxx"
Since MRO is not engaged in business in the Philippines through a permanent establishment
situated therein, your opinion that interest earned by MRO from the loan it extended to GADC shall be
plainly considered as interest income subject to 15% withholding tax pursuant to Article 12(2) of the
Philippines-United States of America tax treaty is hereby confirmed. (BIR Ruling No. DA-ITAD-084-00
dated August 1, 2000)
Moreover, the Loan Agreement executed between GADC and MRO is subject to documentary
stamp tax imposed under Section 179 of the NIRC of 1997, as amended by Republic Act No. 9243 1, at a
rate of (P1.00) for each Two Hundred Pesos (P200) or a functional part thereof, of the issue price of any
such loan contract.
Very truly yours,
By:

Legal Service
Footnotes
1. Republic Act No. 9243 — An Act Rationalizing The Provisions On The Documentary Stamp Tax Of The
National Internal Revenue Code of 1997, as amended and for other purposes. (Effective date is March 20,
July 19, 2006
Arts. 5 & 7, Philippines-Japan Tax Treaty;


20th Floor, Tower 1 The Enterprise Center
1200 Makati City
Attention: Maria Victoria C. Españo

Tax Partner
Gentlemen :
This refers to your letter dated February 6, 2006 on behalf of your client, Koshin Philippines
Corporation (Koshin), seeking for confirmation of your opinion that the service fees paid by Koshin to KJ
Corporation (KJ) under the Support Service Agreement are not subject to income tax and value-added tax
pursuant to the provision of the Philippines-Japan tax treaty and the National Internal Revenue Code (Tax
Code of 1997).
It is represented that KJ is a nonresident foreign corporation and is a taxable person in Japan with
address at 609-C KSP West Belg, 3-2-1 Sakado, Takatsu-ku, Kawasaki, Kanagawa, Japan, as shown in the
Certificate of Status of Taxable Person issued by the District Director of Kawasaki-kita Tax Office; that
KJ is not registered either as a corporation or as a partnership in the Philippines as shown in the Certificate
of Corporate Filing/Information issued by the Securities and Exchange Commission Cebu Extension
Office on January 6, 2006; that Koshin is a corporation duly organized and existing under the laws of the
Philippines with principal address located at Mactan Economic Zone II, Lapu-Lapu City, Cebu; that
Koshin is engaged in the manufacture of various thin film optical elements and modular fiber-optic
devices for electronic, medical, optical, photographic, communications, and general industrial application.
HSaCcE
It is further represented that on October 1, 2005, Koshin and KJ entered into a Support Service
Agreement (SSA) whereby KJ commits the following services to Koshin:
1. Promotion and marketing of the products of Koshin to customers in Japan and other
countries;
2. Assistance for Koshin in the procurement of raw materials and supplies in Japan with regard
to quality and specifications;
3. Review of the financial and other aspects of Koshin's operation; and
4. Provision for training services;
That the above services shall in no case involve the transfer of KJ's technology, know-how, or other
intellectual property rights; that KJ shall perform the aforementioned services in Japan and in cases where
it would be necessary for KJ to send its employees in the Philippines, the stay of these individuals in the
Philippines shall not, in any case, exceed six (6) months; that as a consideration for the said services,
Koshin will pay KJ a fixed monthly fee, as indicated in the SSA; and that the SSA shall be effective for a
twelve month term commencing on October 01, 2005 subject to renewal for another twelve-month term,
unless one of the parties serves a written notice of non-renewal to the other party not later than one (1)
month prior to the expiration of the current term.
In reply, please be informed of Article 7 of the Philippines-Japan tax treaty quoted as follows:
"Article 7

xxx xxx xxx"
that permanent establishment. Applying this to the instant case, the service fees received by KJ for
services rendered in the Philippines under the SSA shall be taxable in the Philippines only if it has a
permanent establishment in the Philippines in connection with the activities giving rise to such income.
"Article 5
place of business through which the business of an enterprise is wholly or partly carried on. ASIDTa
2. The term 'fixed place of business' includes especially:
xxx xxx xxx

an independent status to whom paragraph 7 applies — provided that such activities continue (for the
same project or two or more connected projects) for a period or periods aggregating more than six
months within any taxable year. However, if the furnishing of such services is effected under an
xxx xxx xxx."
Inasmuch as it has been represented that the services will generally be performed by KJ outside the
Philippines and that its employees will not stay in the Philippines for a period or periods aggregating more
than six months within any taxable year in the course of their rendition of services to Koshin, KJ may be
considered as not having a permanent establishment in the Philippines. In other words, KJ is deemed not
to have a permanent establishment for as long as its employees do not stay in the Philippines for a period
or periods aggregating more than six months within any taxable year in the course of their rendition of
services to Koshin. (BIR Ruling No. DA-ITAD 128-05 dated November 10, 2005) In such a case, the
income derived by KJ from services rendered to Koshin shall not be subject to Philippine income tax and,
as such, shall likewise be exempt from withholding tax.
As regards the imposition of the VAT on the rendition of services of KJ, please be informed further
that Section 108 of the Tax Code of 1997 1 provides as follows:
Thus, in general, the VAT is imposed on services rendered by KJ in the Philippines. On every
payment of service fees, Koshin is required to withhold such VAT and treat the same as a "passed on"
VAT, pursuant to Section 4.11.0-3(b) of Revenue Regulations No. 7-95 as amended [now Section
4.114-2(b) of Revenue Regulations No. 16-05]. CSAaDE
"Special laws may certainly exempt transactions from the VAT. 3 However, the Tax Code
xxx xxx xxx
xxx xxx xxx
prohibition, it is deemed included. Exceptio firmat regular in casibus non exceptis. An exception
also prohibited indirectly. DSacAE
xxx xxx xxx"
Such being the case, the payment of services fees by Koshin, being a PEZA-registered enterprise, to
KJ under the above SSA should be, as it is hereby confirmed to be, exempt from VAT.
Very truly yours,
By:

Legal Service
Footnotes
9337]
July 12, 2006
Arts. 5 & 7, Philippines-Netherlands tax treaty; BIR Ruling No.

DA-ITAD 134-02

6766 Ayala Avenue, 1200 Makati City

Tax Partner
Gentlemen :
This refers to your letter, on behalf of your clients Hemisphere Leo Burnett, Inc. (Hemisphere), Arc
Worldwide Philippines Co., Inc. (Arc Worldwide) and Starcom Mediavest Group Philippines, Inc.
(Starcom), requesting confirmation of your opinion that the advisory service fees paid to Publicis
Worldwide BV (PWW) under their respective Advisory Service Contracts are in the nature of business
profits under Article 7 of the Philippines-Netherlands tax treaty, and are therefore, exempt from Philippine
income tax and ten percent (10%) value-added tax (VAT). cCaSHA
It is represented that PWW is a nonresident foreign corporation organized and existing under the
laws of The Netherlands with principal office at 1183 DJ Amstelveen, Prof. W.H. Keesomlaan 12, The
Netherlands as evidenced by an authenticated copy of its Articles of Incorporation; that it is not registered
either as a corporation or as a partnership in the Philippines as evidenced by the Certification of
Non-Registration issued by the Securities and Exchange Commission on December 5, 2005; that
Hemisphere, Arc Worldwide and Starcom are domestic corporations with principal office address at 24/F
Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City, 25/F Tower 2, The Enterprise Center,
6766 Ayala Avenue, Makati City and 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati
City, respectively.
It is further represented that PWW entered into three separate Advisory Service Contracts with
Hemisphere, Arc Worldwide and Starcom, respectively; that under the said contracts, PWW will provide
services to Hemisphere, Arc Worldwide and Starcom consisting in, but not limited to, the following:
I. Advice in Commercial & Creative Development (Quality & Product)
• Advise on the development of worldwide advertising strategies.
• Represent the Beneficiary in appropriate international business and trade association.
• Advise on the methods of approaching new clients and the means and methods of
developing big national budgets.
• Acquisition of new clients and participation in "Pitches".
• Advise on the availability of new products and services on the advertising market.
Advise as to their introduction and their development in the local market. These
services or products can be used either by the Beneficiary or made available to its
clients. Such advice will include, but will not be limited to:
a) Having Expert Staff make contact with potential clients and explaining the
scope and nature of the services offered by the Beneficiary.
b) Having Expert Staff prepare potential clients' written proposals covering the
objectives (what they cover and include) and expected benefits of the
Beneficiary's services.
• Advise regarding the planning, design layout and content of advertising material,
promotion programs, sales promotion, etc.
• Advise to insure the presence, in all the Group's companies, of a high level of quality
and excellence in campaigns.
II. Advise in Media and Research
Assistance in this area is as follows:
• General advice in Research (methodology, approach)
• Advise regarding national and international market surveys and any specific analysis
in relation to local clients.
• Advise regarding the drawing up of action plans and the definition of media
operations.
III. Advise in Finance and Administration
The financial and technical advice includes the following areas:
• Drawing up financing plans.
• Advise on available credit and assistance in procuring funds.
• Advise on treasury management.
• Statistical evaluations and cost comparisons.
• Advise on setting guidelines for accounting, cost accounting, management

accounting, auditing procedures and financial management.
• Initiating and monitoring yearly business plans and budget.
• Cash flow planning and reduction of foreign exchange exposure.
• Providing management systems including short and long range financial planning.
• Tax and legal advice and assistance.
• Advise with respect to the Publicis Group worldwide insurance management service.
• Procurement of insurance plan and payment of insurance costs.
• Advise on the selection of software systems and the installation of these systems.
• Advise on computer engineering and technology.
• Advise on telecommunications procurement and services.
• Advise on Human resource management issues.
• Advise on the training of personnel, personnel evaluation, and remuneration and

profit-sharing plans.
• Advise on administrative organization.
IV. Advise on Other Issues
• Advise on the development of the commercial strategy of the Beneficiary.
• Advise on the global knowledge database.
• Advise on the selection of key staff member.
• Advise oil strategies for pursuing new business and key growth strategies. Help select
aid manage growth of new markets.
• Advise on accounting and cost control. Advise on efforts to maintain profitability of

units. TAaHIE
that the abovementioned services are and will be performed primarily outside the Philippines, and in the
event that the presence of PWW's personnel are required in the Philippines, their stay will not exceed an
aggregate period of 183 days within any twelve-month period; and that the three contracts are made
effective as of January 1, 2003 and shall remain in force and effect until terminated for any reason by
either Party.
In reply, please be informed that Article 7 of the Philippines-Netherlands tax treaty provides, viz:
"Article 7
BUSINESS PROFITS
1. The profits of an enterprise one of the States shall be taxable only in that State unless
the enterprise carries on business in the other 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 that permanent establishment.
xxx xxx xxx."
Based on the above provision, the profits of an enterprise which is a resident of The Netherlands
shall be taxable only in The Netherlands unless such enterprise carries on business in the Philippines
through a permanent establishment situated therein. If the enterprise which is a resident of The
Netherlands 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 PWW for the services rendered in the Philippines shall be taxable in the
Philippines only if it has a permanent establishment in the Philippines in connection with the activities
giving rise to such income.
In relation thereto, Article 5 of the Philippines-Netherlands tax treaty provides:
"Article 5
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, quarry, or other place of exploration or extraction of natural

resources;
g) a building site or construction or assembly project or supervisory

activities in connection therewith, where such site, project or activity continues for a
period more than 183 days; and
h) the furnishing of services including consultancy services by an

enterprise through an employee or other personnel where activities of that nature
continue (for the same or a connected project) for a period or periods exceeding in
the aggregate 183 days within any twelve-month period.
xxx xxx xxx."
Inasmuch as it is represented that the Advisory Service Contracts shall continue until terminated by
either of the respective parties, the whole of such Contract, including its continuance, upon its automatic
renewal, shall be regarded as being the "same or connected project" for the purpose of counting the
aggregate 183 days within any twelve-month period. 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 Contract within any twelve-month period. Accordingly, for as long as the employees or agents of
PWW do not stay in the Philippines for a period or periods aggregating 183 days within any twelve-month
period in the course of their rendition of services to Hemisphere. Arc Worldwide and Starcom under their
respective Contracts, then PWW is deemed not to have a permanent establishment in the Philippines to
which payment of the service fees may be attributed. Therefore, such service fees derived by PWW for the
rendition of service under the Advisory Service Contracts are exempt from Philippine income tax pursuant
to Article 7 in relation to Article 5 of the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD
132-02 dated October 9, 2003)
the fees paid for the services rendered for Hemisphere, Arc Worldwide and Starcom within the Philippines
are, however, subject to 10% (12% effective February 1, 2006, under Republic Act No. 9337) 1(72)
value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Hemisphere, Arc
Worldwide and Starcom, being the resident withholding agents and payors in control of payment shall be
responsible for the withholding of the final VAT on such fees before making any payment to PWW. In
remitting the VAT withheld, Hemisphere, Arc Worldwide and Starcom shall use 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, respectively, from Hemisphere, Arc
Worldwide and Starcom if they are VAT-registered taxpayers. In case they are non-VAT registered
taxpayers, 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, they are 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 PWW and the fourth copy for them as their respective file copy. (Sections 4 & 6,
Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002)
Very truly yours,
By:

Legal Service
Footnotes
July 5, 2006
Arts. 12, Philippines-United States tax treaty; BIR Ruling No.

DA-ITAD-187-03
Puyat Jacinto & Santos Law

12/F Manilabank Building
6772 Ayala Avenue
1226 Makati City
Attention: Atty. Virginia B. Viray

Atty. Divina Gracia Cabildo-Yap
Gentlemen :
This refers to your letter dated November 29, 2005 on behalf of your client, Morgan Stanley
Emerging Markets Inc. (MSEMI), requesting confirmation of your opinion that the interests on a loan
advanced by MSEMI to Philippine Asset Investment (SPV-AMC) Inc. (PAII) shall be subject to the
preferential tax rate of fifteen percent (15%) pursuant to Article 12(2) of the Philippines-United States of
America (US) tax treaty.
It is represented that MSEMI is a nonresident foreign corporation duly organized and existing under
the laws of the State of Delaware, USA with principal address at 1585 Broadway, New York, USA; that it
is not registered either as a corporation or as a partnership in the Philippines per Certification of
Non-Registration issued by the Securities and Exchange Commission (SEC) dated November 29, 2005;
that, on the other hand, PAII is a corporation duly organized and existing under the laws of the Philippines
per Certificate of Incorporation and Company Registration No. CS200412996 issued by the SEC dated
August 20, 2004; that PAII is organized as a Special Purpose Vehicle (SPV) pursuant to Republic Act No.
9182, otherwise known as SPV Act of 2002, to engage in the business of investing in or acquiring Non
Performing Assets (NPAs) of Financial Institutions (FIs).
It is further represented that on January 3, 2005, MSEMI and PAII entered into a Loan Agreement
where an amount of US$2,920,000.00 equivalent to Php164,045,600.00 was advanced by MSEMI to PAII
to be used by PAII to finance its purchase of NPAs; that the loan has a term of 25 years, with a basic
interest of 8% per annum, subject to adjustment every anniversary date of the advance based on the change
in the Philippines' 365-day treasury bill rate; that in addition to the basic interest, PAII shall pay a turnover
1 interest of 1% of its turnover exceeding Php56,000,000.00 in the financial 2 year preceding the date of
payment; that both basic and turnover interest rates in each financial year shall not exceed the T-Bill rate
plus 1% at date of drawdown of the outstanding principal balance of the advance, the rate of which is
subject to adjustment every anniversary date of the advance based on the change in the Philippines'
365-day treasury bill rate; and that MSEMI may, at the end of 25 years from the date of advance, elect to
convert all of the outstanding principal balance of the advance into shares of PAII, with each Php1,000.00
in the principal amount shall be converted into one (1) share.
In reply, please be informed that Article 12 of the Philippines-US tax treaty provides as follows:
"Article 12
INTEREST
other Contracting State shall not be taxed by the other Contracting State at a rate in excess of 15
percent of the gross amount of such interest.
other Contracting State with respect to public issues of bonded indebtedness shall not be taxed by
the other Contracting State at a rate in excess of 10 percent of the gross amount of such interest.
4. Notwithstanding paragraphs 1, 2, and 3, interest derived by —
(a) One of the Contracting States, or an instrumentality thereof (including the Central
Bank of the Philippines, the Federal Reserve Banks of the United States, the Export-Import Bank of
the United States, the Overseas Private Investment Corporation of the United States, and such other
institutions of either Contracting State as the competent authorities of both Contracting States may
determine by mutual agreement), or
b) A resident of one of the Contracting States with respect to debt obligations guaranteed
or insured by that Contracting State or an instrumentality thereof.
shall be exempt from tax by the other Contracting State.
5. Paragraphs 2, 3, and 4 shall not apply if the recipient of interest from sources within
one of the Contracting States, being a resident of the other Contracting State, carries on business in
the first-mentioned Contracting State through a permanent establishment situated therein or
performs in that other State independent personal services from a fixed base situated therein and the
debt claim in respect of which the interest is paid is effectively connected with such permanent
establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article
15 (Independent Personal Services), as the case may be, shall apply.
xxx xxx xxx
7. The term "interest" as used in this Convention means income from debt-claims of
every kind, whether or not secured by mortgage, and whether or not carrying a right to participate in
the debtor's profits, and in particular, income from government securities and income from bonds or
debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well
as income assimilated to income from money lent by the taxation law of the Contracting State in
which the income arises, including interest on deferred payment sales.
xxx xxx xxx"
Based on the foregoing, interest arising from the Philippines and paid to a resident of the US which
does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not
exceeding ten percent (10%) of the gross amount of interest with respect to public issues of bonded
indebtedness; or exempt from income tax if the interest is derived, guaranteed or insured by the US
government or an instrumentality thereof or by other institutions as may be mutually agreed upon by the
competent authorities of the Philippines and the US. In all other cases, a tax rate not exceeding fifteen
percent (15%) of the gross amount of interest shall apply.
Such being the case, this Office is of the opinion and so holds that since MSEMI is not engaged in
business in the Philippines through a permanent establishment situated therein, and the interest is neither
with respect to public issues of bonded indebtedness nor derived, guaranteed or insured by the US
government or an instrumentality thereof, the interest income to be paid by PAII to MSEMI, whether
falling under the purview of basic or turnover interest, shall be subject to a preferential tax rate of 15%
pursuant to Article 12(2) of the Philippines-US tax treaty. (BIR Ruling No. ITAD-187-03 dated December
1, 2003)
Moreover, the subject Loan Agreement shall be subject to the documentary stamp tax imposed
under Section 179 of the National Internal Revenue Code of 1997 (Tax Code), as amended. The same Tax
Code also provides that the corresponding documentary stamp taxes shall be levied, collected and paid, for
and in respect of the transactions so had or accomplished, by the person making, signing, issuing,
accepting, or transferring the document, instrument or paper wherever the same is made, signed, issued,
accepted or transferred when the obligation or right arises from Philippine sources or the property is
situated in the Philippines. Thus, the burden of paying the documentary stamp tax is placed upon the
parties to the contract and leaves the tax to be paid indifferently by either of the parties, and accordingly,
the party assuming payment of said tax under the contract becomes directly liable therefor. But if for one
reason or another, the said tax is not paid, either party to the contract may be made liable to the tax.
In view thereof, the documentary stamp tax (including penalties thereto, if there are any) on the
Loan Agreement must be paid and the corresponding return thereon be filed by either PAII or MSEMI in
accordance with the provisions of the Revenue Regulations No. 9-200 (Mode of Payment and/or
Remittance of the Documentary Stamp Tax (DST) under Certain Conditions) and the Tax Code, as
amended.
Very truly yours,
By:

Legal Service
Footnotes
1. Turnover means gross revenue of PAII before deduction of expenses, including revenue arising from PAII's
principal activities as well as any items of revenue and gains that arise incidentally
2. Financial Year means December 1 to November 30 or such period for which PAII publishes its financial
statements
June 23, 2006
Article 13 (Royalties) Philippines-United States of America tax

treaty;

20th Floor, Tower 1
6766 Ayala Avenue
1200 Makati City

Tax Partner
Gentlemen :
This refers to your letter dated November 18, 2005 requesting confirmation that royalties to be paid
by Warner Music Philippines, Inc. (Warner Philippines) to WEA International, Inc. (WEA International)
pursuant to a License Agreement are subject to fifteen percent (15%) income tax under Article 13
(Royalties) of the Convention between the Government of the Republic of the Philippines and the
Government of the United States of America with Respect to Taxes on Income (Philippines-United States
of America tax treaty).
It is represented that WEA International is a corporation organized and existing under the laws of
the United States of America, with address at 1 Commerce Center, Suite 714, 12th and Orange Street,
Wilmington, Delaware 19801, United States of America, as confirmed by its Certificate of Incorporation
filed at the Office of the Secretary of State of the State of Delaware on February 21, 1975 and by the
subject License Agreement; that WEA International is not registered as a corporation or as a partnership in
the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated
April 11, 2005 issued by the Securities and Exchange Commission; and that, on the other hand, Warner
Philippines is a corporation organized and existing under the laws of the Philippines, with address at 4th
Floor, Ma. Daniel Building, 470 M.H. del Pilar corner San Andres Streets, Malate, Manila, Philippines, as
confirmed by its Articles of Incorporation and By-Laws filed at the Securities and Exchange Commission
on October 29, 1999 and be the subject License Agreement.
It is further represented that WEA International has the right to license the right to sell and/or to
manufacture and sell in countries other than the United States, records 1 containing the sound
performances embodied upon or in recording devices such as metal masters and/or master recording tapes
(herein called "Masters" within the Licensed Catalogues 2; that, on the other hand, Warner Philippines is
engaged and will continue during the term of the License Agreement to be actively engaged in the
manufacture and sale of records in the Philippines (herein called the "Licensed Territory"), and desires to
obtain certain rights to sell and/or manufacture and sell records in the Licensed Territory reproducing the
sound performances embodied upon or in the Masters within the Licensed Catalogues; that on December
1, 1992, WEA International and Warner Philippines entered into a License Agreement whereby WEA
International granted Warner Philippines the following rights subject to certain restrictions, terms and
conditions of the License Agreement:
(a) the right to use in the Licensed Territory each and every master recording in the Licensed
Catalogues (such Masters being thereinafter referred to as the "available Masters") except
such master recordings as are committed or restricted with respect to the Licensed Territory
at the time of their acquisition and except such master recordings as are subject to
contractual commitments in the Licensed Territory prior to the effective date of the License
Agreement (for so long as such commitments remain in effect) for the purpose of
manufacturing and selling records therefrom during the term of the License Agreement in
the Licensed Territory only; ADHCSE
(b) the right (to the extent WEA International has such right) to use in the Licensed Territory the
name, likeness and biography of each artist whose performance is embodied in the said
master recording only for advertising and trade purposes in connection with the sales of
records thereunder; it being expressly understood and agreed that no such use shall be in the
nature of an endorsement, commercial tie-in or association other than with reference to
records by such artist manufactured and/or sold by Warner Philippines thereunder. Warner
Philippines shall abide by any restrictions imposed upon WEA International with respect to
such use of which WEA International has notified Warner Philippines;
(c) the right to grant licenses for the public performance and/or broadcasting in the Licensed
Territory of recordings in the Licensed Catalogue, subject to the right of copyright
proprietors; and
(d) during the term of the License Agreement, WEA International shall not grant rights to third
parties which derogate from or are inconsistent with the rights therein granted to Warner
Philippines.
that in consideration of the foregoing, Warner Philippines shall pay WEA International royalties (in
United States dollars) computed as follows:
(a) Master Use Royalty. In consideration of the rights granted to manufacture and sell records
derived from available Masters, Warner Philippines shall pay WEA International a Master
use royalty in respect of one hundred percent (100%) of all records sold thereunder,
calculated at the rate of twenty-six percent (26%) of the Royalty Base ("retail list price" or
"suggested retail price" per record in the country of sale); and
(b) Performance Royalties. To the extent permitted by applicable law, Warner Philippines shall
pay WEA International an amount equal to fifty percent (50%) of the fees, if any, received or
credited to Warner Philippines by reason of the public performance and/or broadcasting of
the records in the Licensed Catalogues.
and that the License Agreement, which became effective on December 1, 1992 for an initial period of one
(1) year, shall be renewed automatically thereafter indefinitely unless otherwise terminated.
In reply, please be informed that as regards income tax, the royalties for the musical copyrights to
be paid by Warner Philippines to WEA International are subject to the preferential tax rate under Article
13 of the Philippines-United States tax treaty, to wit.:
"Article 13
ROYALTIES
(ii) 15 percent of the gross amount of the royalties, where the royalties are
paid by a corporation registered with the Philippine Board of Investments and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident of a third State.
including cinematographic films or films or tapes used for radio or television broadcasting, any
patent, trade mark, design or model, plan, secret formula or process, or other like right or property,
or for information concerning industrial, commercial or scientific experience. The term "royalties"
also includes gains derived from the sale, exchange or other disposition of any such right or property
which are contingent on the productivity, use, or disposition thereof. aEDCSI
xxx xxx xxx"
Paragraph 2(b)(iii) above provides that royalties arising in the Philippines and derived by a resident
of the United States shall be subject to the lowest rate of Philippine income tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third State (commonly
known as the most-favored-nation tax treatment of royalties). In relation thereto, the Supreme Court, in
must be of the same kind as those derived by a resident of the third country which are subject to the
country. Second, the mechanism employed by the other country (the United States) in mitigating the
effects of double taxation of foreign-sounded income derived by its residents must be the same with that
country under their respective tax treaties with the Philippines.
In looking for a third country which grants a most-favored-nation tax treatment on royalties, you
cited the Netherlands and, accordingly, the Convention between the Kingdom of the Netherlands and the
Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income (Philippines-Netherlands tax treaty), which entered into force on
September 20, 1991 and whose provisions on taxes apply on income derived or which accrued beginning
January 1, 1992.
As to the first condition for the most-favored-nation tax treatment, it is noteworthy that payments
for copyright of literary, artistic or scientific work (to which royalties for the musical copyrights to be paid
by Warner Philippines to WEA International are assimilated), which are considered royalties under
paragraph 3, Article 13 of the Philippines-United States tax treaty, are likewise considered as such under
paragraph 4, Article 12 of the Philippines-Netherlands tax treaty, to wit:
"Article 12
ROYALTIES
1. Royalties arising in one of the States and paid to a resident of the other State may be
taxed in that other State.
2. However, such royalties may also be taxed in the State in which they arise, and
according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax
so charged shall not exceed:
a) 10 per cent of the gross amount of the royalties where the royalties are
paid by an enterprise registered, and engaged in preferred areas of activities in that
State; and
3. The competent authorities of the States shall by mutual agreement settle the mode of
application of paragraph 2.
including cinematograph films or tapes for radio or television broadcasting, any patent, trademark, a
sign or model, plan, secret formula or process, or for the use of, or the right to use, industrial,
commercial or scientific equipment, or for the information concerning industrial, commercial or
scientific experience.
xxx xxx xxx"
As to the second condition for the most-favored-nation tax treatment, it is also noteworthy that the
United States and the Netherlands employ the same mechanism in mitigating the effects of double taxation
of foreign-sourced income derived by their residents, that is, the ordinary credit method, as provided under
United States:
"Article 23
1. In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the general principle
hereof), the United States shall allow to a citizen or resident of the United States as a credit against
the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the
case of a United States corporation owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall allow credit for the
appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying
such dividends with respect to the profits out of which such dividends are paid. Such appropriate
amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall
not exceed the limitations (for the purpose of limiting the credit to time United States tax on income
from sources within the Philippines or on income from sources outside United States) provided by
United States law for the taxable year. For the purpose of applying the United States credit in
relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of
Income) shall be applied to determine the source of income. For purposes of applying the United
paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes. HTAEIS
xxx xxx xxx"
Netherlands:
"Article 22
ELIMINATION OF DOUBLE TAXATION

xxx xxx xxx
1. The Netherlands, when imposing tax on its residents, may include in the basis upon
which such taxes are imposed the items of income which, according to the provisions of this
Convention, may be taxed in the Philippines.
2. Without prejudice to the application of the provisions concerning the compensation of

losses in the unilateral regulations for the avoidance of double taxation, where a resident of the
Netherlands derives items of income which according to Article 6, Article 7, paragraph 6 of Article
10, paragraph 6 of Article 11, paragraph 5 of Article 12, paragraphs 1 and 2 of Article 13, Article
14, paragraph 1 of Article 15, paragraphs 1 and 3 of Article 16, paragraph 2 of Article 18 and
Article 19 of this Convention may be taxed in the Philippines and are included in the basis referred
to in paragraph 1, the Netherlands shall exempt such items of income by allowing a proportionate
reduction of its tax. This reduction shall not, however, exceed that part of the Netherlands tax as
computed before the reduction is given, which is otherwise due on the said items of income.
3. Further, the Netherlands shall allow a deduction from the Netherlands tax so computed
for the items of income which according to paragraph 2 of Article 8, paragraph 2 of Article 10,
paragraph 2 of Article 11, paragraph 2 of Article 12 and Article 17 of this Convention may be taxed
in the Philippines to the extent that these items are included in the basis referred to in paragraph 1.
The amount of this deduction shall be equal to the tax paid in the Philippines on these items of
income, but shall not exceed that part of the Netherlands tax which is otherwise due on the said
items of income.
4. For the purposes of paragraph 3, where the Philippine tax actually paid on interest and
royalties arising in the Philippines is lower than 15 per cent, then, the tax paid in the Philippines on
these items of income shall be deemed to be 15 per cent.
xxx xxx xxx"
Under the ordinary credit method, the United States and the Netherlands (as countries of residence)
would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries
that is attributable to the income taxed in the Philippines (the country of source or country of situs). As a
result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the
United States and of the Netherlands on a particular income, the taxpayer would not receive full credit for
the income tax imposed by the Philippines on such income.
Under the article on Elimination of Double Taxation of the Philippines-Netherlands tax treaty, the
Netherlands applies the ordinary credit method to profits from the operation of ships and aircraft in
international traffic, and dividends, interest and royalties to the extent they are not effectively connected to
a permanent establishment or a fixed base, and income of artistes and athletes (paragraph 3, Article 22 of
the tax treaty). (In addition, if the Philippine income tax on interest and royalties is lower than 15%, for
example, 10% for interest and royalties paid under special circumstances, the Netherlands shall deem that
the income tax on such interest and royalties is paid at 15%, the difference between 15% and the lower
rate being the allowable tax sparing credit (paragraph 4, Ibid.). The tax sparing credit provision does not
apply to royalties for musical copyrights like the subject royalties to be paid by Warner Philippines to
WEA International because such royalties are subject to the rate of 15% and not lower than that.) On the
other hand, the Netherlands applies the exemption method to all other types of income whereby the
Netherlands exempts such income from Netherlands income tax (paragraph 2, Ibid.)
In fine, because the two conditions for the most-favored-nation tax treatment on royalties are both
satisfied, this Office is of the opinion and so holds that the royalties for the musical copyrights to be paid
by Warner Philippines to WEA International are subject to the preferential income tax rate of 15% based
on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax
treaty in relation to paragraph 2(b), Article 12 of the Philippines-Netherlands tax treaty. (BIR Ruling No.
DA-ITAD 111-03 dated July 29, 2003)
The subject royalties cannot be subject to the lower rate of 10% under paragraph 2(a), Article 12 of
the Philippines-Netherlands tax treaty because Warner Philippines, the company paying the royalties, is
not a registered enterprise engaged in preferred areas of activities in the Philippines (for example, if the
enterprise is registered with the Board of Investments). cDTACE
Finally, as regards value-added tax (VAT), the royalties for the musical copyrights to be paid by
Warner Philippines to WEA International are subject to VAT under Section 108(A) of the National
Internal Revenue Code of 1997 (Tax Code), to wit:
including the use or lease of properties
(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" 3
Regulations No. 14-2002, provide that Warner Philippines shall be responsible for the withholding of the
VAT on the royalties before remitting them to WEA International. In remitting the Bureau of Internal
Revenue the VAT withheld on the royalties, Warner Philippines shall use BIR Form No. 1600 (Monthly
Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Warner
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, Warner Philippines
may include as part of the cost of the musical copyrights licensed to it by WEA International the VAT
applicable. In addition, Warner Philippines is required to issue in quadruplicate the Certificate of Final
Tax Withheld at Source (BIR Form No. 2306), the first three copies for WEA International and the fourth
copy for Warner Philippines as its file copy.
Very truly yours,
By:

Assistant Commissioner, Legal Service
Footnotes
1. Records shall refer only to disc type phonegraph records of the type now in use in the Licensed Territory
covered thereby, and analog prerecorded magnetic sound tapes in reel-to-reel, cartridge and cassette
configurations and compact discs, but said term does not include any device combining sound and sight or
any other form or type of sound recording whatsoever except as specifically set forth above.
2. Licensed Catalogues shall refer to cash and every Master which is presently owned, or which may hereafter
be produced or otherwise acquired by (i) Warner Bros. Records, Inc., (ii) Elektra Entertainment, a division
of Warner Communications, Inc., or (iii) Atlantic Recording corporation or their respective successors and
or subsidiaries engaged in the record business in the United States of America, or (iv) WEA International
with respect to which WEA International has the unilateral right or disposition in the Licensed Territory
and which is released in the United States of America or the country of origin.
xxx xxx xxx"
June 23, 2006
RP-US Article 14 Tax Code of 1997;

SPI Technologies, Inc.

SPI Building, Pascor Drive
Sto. Niño, Parañaque City
Philippines
Attention: Redentor R. Gabinete

Director for Taxation
Gentlemen :
This refers to your application for relief from double taxation dated June 2, 5, 7 and 21, 2006,
requesting confirmation of your opinion that the gains to be realized by SPI Tech., L.P. (formerly known
as THLPV Acquisition, L.P.) (SPI Tech) from the acquisition of its shares in SPI Technologies, Inc.
(formerly known as SPI Acquisition Co. Inc.) (SPI) by ePLDT, Inc. (ePLDT) are exempt from capital
gains tax pursuant to the Philippine-United States of America tax treaty (RP-US tax treaty).
It is represented that SPI Tech is a corporation duly organized and existing under the laws of
Delaware, USA, with office located at 2711 Centerville Road, Suite 400, Wilmington, DE 19808 County
of New Castle Delaware, USA; that it is not registered as either a corporation or a partnership in the
Philippines per certification issued by the Securities and Exchange Commission dated May 17, 2006; that
SPI is a corporation organized and existing under the laws of the Philippines with principal office address
at SPI Building, Pascor Drive, Sto. Niño, Parañaque, Philippines; that on July 23, 2004 the Securities and
Exchange Commission approved the amended articles of incorporation of SPI in order to show an increase
in its authorized capital stock from an amount of P11,260,000.00 to P75,330,000.00 divided into 112,600
and 2,511 shares, respectively and the change in the par value of the shares from P100.00 to P30,000.00;
that out of 2,511 shares of stock of SPI, SPI Tech owns 2,480 (as evidenced by its Stock Certificate No.
13) shares with a par value of P30,000.00 per share; that ePLDT is a wholly owned subsidiary of the
publicly listed Philippine Long Distance Company (PLDT); that as of December 31, 2005, the Balance
Sheet of SPI shows that its Property and Equipment amounts to $1,363,458 (Net of Accumulated
Depreciation) while its total assets amounts to $101,720,489 thereby showing that SPI's real properties
interest in the Philippines does not comprise more than 50% of its total assets but approximately one
percent and 34/100 percent (1.34%) of its total asset.
It is further represented that on May 23, 2006, a Letter of Intent (LOI) was executed by ePLDT
which sets forth ePLDT's proposal to "acquire all of the shares of SPI from SPI Tech including all shares,
options, warrants, convertible and equity-linked securities of SPI issued and outstanding as of the date of
that Acquisition is contemplated (the 'Closing'), as would be set forth in a definitive share purchase
agreement executed by the parties (the 'Share Purchase Agreement')"; and that on May 24, 2006, SPI Tech
agreed to such proposal.
In reply, please be informed that Article 14 of the RP-US tax treaty provides as follows, viz:
"Article 14
"CAPITAL GAINS
1. Gains from the alienation of tangible personal (movable) property forming part of the
business property of a permanent establishment which a resident of a Contracting State has in the
other Contracting State or of tangible personal (movable) property pertaining to a fixed base
available to a resident of a Contracting State in the other Contracting State for the purpose of
performing independent personal services, including such gains from the alienation of such a
permanent establishment (alone or together with the whole enterprise) or of such a fixed base may
be taxed in the other State. However gains derived by a resident of a Contracting State from the
alienation of ships; aircraft or containers operated by such resident in international traffic shall be
taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in
accordance with the provisions of Article 13.
2. Gains from the alienation of any property other than those mentioned in paragraph (1)
or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which
the alienator is a resident."
Furthermore, the Reservation Clause of the same treaty provides, in part, as follows:
"Article I
Notwithstanding the provisions of Article 14 of the Convention relating to the capital gains,
both the Philippines and the United States may tax gains from the disposition of an interest in a
corporation if its assets consists principally of a real property interest located in the country.
Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or
estate to the extent the gain is attributable to a real property interest in one of the countries. The
term 'real property interest' is to have the meaning it has under the law of the country in which the
underlying real property is located."
It is clear from the aforequoted provisions that any capital gains which may be derived by SPI Tech
from the alienation of any property other than those mentioned in paragraph (1) of Article 14 of the RP-US
Tax Treaty shall be taxable only in the State where the alienator is a resident. However, it is to be noted
that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of
interests in a corporation if its assets consist principally of real property interest located in the Philippines.
"Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No.
4-86).
In the instant case, the value of the real property interest of SPI located in the Philippines as
appearing in its audited financial statements for the calendar year December 31, 2005 is less than 50% of
the value of its total assets. Thus, this Office is of the opinion and so holds that the gains that may be
derived by SPI Tech from the proposed sale of its shares in SPI to ePLDT shall be taxable only in United
States of America as paragraph 1 of the Article 14 (Reservation Clause of Article I) clearly states that "any
capital gains from the alienation of any property, other than those mentioned in paragraph 1 Article 14 of
the Philippines-United States of America tax treaty shall be taxable only in the Contracting State of which
the alienator is a resident". cHDEaC
In sum, inasmuch as the assets of SPI do not consist principally of real property interest located in
the Philippines, your opinion that the gains from the sale of shares of stock by SPI Tech to ePLDT are not
subject to capital gains tax is hereby confirmed.
This ruling shall be without force and effect unless and until an actual agreement or contract, which
stipulations are found to be consistent with the representations made herein, has been entered into by the
parties involved. Thus, upon the execution of the Share Purchase Agreement as agreed upon pursuant to
the May 23, 2006 Letter of Intent signed by both ePLDT and SPI Tech, the same must be presented to the
International Tax Affairs Division of this Bureau within 15 days from its due execution for verification
whether the representations made herein upon which this ruling is based are consistent with the actual
facts of the transaction; and for the issuances of a corresponding certification based upon a duly
accomplished BIR Form No. 1928 [Application for Relief from Double Taxation (Gains from Sale or
Transfer of Shares of Stock in Philippine Corporation)] confirming that the aforementioned sale is not
subject to capital gains tax pursuant to Revenue Memorandum Order No. 30-2002 but such transfer of
shares shall be subject to Documentary Stamp Tax under Section 175 of the National Internal Revenue
Code of 1997, as amended by Republic Act 9243, which became effective on March 20, 2004. The
application (BIR Form No. 1928) which shall be submitted to this Office must be accompanied by
complete documents required as enumerated at the back of the Form, and accompanied by a proof of
payment of documentary stamp taxes and the filing fee of P5,000.
investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and
void.

Legal Service
June 22, 2006
Article 5 & 7 of the Philippines-Singapore tax treaty;
SGV & Co.

6760 Ayala Avenue
1226 Makati City
Attention: R.C. Vinzon

Tax Services
Gentlemen :
This refers to your letter dated March 2, 2005, on behalf of your client, Samsung Electronics
Philippines Manufacturing Corporation (SEPHIL), requesting confirmation of your opinion that the fees
paid by SEPHIL to Samsung Asia Pte. Ltd. (SAPL) for consultancy services are not subject to Philippine
income tax pursuant to Articles 5(2)(j), 7(1) and 12(3) of the Philippines-Singapore tax treaty.
It is represented that SAPL is a corporation duly organized and existing under the laws of
Singapore with principal at 83 Clemenceau Avenue, #08-01 UE Square, Singapore 239920; that it engaged
in the business of research, development, manufacture, procurement, sale and distribution of electrical and
electric components, appliances, apparatus, equipment, workstations, facsimile machines and other
business equipment, software products and all related products thereto; that SAPL has a representative
office in the Philippines, the activities of which are limited to gathering economic, market, and industry
information, conducting market research for the market development in the Philippines, assisting Filipino
distributors, buyers and end-users in the importation of materials, supplies and components from the
Samsung Electro Mechanics companies abroad, conducting such other activities which consists of purely
coordination work, and acting as a liaison office between the company and the Samsung Group of
Companies; that SEPHIL is a PEZA-registered corporation duly organized and existing under the laws of
the Philippines with principal address at Block 6, Calamba Premiere International Park, Batino, Calamba,
Laguna; that it is engaged in the design, manufacture and sale of electronic products including but not
limited to optical disk drive products, their components and parts.
It is further represented that on January 1, 2003, SEPHIL and SAPL entered into a Consultancy
Agreement where, as attested by the Certification made by SAPL dated January 12, 2006, SAPL sent
employees to the Philippines to provide (a) Overall Business Consulting Services and (b) Shared Services;
that in the event that SEPHIL would request SAPL to require personnel from SAPL to be seconded or
assigned to SEPHIL, the aggregate stay of SAPL's personnel rendering the services in the Philippines shall
not exceed 183 days in a year; that as of this date, SAPL has not yet sent any employees to the Philippines;
and that as a consideration for the services rendered, SEPHIL shall pay SAPL an annual service fee, which
for 2003 was in the amount of US$310,000.
In reply, please be informed that Article 12(3) of the Philippines-Singapore tax treaty defines the
term "royalties", as follows: HcTIDC
"Article 12
ROYALTIES
including cinematographic films or tapes for television or broadcasting, any patent, trade mark,
design or model, plan, secret formula or process, or for the use of, or the right to use, industrial,
commercial or scientific equipment, or for information concerning industrial, commercial or
scientific experience."
The above tax treaty defines "royalties" to include "payments of any kind received as a
consideration for information concerning industrial, commercial or scientific experience." According to
the commentaries of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
(OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12
(Royalties), © 2005, p. 181], such information alludes to the concept of "know-how". The definition of
"know-how" adopted by the said Committee is "all the undivulged technical information, whether capable
of being patented or not, that is necessary for the industrial reproduction of a product or process, directly
and under the same conditions; inasmuch as it is derived from experience, know-how represents what a
manufacturer cannot know from mere examination of the product and mere knowledge of the progress of
technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use
them for his own account, his special knowledge and experience which remain unrevealed to the public.
Further, in the case of Philippine Refining Company vs. CIR, CTA case No. 2872 dated January 15,
1986, the Court of Tax Appeals had an occasion to rule on the distinction of service fees from royalties, to
wit:
"To distinguish between compensation for service and royalty payments, one must inquire
on whether the payee has proprietary interest in the property giving rise to the income. If the payee
has none, then the payment is a compensation for personal services, if the payee has proprietary
interest then the payment is royalty."
Applying the above discussions to the instant case, there is nothing in the subject Agreement that
requires transfer to SEPHIL of technology, equipment or other property where SAPL has proprietary
interest or that permits SAPL to impart to SEPHIL its special knowledge and experience which remain
unrevealed to the public. Inasmuch as SAPL shall render these services using its customary skills, the
compensation to be received therefor shall not constitute as consideration for the use of, or the right to use,
any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of
technology.
In this regard, Article 7 in relation to Article 5 of the Philippines-Singapore tax treaty provides:
"Article 7
BUSINESS PROFITS
xxx xxx xxx"
Moreover, Article 5 of the same treaty provides:
"Article 5
2. The term 'permanent establishment' includes specially but is not limited to:
b) A branch; AaHcIT
c) An office;
e) A factory;
f) A workshop;
g) A warehouse, in relation to a person providing storage facilities for

others;
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

other Contracting State for a period or periods aggregating more than 183 days.
(Emphasis supplied)
xxx xxx xxx"
Based on the foregoing, a corporation which is a resident of Singapore and does not carry on
business in the Philippines through a permanent establishment situated therein shall not be subject to
Philippine income tax for profits derived in the Philippines. For this purpose, a Singaporean corporation
may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of
services through its employees or other personnel continue for the same or a connected project within the
Philippines for a period or periods aggregating more than 183 days.
Inasmuch as it is represented that the services are to be performed outside of the Philippines by
SAPL except for occasional visits to render overall business consultancy services and shared services with
SEPHIL, which visits shall in no case exceed 183 days during the term of the contract, then the furnishing
of said services by SAPL through its employees or other personnel shall not constitute the carrying on of
business through a permanent establishment in the Philippines. Such being the case, payments by SEPHIL
to SAPL are considered compensation for labor or personal services performed outside the Philippines and
are therefore considered income derived from sources outside the Philippines pursuant to Section 42(C)(3)
of the Tax Code of 1997. Furthermore, since the service fees are considered income derived from sources
outside the Philippines, the payments made by SEPHIL to SAPL shall not be subject to Philippine income
tax, and consequently also to withholding tax under Section 28(B)(1) of the Tax Code of 1997. (BIR
Ruling No. 088-86 dated June 24, 1986)
Very truly yours,
By:

Legal Service
June 20, 2006
Article 34, Vienna Convention; BIR Ruling No. DA-ITAD-16-03
Embassy of Japan
Pasay City
Gentlemen :
This has reference to your Note No. 221-06 dated May 15, 2005, referred to this Office by the
requesting for a tax-free purchase on a local motor vehicle for the personal use of Mr. Norito Araki,
Second Secretary of the Embassy of Japan, specifically described as follows: DEIHAa
Make: Honda CRV 2.0AT 2WD (5P)
Model Year: 2006
Color: Shoreline
Engine Number: PNKD756401391
Frame Number: PADRD48506V401389
reads.
"ARTICLE 34
services;
"xxx xxx xxx"
that Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108,
both of the National Internal Revenue Code of 1997.
Japan or its personnel on their local purchases of goods and/or services it appearing from the list submitted
by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar
exemption to Philippine Embassy personnel on their purchases of goods and services in your country.
Hence, the herein local purchase of one (1) Honda CRV 2.0AT 2WD (5P) for the personal use of
Mr. Norito Araki, Second Secretary of the Embassy of Japan is exempt from VAT. (BIR Ruling No.
DA-ITAD-16-03 dated July 16, 2003) ECaITc
Very truly yours,

Legal Service
June 20, 2006
Article 34, Vienna Convention; BIR Ruling No. DA-ITAD-16-03
Embassy of Japan
Pasay City
Gentlemen :
This has reference to your Note No. 222-06 dated May 15, 2005, referred to this Office by the
requesting for a tax-free purchase on a local motor vehicle for the personal use of Mr. Shinichi Kakui,
First Secretary of the Embassy of Japan, specifically described as follows:
Make: Toyota Innova G DSL AT 2.5 4S

Model Year: 2006
Color: 199 Quick Silver
Frame Number: KUN40-5008812
reads:
"ARTICLE 34
services:
"xxx xxx xxx"
that Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108,
both of the National Internal Revenue Code of 1997.
Japan or its personnel on their local purchases of goods and/or services it appearing from the list submitted
by the Department of Foreign Affairs as of October 18, 2005 that your Government allows similar
exemption to Philippine Embassy personnel on their purchases of goods and services in your country. aAHSEC
Hence, the herein local purchase of one (1) Toyota Innova G DSL AT 2.5 4S for the personal use of
Mr. Shinichi Kakui of the Embassy of Japan is exempt from VAT. (BIR Ruling No. DA-ITAD-16-03
dated July 16, 2003)
Very truly yours,

Legal Service
June 16, 2006
Article 5&7, Philippines-Japan tax treaty;


Unit 807, 8th, Floor
Ayala Life-FGU Center
Mindanao Avenue Corner
Biliran Road, Cebu Business Park
6000 Cebu City, Philippines
Attention: Ms. Marivic C. Españo

Partner, Tax Advisory and Compliance
Gentlemen :
This refers to your letter dated June 1, 2005, on behalf of your client, KT Sakurai Corporation
(KTSC), requesting confirmation of your opinion that the service fees paid by KTSC to Kenko Co., Ltd.
(KCL) under their Management Agreement are not subject to Philippine income tax and value-added tax
(VAT), pursuant to the provisions of the National Internal Revenue Code of 1997 and the
It is represented that KCL is a nonresident foreign corporation with office address at 3-9-19
Nishiochiai, Shinjyuku-ku, Tokyo, Japan and is a taxable person in Japan with Tax Reference Number
165077 per Certification issued by the District Director of the Shinjuko Tax Office, Japan dated February
2, 2005; that it is not registered either as a corporation or a partnership in the Philippines per certification
issued by the Securities and Exchange Commission dated May 27, 2005; that KTSC is a corporation
organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone
Authority (PEZA) with office address at Mactan Export Processing Zone I, Lapu Lapu City, Cebu.
It is further represented that KTSC and KCL entered into a Management Agreement (Agreement)
which is effective for a twelve month-term commencing on May 1, 2004 until April 30, 2005 subject to
automatic renewal for another twelve-month term unless one of the parties serves a written notice of
non-renewal to the other party not later than one (1) month prior to the expiration of` the current term; that
under the said Agreement, KCL shall provide KTSC they following services outside of the Philippines: (a)
advertisement and promotion of sales of the products manufactured by KTSC in the Philippines to the
customers in Japan and other foreign countries; (b) formulation and implementation of a business strategy
for the customers outside the Philippines; (c) conducting of operating activities associated with sales
promotion in foreign countries requested by KTSC; (d) ordering and purchasing of parts of the products
manufactured by KTSC and making payments for KTSC; and (e) assisting the management and funding
for KTSC; that pursuant to the Agreement, the employees and personnel of KCL shall exclusively perform
the services for KTSC in Japan or in other countries outside the Philippines and that should it be necessary
for KCL to send its employees to the Philippines, the stay of these individuals shall not in any case exceed
six (6) months; that as compensation for the services performed by KCL, KTSC shall pay Nineteen
Million One Hundred Fifty Four Thousand One Hundred Seventy Yen (Y19,154,170) per year to KCL and
KCL shall send an invoice to KTSC on a monthly basis for the services rendered during the quarter
covered and it shall be paid by KTSC thirty (30) days from the receipt of such invoice; and that an
employee of KTSC came to the Philippines to render services pursuant to the Agreement on the following
dates: May 4, 2004 to May 8, 2004; and January 16, 2005 to January 20, 2005. HAECID
In reply, please be informed that Article 7(1) of the Philippines-Japan tax treaty provides, viz:
"Article 7

permanent establishment situated therein. If the enterprise carries on business aforesaid, the profits
of the enterprise may be taxed in that other Contracting State but only so much of them as is
In relation thereto, Article 5 of the said treaty provides, viz:
"Article 5
xxx xxx xxx

an independent status to whom paragraph 7 applies —, (for the same project or two or more
connected projects) for a period or periods aggregating more than six months within any taxable
year. However, if the furnishing of such services is effected under an agreement between the
Governments of the two Contracting States regarding economic or technical cooperation, that
enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent
establishment in that other Contracting State.
xxx xxx xxx"
Based on the aforementioned provisions, it is clear that if a corporation which is a resident of Japan
same shall be subject to Philippine income tax, but only so much of the profits as is attributable to that
have a permanent establishment in the Philippines if, among others, the furnishing of consultancy services
by such corporation, through its employees, continue within the Philippines for a period or periods
aggregating more than six months in any taxable year.
Considering that the furnishing of the services under the Management Agreement is to be generally
performed by KCL for KTSC in Japan, and that should it be necessary for KCL to send its employees to
the Philippines, the stay of these individuals shall not in any case exceed six (6) months, KCL may be
deemed not to have a permanent establishment in the Philippines to which its business profits may be
attributed to. Therefore, the income derived by KCL from services rendered to KTSC under the
Management Agreement is not subject to Philippine income tax for as long as KCL does not have a
permanent establishment in the Philippines and that in the course of its rendition of services, none of its
employees will stay in the Philippines for a period or periods aggregating more than 6 months in any
taxable year. (BIR Ruling No. 068-88 dated March 3, 1988)
As regards the imposition of the VAT on the rendition of services of KCL, please be informed
further that Section 108 of the Tax Code of 1997 1 provides as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.—
Thus, in general, the VAT is imposed on services rendered by KCL in the Philippines. On every
payment of service fees, KTSC is required to withhold such VAT and treat the same as a "passed on"
VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-9 as amended [now Section 4.114-2(b)
of Revenue Regulations No. 16-05]. CSIDTc
xxx xxx xxx
Since the purchase of respondent are not exempt from the VAT, the rate to be applied is
rate, because the ecozone within which it is registered is manage and operated by the PEZA as a
xxx xxx xxx
. . . , RA 7916 states that 'no taxes, local and national, shall be imposed on business
xxx xxx xxx"
Such being the case, the payment of services fees by KTSC, being a PEZA-registered enterprise, to
KCL under the above Agreement should be, as it is hereby confirmed to be, exempt from VAT. ASHICc
Very truly yours,
By:

Legal Service
Footnotes
9337].
June 15, 2006
BIR Ruling No. DA-041-06
Embassy of Brunei Darussalam

11th Floor, BPI Building
Ayala Ave. Cor. Paseo de Roxas
1226 Makati City
Gentlemen :
This has reference to your Note Nos. 06-0166 and No. 068/2006 dated January 26, 2006 and May
23, 2006 respectively, referred to this Office by the Department of Finance (DOF) and the Department of
Foreign Affairs (DFA), requesting exemption from payment of value-added tax (VAT) and ad valorem tax
on the purchase of one (1) locally-assembled motor vehicle, for the official use of the Embassy of Brunei
Darussalam, specifically described as follows:
Make: Toyota Hi-Ace Commuter 2.5 DSL M/T

Model Year: 2006
Color: Green
Chassis Number: JTFJS02P1-00004946
reads.
"ARTICLE 34
services:
xxx xxx xxx"
from value-added tax (VAT) and ad valorem tax on its purchases of locally-assembled motor vehicles. In
other words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles
shall be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem tax under
Section 149, all of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant VAT exemption to the
Embassy of Brunei Darussalam and/or its personnel on their purchases of locally-assembled motor
Hence, the local purchase of one (1) unit of 2006 Toyota Hi-Ace Commuter 2.5 DSL M/T for the
official use of the Embassy of Brunei Darussalam is exempt from ad valorem and value-added taxes.
herein parties are concerned. TEAcCD
Very truly yours,

Legal Services
June 14, 2006
Section 108, NIRC of 1997; Articles 5, 7 & 12, Philippines-Japan

tax treaty; Sec. 108, NIRC of 1997; BIR Ruling No. 13-06

6F Ayala Life-FGU Center
Mindanao Avenue corner Biliran Road
Cebu Business Park, Cebu City
6000 Cebu
Attention: Rita A.S. Fernandez

Tax Services
Gentlemen :
This refers to your application for relief from double taxation dated September 15, 2004, on behalf
of your client, Taiyo Yuden (Philippines), Inc. (TYPI), requesting confirmation of your opinion that the
gross amount of service fee remittances made by TYPI to Taiyo Yuden Co., Ltd. (Japan) (TYCL) are not
royalties as defined under Section 42(A)(4) of the National Internal Revenue Code (Tax Code) of 1997,
but are fees which constitute compensation for services performed outside the Philippines and are not
subject to Philippine income tax, pursuant to Articles 5 and 7 of the Philippines-Japan tax treaty; nor to the
ten percent (10%) value-added tax (VAT).
It is represented that TYCL is a nonresident foreign corporation organized and existing under the
laws of Japan with principal address at 16-20, Ueno 6-chome, Taito-ku, Tokyo, Japan; that TYCL has
registered a representative office in the Philippines located at Makati City; that the representative office is
registered as such for the following purposes: (1) to act as a liaison office and deal directly with clients,
(2) to undertake information dissemination and promotion of the company's products, (3) to study and
investigate export feasibility, (4) to cope with customers complaints and coordinate after sales service, (5)
to coordinate warranty claims, (6) to conduct market research for its production and market expansion, and
(7) to act as a communication link between clients and the company's head office; that as a representative
office, it has not derived income from sources within the Philippines as evidenced by its Annual Income
Tax Return and Audited Financial Statements for the fiscal years ending March 31, 2004, 2003 and 2002;
that as shown in its Statement of Income and Expenses, the only income it has derived are minimal income
on interests from local bank deposits and gains from foreign exchange; that its operation is fully
subsidized by its head office as shown in its Balance Sheet under the account "Advances from JTY" 1; that
it does not participate in any manner in the management of any subsidiary that TYCL has in the
Philippines; that since TYCL has a registered representative office in the Philippines, a Securities and
Exchange Commission Negative Certification could not be obtained; and that the registration of a
representative office in the Philippines would not prejudice the application for tax treaty relief since the
representative office does not create a permanent establishment because it does not derive any income
from the Philippines other than the passive income of interests on bank deposits; that per certification of
Registration No. 2005-101 dated March 17, 2005, TYPI is registered with the then Export Processing Zone
Authority (EPZA), now Philippine Economic Zone Authority (PEZA), as a Zone Export Enterprise under
Registration Certificate No. 89-04 dated January 12, 1989; that it is further certified that TYPI's registered
activities (except for the manufacture of ferrite chip beads inductors, etc., and the manufacture of
surface-mounted choke coil) are entitled to the 5% Special Tax on Gross income under Section 24 of
Republic Act (RA) No. 7916, 2 as amended by R.A. 8748 3 and in accordance with Rules XXV, Section 4
of its Implementing Rules and Regulations, and such 5% Special Tax on Gross Income applies upon
expiry of TYPI's Income Tax Holiday entitlement.
It is further represented that on September 1, 2004, a Service Agreement (Agreement) was executed
by and between TYPI and TYCL, whereby it is stated that the former desires and the latter agrees to
render certain support services for various product lines, service assistance during "suppliers' audit"
conducted by TYPI's major customers, and various other services to be performed by TYCL in connection
with TYPI's operations which shall neither involve a grant of license for the use of TYCL's proprietary
rights nor will involve transfer of technological know-how and other intellectual property rights; that the
support services are specifically in the nature of the following: (1) consultation and advisory services on
its general management and administration including business planning and coordination, (2) assistance in
procurement of raw materials and components sourced in Japan as well as sourcing of other product
requirements, (3) advice on sales and marketing policies, strategies, marketing development, packaging
design including provision of sample box products, (4) consultation and advisory services on operations
and preventive maintenance of various product lines machinery and equipment, (5) provision of specialist
production support in circumstances where TYPI's own technical resources are inadequate and need
supplementing, (6) provision of internal audit services covering full scope of TYPI's operation, and (7)
assistance during suppliers' audit conduct by TYPI's major customers; that TYCL shall perform the above
services in Japan except for occasional visits or consultations required by TYPI in the Philippines which
visits shall only be for short durations and in no case shall exceed an aggregate period of three (3) months
in any calendar year; that in consideration for the above support services, TYPI shall pay TYCL the actual
cost of services incurred, which includes, among others, the labor cost of TYCL personnel and all other
incidental expenses incurred by the latter in the performance of their designated duties including, but not
limited to, transportation, hotel and accommodation, meals and allowances; and that the Agreement takes
effect on April 1, 2004 and will be valid for five (5) years, to be automatically renewed each year, unless
otherwise agreed upon by both parties thereto, 60 days prior to its expiration.
In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides, viz:
"Article 12
xxx xxx xxx
including cinematograph films and films or tapes for radio or television, broadcasting, any patent,
or scientific experience.
xxx xxx xxx"
The above tax treaty defines ''royalties" to include "payments of any kind received as a
Further, in the case of Philippine Refining Company vs. CIR, CTA Case No. 2872 dated January 15,
wit:
interest then the payment is royalty." CIHTac
Applying the above discussions to the case at hand, it is clear in the subject Agreement that the
service fees are not within the definition of "royalties" under Article 12 of the Philippines-Japan tax treaty.
Specifically, nothing in the Agreement would require transfer into the Philippines of technology,
equipment or other property where TYCL has proprietary interest (BIR Ruling No. 093-89) or would
otherwise permit TYCL to impart to TYPI its special knowledge and experience which remain unrevealed
to the public. Inasmuch as TYCL shall render these services using only its customary skills, then the
compensation to be received therefor shall not constitute as consideration for the use of, or the right to use,
any copyright, patent, trademark, design or model, plan, secret formula or process, or for the transfer of
technology. Thus, the service fees paid to TYCL shall not be considered as royalties but shall be
considered as business profits.
With respect to business profits, Article 7(1) of the Philippines-Japan tax treaty provides as
follows:
"Article 7
1. The profits of an enterprise of Contracting State shall be taxable only in that

Relative thereto, paragraphs (1), (2) and (6) of Article 5 of the said treaty provides, viz:
"Article 5
fixed place of business through which the business of an enterprise is wholly or partly carried on.
(a) a store or other sales outlet;
(b) a branch;
(c) an office;
xxx xxx xxx"

six months within any taxable year. However, if the furnishing of such Services is effected under an
have a permanent establishment in that other Contracting State. (emphasis supplied)
xxx xxx xxx"
If based solely on the aforequoted paragraph 6, TYCL may initially be considered as not having a
permanent establishment in the Philippines, since the above Service Agreement executed by and between
TYPI and TYCL provides that the occasional visits or consultations in the Philippines "shall only be for
short durations and in no case shall exceed an aggregate of 3 months in any given calendar year." (BIR
Ruling No. 116-96 dated November 4, 1996).
On the other hand, taking into consideration the provision under paragraph 2(c), TYCL is
considered as having a permanent establishment in the Philippines since it maintains therein a
representative office.
Such being the case, the income which are or may be derived by TYCL may be taxed in the
Philippines but only so much thereof as is attributable to such representative office, pursuant to Article
7(1) of the Philippines-Japan tax treaty. (BIR Ruling No. 171-00)
However, inasmuch as the purposes for which such representative office was established do not
include the rendition of the services mentioned in the Service Agreement and since it is represented that
the representative office of TYCL "does not participate in any manner in the management of any
subsidiary TYCL has in the Philippines", no part of the income of TYCL derived from such services may
be attributed to such representative office. Thus, the entire income of TYCL insofar as the rendition of the
same services is concerned shall not be subject to income tax, pursuant to Article 7(1) of the
Philippines-Japan tax treaty. aSTHDc
As the regards the imposition of the VAT on the rendition of services of TYCL, please be informed further
that Section 108 of the Tax Code of 1997 4 provides as follows, to wit:
Thus, the VAT should be imposed when TYCL provides the above services in the Philippines " for
short durations and in no case shall exceed an aggregate of 3 months in any given calendar year". TYPI
shall then be required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section
4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue Regulations
No. 16-05].
153866, February 11, 2005), the Supreme Court held that:
"Special laws may certainly exempt transactions from the VAT. 3 *(73) However, the Tax
Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 — the
special law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
provision for exempt transactions under Section 109(q) [now Section 109 (K)] of the Tax Code of 1997
No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling 13-06 dated February
20, 2006)
Such being the case, the payment of services fees by TYPI, being an EPZA-registered (now a
PEZA-registered) export enterprise to TYCL, under the above Agreement, should be as it is hereby
confirmed to be exempt from VAT.
herein parties are concerned. IETCAS
Very truly yours,
By:

Legal Service
Footnotes
1. This account consists of expenses incurred by TYCL on behalf of its representative office in Manila for the
fiscal years 1999 to 2004.
2. AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE CREATION,
OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN
THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE
AUTHORITY (PEZA), AND FOR OTHER PURPOSES.
3. AN ACT AMENDING REPUBLIC ACT NO. 7916, OTHERWISE KNOWN AS THE "SPECIAL
ECONOMIC ZONE ACT OF 1995."
9337]
June 9, 2006
Article 5 & 7, Philippine-Japan Tax Treaty;

Aranas Consunji Barleta

Unit 106 G/F Le Metropole Building
326 Dela Costa cor. Tordesilla St.
Attention: Atty. Jesus Clint O. Aranas
Gentlemen :
This refers to your letter dated November 3, 2004, received by this Office on June 8, 2005,
requesting confirmation of your opinion that the service fees paid by Philippine Iris Co., Inc. (IRIS-Phils)
to Iris Company Limited (IRIS-Japan) under a Management Support Service Agreement are: (a) not
royalty payments subject to tax on royalties under the Philippines-Japan tax treaty; and (b) exempt from
income and withholding taxes, pursuant to Article 7 of the same treaty.
It is represented that IRIS-Japan is a corporation organized and existing under the laws of Japan
with head office at 1933, Iizuka-cho, Ota City, Gunma Prefecture, Japan as evidenced by the certified copy
of Corporate Registration issued by the Minato Office, Tokyo Regional Legal Affair Bureau, Register of
Deeds; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by
the Certification of Non-Registration of Corporation or Partnership issued by the Securities and Exchange
Commission dated May 17, 2005; that IRIS-Phils is a corporation duly organized and existing under the
laws of the Philippines.
It is further represented that on November 6, 1998, IRIS-Japan and IRIS-Phils entered into a
Management Support Service Agreement (Agreement) whereby IRIS-Japan agreed to provide offsite and
onsite services (management services) to IRIS-Phils; that the offsite services to be rendered by IRIS-Japan
to IRIS-Phils include the following: a) review of IRIS-Phils' monthly financial reports and other
management reports to identify the points to be improved, b) assistance to IRIS-Phils in developing its
organization and creating its annual business plan, and c) provision of such other incidental advise as may
be requested by IRIS-Phils to improve the latter's management in general; that all the above services shall
be performed outside the Philippines, primarily in Japan, and shall not involve any transfer of technology,
know-how or other intellectual property rights other than that related to the management of the company;
that the Onsite Services shall be provided by IRIS-Japan to IRIS-Phils upon the written request of the
latter and based on the terms mutually agreed upon by both parties; that in connection with the Onsite
Services, IRIS-Japan shall send to IRIS-Phils, subject to availability of personnel, qualified administration
professionals to render assistance and services to IRIS-Phils in connection with the management of
IRIS-Phils for a reasonable period to be agreed upon by the parties hereto but not exceeding an aggregate
period of 6 months in a given taxable year; that in consideration of the said Management Services,
IRIS-Phils shall pay IRIS-Japan a monthly service fee of Four Hundred Thousand Yen in Japanese
Currency (JP¥400,000) payable semi-annually, which fee shall be reviewed by the parties on a periodic
basis and which may be revised subject to the mutual agreement of the parties; and that the Agreement
shall be effective for a period of one (1) year starting from the 1st day of October 1998 and renewable for
like periods unless sooner terminated pursuant to the provisions of the Agreement.
Article 12
(4) The term 'royalties' as used in this Article means payments of any kind received as a
The above tax treaty-defines "royalties" to include "payments of any kind received as a
wit:
interest then the payment is royalty. HIaTDS
Applying the above discussions to the instant case, there is nothing in the subject Agreement that
would require transfer into the Philippines of technology, equipment or other property where IRIS-Japan
has proprietary interest or would otherwise permit IRIS-Japan to impart to IRIS-Phils their special
knowledge and experience which remain unrevealed to the public. Likewise, inasmuch as IRIS-Japan shall
render these services using their customary skills, then the compensation to be received therefor shall not
constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or
model, plan, secret formula or process, or for the transfer of technology. (BIR Ruling No. 036-90 dated
March 27, 1990)
Thus, service fees under the Agreement shall be subject to Article 7 and Article 5 of the
Philippines-Japan tax treaty, which provide as follows:
"Article 7
"1. The profits of an enterprise of a Contracting State shall be taxable only in that
"Article 5
xxx xxx xxx

six months within any taxable year. . . .
Based on the aforequoted provisions, it is clear that if a corporation which is a resident of Japan
same shall be subject to Philippine income tax, but only so much of them as is attributable to that
have a permanent establishment in the Philippines if, among others, the furnishing of consultancy or
supervisory services by such corporation, through its employees or other personnel, in the same or
connected project, continue within the Philippines for a period or periods aggregating more than six (6)
months in any taxable year.
Considering that under the subject Agreement, the furnishing of services is agreed to be performed
by IRIS-Japan in Japan and that should it be necessary for IRIS-Japan to send its employees to the
Philippines, as in the case of the onsite services, the length of stay of said employees shall not exceed an
aggregate of six (6) months in a given taxable year, IRIS-Japan is deemed not to have a permanent
establishment in the Philippines to which its business profits may be attributed to. Such being the case, the
service, income derived by IRIS-Japan from services rendered to IRIS-Phils under the subject Agreement
are not subject to Philippine income tax and consequently withholding tax pursuant to Article 7 in relation
to Article 5 of the Philippines-Japan tax treaty. (BIR Ruling No. 78-02 and 184-02 dated May 2, 2002 and
October 17, 2002)
However, the fees to be paid by IRIS-Phils to IRIS-Japan for the services actually rendered in the
Philippines are subject to value-added tax (VAT) at the appropriate rate 1. Accordingly, IRIS-Phils, being
the resident withholding agent and payor in control of payment shall be responsible for the final VAT on
such fees before making any payment to IRIS-Japan. In remitting the VAT withheld, IRIS-Phils shall use
substantiation for the claim of input tax to be applied against the output tax that may be due from
IRIS-Phils if it is a VAT-registered taxpayer. In case IRIS-Phils is non-VAT registered taxpayer, the
an "asset", whichever is applicable. In addition, IRIS-Phils is required to issue the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof be given to
IRIS-Japan upon its request, and the fourth copy to be retained by IRIS-Phils. [Section 4.110-3(b),
Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02 and 8-02/ Section 4.114-2(b), RR No.
16-05; Section 4.114, RR No. 2-98, as last amended by RR No. 28-03]. DcSEHT
Very truly yours,
By:

Legal Service
Footnotes
1. The rate shall be 12% effective February 1, 2006 (Revenue Memorandum Circular No. 7-2006)
June 8, 2006
Article 34, Vienna Convention on Diplomatic Relations
Embassy of Spain/Instituto Cervantes

The Cultural Center
2 Lafayette Square
Unit 16E, 105 Tordesillas St.
Gentlemen :
This has reference to your Note No. 155 dated December 13, 2005, referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from
payment of value-added tax (VAT) on the purchase from an Asian Development Bank (ADB) personnel of
one (1) locally-assembled motor vehicle, by the Embassy of Spain/Instituto Cervantes for its official use,
Make: Honda CRV 2.0 M/T
Model Year: 2001
License No.: 22219
Engine Number: PADRD17201V303043
Chassis Number: PEWD2-1403021
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by
that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections
106 and 108 of the National Internal Revenue Code of 1997.
Spain and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the list
submitted by the Department of Foreign Affairs as of October 18, 2005 and as confirmed by the Office of
the Protocol (DFA) in its Indorsement letter dated October 17, 2005, that your Government allows similar
exemption to Philippine Embassy and its personnel on their purchase of locally-assembled motor vehicles
in your country.
Hence, since the transferor (ADB) and the transferee (Embassy of Spain) of the subject motor
vehicle are both VAT exempt entities, the sale of one (1) unit of 2001 Honda CRV 2.0 M/T by ADB to the
Cultural Center of the Embassy of Spain/Instituto Cervantes for its official use continues to be exempt
from VAT. cACTaI
Very truly yours,

Commissioner
June 7, 2006
Sec 106 & 109(K), National Internal Revenue Code of 1997, as

amended;
Articles 5 & 7, General Agreement on Development Cooperation
between the Government of Australia and the Government of the
Republic of the Philippines;
Philippines-Australian Basic Education

Assistance For Mindanao (Beam) Project
c/o DepEd Region XI
Torres St., Davao City
Gentlemen :
This has reference to the Australian Embassy's Note No. 076/06 and File No. 2002/0059 dated
March 16, 2006 referred to this Office by the Department of Finance (DOF) and the Department of
Foreign Affairs (DFA), requesting exemption from payment of ad valorem and value-added taxes (VAT)
on the purchase of one (1) unit 2005 Mitsubishi Grandis for official use by the Philippines-Australia Basic
Education Assistance for Mindanao (BEAM) Project specifically described as follows:
Make: Mitsubishi Grandis A/T
Model Year: 2005
Serial Number: MMBLRNA405F000184
Engine Number: 4G69K - S1169
In reply, please be informed that Section 106(A)(2)(c) of the National Internal Revenue Code of
1991 as amended (NIRC) provides, viz:
such tax to be paid by the seller or transferor: Provided, That the President, upon the
value-added tax to twelve-percent (12%). . . .
xxx xxx xxx"
rate:
xxx xxx xxx
agreements to which the Philippines is a signatory effectively subjects such sales to zero rate."
In this connection, Article 5, paragraphs 1 and 2 of the General Agreement on Development

Cooperation (GADC) between the Government of Australia (GOA) and the Government of the Republic
of the Philippines (GRP), signed on October 28, 1994 and entered into force on March 12, 1998, provides,
viz:
"Article 5
1. In support of the objective of this Agreement, the Government of Australia and the
possible, such subsidiary arrangements shall set out: (Emphasis supplied) DHTCaI

xxx xxx xxx"
Relative thereto, Article 7, paragraph 1 (a) of the GADC between GRP and GOA, pertinently
provides, viz:
"Article 7
rate for purposes of Value Added Tax (VAT); exempt direct importation of goods
levies, fees and charges;"
xxx xxx xxx
3. The disposal of vehicle provided for activities executed under the Agreement shall be
requirements of other activities assisted by the Government of Australia under the Program of
development cooperation."
Based on the above-quoted provisions, the terms of the GADC, unless otherwise stated, shall apply
to subsidiary arrangements with specific reference to said Agreement. Moreover, Article 7(1)(a) and (3) of
the GADC state that GRP shall subject to zero rate, for purposes of VAT, direct supplies of domestic
goods and services in respect of project supplies and professional and technical material and services
including vehicles. Furthermore, GRP shall exempt direct importation of goods from import duties, VAT
and other taxes imposed in the Philippines (or pay such duties thereon).
It is worthy to note that the abovementioned BEAM was created by virtue of the concluded
Subsidiary Arrangement between the Government of the Republic of the Philippines and the Government
of Australia on June 27, 2001 pursuant to Article 5 of the GADC.
Such being the case, this Office is of the opinion and so holds that since BEAM was created by
virtue of a subsidiary arrangement pursuant to the GADC, an international agreement to which the
Philippines is a signatory, then direct supplies of domestic goods and services of BEAM are subject to
VAT at zero percent rate in respect of supplies, motor vehicles and professional and technical material and
services provided by the Government of Australia while direct importations of goods are exempt from
VAT. (BIR Ruling No. ITAD-011-05 dated February 16, 2005)
In view of the foregoing, the local purchase by BEAM of one (1) unit of 2005 Mitsubishi Grandis
for official use, is subject to VAT at zero percent rate, pursuant to Sections 106(A)(2)(c) of the NIRC in
relation to Article 7 of the GADC.
As regards the seller of goods and services to BEAM, the sales by a VAT-registered entity of goods
and services under the above circumstances shall be treated as effectively zero-rated transactions. (Sec
4.106.5(c), Revenue Regulations No. 16-2005) In this jurisdiction, the grant of VAT exemption alone
would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT
to BEAM. To enable local sellers to refund the amount of tax inputted into the cost of goods and services
supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the
VAT-registered seller, although the sale of goods or services to BEAM is a taxable transaction for VAT
purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and
the input tax on his own purchase of goods, properties or services related to such effectively zero-rated
sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000)
Treated as effectively zero-rated transaction, the VAT-registered seller of goods or services to

BEAM is required to file an application and secure prior approval for zero-rating to be able to claim tax
to the Large Taxpayers Audit and Investigation Division (LTAID II) if VAT-registered seller is a large
taxpayer, or to the Audit Information, Tax Exemption and Incentives Division (AITIED) of this Bureau if
the VAT-registered seller is a non-large taxpayer, which, when approved, shall be effective for 12 months
from the date of issuance of the approval. (Revenue Memorandum Circular No. 17-96). Without an
approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be
considered exempt. Consequently, failure of the part of a VAT-registered seller to secure an approval for
effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax
credit/refund on the (VAT) input tax passed on to him. (Sections 4.106-6 of Revenue Regulations No.
16-2005) IEHTaA
This ruling is issued on the basis of facts represented. However, if upon investigation it shall be
party is concerned.
Very truly yours,

Legal Service
June 6, 2006
Sec. 106 & 108, Tax Code of 1997

ITAD Ruling No. 065-03;
Atty. Francisco B. Gonzalez V

429-D. Shaw Boulevard
Mandaluyong City
Sir:
This refers to your letters, all dated September 21, 2005, endorsed by Acting Director, Mr. Ruel U.
Gunabe of the Office of Protocol and State Visits, Department of Foreign Affairs, on November 18, 2005,
seeking confirmation of your opinion that the rental payments arising from the lease contracts entered into
by Tierra International Construction Corporation (TICC) with the following embassies:
1. The Australian Embassy;
2. Her Majesty The Queen in Right of Canada;
3. The Royal Netherlands Embassy;
4. Royal Thai Embassy
are subject to zero percent (0%) value-added tax (VAT) based on the VAT Exemption Certificates issued
to the above-named embassies on their official purchases of goods and services in the Philippines on the
basis of reciprocity.
It is represented that TICC is a domestic corporation with principal office address located at 105-B,
Hen. P. Garcia St., Bangkal, Makati City; that it is engaged in real estate development and leasing of
housing and condominium units; that lease contracts were entered into by the TICC (as the Lessor) with
the following embassies (as the Lessees) summarized as follows:
1. The Australian Embassy — Contract of Lease effective December 7, 2003 until December 6,
2006, renewable;
2. Her Majesty The Queen in Right of Canada — Contract of Lease effective June 1, 2001 to
August 31, 2004; Contract of Lease dated December 17, 2004, effective December 10, 2004
to December 9, 2006;
3. The Royal Netherlands Embassy — Contract of Lease effective August 1, 2003 to July 31,
2007; and
4. Royal Thai Embassy — Contract of Lease effective March 1, 2004 until February 28, 2005;
Extension of the Contract of Lease commencing on March 1, 2005 to February 28, 2006;
that per the list submitted by the Office of Protocol, Department of Foreign Affairs, dated October 17,
2005, the above-named embassies allow tax exemption to the Philippine Embassy and its personnel on the
purchase of goods and services in their respective countries.
reads. SaCIAE
"ARTICLE 34
(a) indirect taxes of a kind which are normally incorporated in the price of
goods or services;
xxx xxx xxx"
from VAT on its leases of real properties in the Philippines. In other words, lease of real properties in the
Philippines by an Embassy and/or its diplomatic agents shall, in general, be subject to the value-added tax
prescribed under Section 108 of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may recognize the VAT exempt status of
the above-named embassies on their lease of real properties in the Philippines it appearing from the list
submitted by the Department of Foreign Affairs as of October 17, 2005, that the respective Government of
the said embassies allows similar exemption to the Philippine Embassy and/or its personnel on their lease
of real properties in their respective countries. (DA-ITAD 065-03 dated April 25, 2003)
Hence, in view of all the foregoing, the lease of real properties in the Philippines of the following
embassies under the subject Contracts of Lease with Tierra International Construction are considered
effectively zero-rated sale of services:
1) Embassy of Australia;
2) Her Majesty The Queen in Right of Canada;
3) The Royal Netherlands Embassy; and
4) Royal Thai Embassy
Furthermore, since the above-mentioned embassies are in fact the purchasers of the services and,
owing to their exempt status, they are relieved from the indirect burden of the VAT, their lease of real
properties in the Philippines are considered effectively zero-rated sale of service. It must be understood,
however, that the lessor (TICC) must secure prior approval for effective zero-rating of such sale of service.
Otherwise, the transaction shall only be considered exempt from VAT pursuant to Section 4.108-6 of
Revenue Regulations No. 16-2005. In other words, although the said sale of rental services is a taxable
transaction for VAT purposes, the same shall not result in any output tax on the part of the lessor and the
input tax on his purchase of goods, properties or services related to such effectively zero-rated sale of
service shall be available as tax credit or refund. (BIR Ruling 117-99 dated December 7, 1999)
Very truly yours,
By:

Legal Service
June 6, 2006
Sec 106 & 108 of the National Internal Revenue Code of

1997;
Article 34, Vienna Convention
Royal Norwegian Embassy

21st Floor, Petron Mega Plaza Bldg.
358 Sen. Gil Puyat Avenue
Makati City
Gentlemen :
This has reference to your Note No. 18/06 dated May 23, 2006, referred to this Office by the
requesting for a tax-free purchase on a local motor vehicle for the official use of the Royal Norwegian
Embassy, specifically described as follows:
Make: Mitsubishi Pajero 4x4 Automatic Super Select
Model Year: 2006
Color: Deep Blue Mica
Engine Number: 6G75RG5826
Chassis Number: JMYLYV77W4J000985
In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations,
reads:
"ARTICLE 34
services;
"xxx xxx xxx"
that Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108
of the National Internal Revenue Code of 1997.
However, applying the principle of reciprocity, this Office may grant exemptions to the Royal
Norwegian Embassy or its personnel on their local purchases of goods and/or services it appearing from
allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in
your country. ASHECD
Hence, the herein local purchase of one (1) Mitsubishi Pajero 4x4 Automatic Super Select for the
official use of the Royal Norwegian Embassy is exempt from VAT. (ITAD-Ruling No. 10-04 dated August
2, 2000)
Very truly yours,

Legal Service
June 1, 2006
Articles 5 & 8 of the Philippines-United States tax treaty;

SGV & Co.

6/F Ayala Life-FGU Center
Mindanao Avenue cor. Biliran Road
Cebu Business Park, Cebu City
Attention: Ms. Rita A.S. Fernandez

Tax Services
Gentlemen :
This refers to your letter dated September 19, 2005, on behalf of your client, NKC Manufacturing
Philippines Corporation (NKC-Phils) requesting confirmation of your opinion that the rental payments
made by NKC-Phils to Nakanishi Manufacturing Corporation (NMC) for the lease of the latter's
machinery are not subject to Philippine income tax and value-added tax (VAT) pursuant to the
Philippines-United States of America tax treaty (Philippine-United States tax treaty).
It is represented that NMC is a nonresident foreign corporation duly organized and existing under
the laws of the United States of America with principal address at 1225 Voyles Rd., Winterville, Georgia
30683, USA; that it is not registered as either corporation or as a partnership in the Philippines per
certification issued by the Securities and Exchange Commission dated July 18, 2005; that NKC-Phils is a
corporation duly organized and existing under the laws of the Philippines with principal address at Lot
6-8, Block 2, Mactan Export Processing Zone II, Basak, Lapu-lapu City, Cebu; that it is duly registered
with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 97-031 dated
April 8, 1997 as an Ecozone Enterprise on a non-pioneer status engaged in the manufacture of parts for
roller bearings, conveyor systems, sash rollers, rubber seals, metal core plates and other hearing related
products; that it is currently subject to the 5% preferential tax rate under Section 24 of Republic Act
(R.A.) 7916 otherwise known as the Special Economic Zone Act of 1995; that NKC-Phils and NMC
entered into two (2) Contracts of lease (Agreements) dated April 1, 2005 and May 24, 2005, and involving
annual rental fees of US$470,400 and US$311,360, respectively; and that under the Agreements, NMC
leases to NKC-Phils Property (i.e., machinery described in the Annex of the Agreements, copy of which is
attached hereto) under the following conditions with respect to the use and maintenance of the Property:
(1) that NKC-Phils shall use the Property in good and safe custody, solely for performing the
operation for which it was designated and made, and only in the conduct of its ordinary and
usual business, and all the time in compliance with the laws and regulations pertaining to the
Property or the operation or maintenance thereof;
(2) that until the return of the Property NKC-Phils shall, in any cases, at its own costs and
expenses furnish, repair and replace any and all parts and accessories required for aforesaid
purpose and shall, whether from time to time and periodically, inspect all the Property and
furnish all maintenance works and labor to keep in good repair, condition and working order.
If and when the insurance proceeds may have been received by NMC under the Agreement,
NKC-Phils shall be exempted insofar as NMC may have received, from aforesaid obligation
to pay or bear costs and expenses of repair or replacement;
(3) that NKC-Phils shall, as and if required by NMC, make a contract for maintenance of the
Property with a competent person or corporation as prior approved by NMC. NKC-Phils
shall thereupon submit to NMC a copy of such contract; SEHACI
(4) that NMC agrees to be liable for and to pay, satisfy and settle every claim, demand, action
and liability arising from loss, damage to injury to any person or property of any character
whatsoever arising out of or occasioned by or through selection, possession, leasing, renting,
operation, handling, control, use, maintenance, transportation, delivery and/or return of the
property and hold NMC free and harmless of any and all claims and demands which may
arise from or be occasioned by any causes whatsoever of like nature.
In reply, please be informed that considering that the parties in this case (i.e. NMC and NKC-Phils)
are resident corporations of the Philippines and the United States, respectively, the provisions of the
Philippines-United States tax treaty should be applied. In connection thereto, paragraphs 1 and 6 of Article
8 of the said treaty provide as follows:
"Article 8
BUSINESS PROFITS
(1) Business profits of a resident of one of the Contracting States shall be taxable only in
attributable to the permanent establishment.
xxx xxx xxx
(6) The term 'business profits' means income derived from any trade or business whether
carried on by an individual, corporation or any other person, or group of persons, including the
rental of tangible personal (movable) property.
In relation thereto, Article 5(1) and (2) of the said treaty provides, viz:
"Article 5
(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

(j) The furnishing of services, including consultancy services, by a resident

other Contracting State for a period or periods aggregating more than 183 days."
Considering that in the present case, NMC, the foreign lessor, does not have a permanent
establishment in the Philippines as contemplated in the provisions of the Philippines-United States tax
treaty, the said rental fees paid by NKC-Phils to NMC pursuant to their Agreement are considered as
"business profits" taxable only in the United States, where NMC is a resident and has its fixed place of
business, and as such are, not subject to the 7 1/2% final withholding tax imposed under Section 25(b)(4)
of the National Internal Revenue Code (Tax Code) of 1997 as amended. (BIR Ruling No. 025-87 dated
January 28, 1987)
As regards the imposition of the VAT on the above rental fees, please be informed further that
Section 108 of the Tax Code of 1997 1 provides as follows, to wit:
. . . . The phrase 'sale or exchange of services' shall likewise include: TAcSaC
xxx xxx xxx
(2) The lease or the use of, or the right to use any industrial, commercial or scientific
equipment;
xxx xxx xxx
Based on the foregoing, the VAT should, in general, be imposed on the said rental fees to be paid
by NKC-Phils to NMC. Accordingly, NKC-Phils is required to withhold such VAT and treat the same as a
"passed on" VAT, pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now
Section 4.114-2(b) of Revenue Regulations No. 16-05].
xxx xxx xxx
xxx xxx xxx
Applying the special laws we have earlier discussed, respondent as all entity is exempt from
law does not distinguish, we ought not to distinguish. AIHECa
xxx xxx xxx"
No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling No. ITAD-13-06 dated
February 20, 2006)
Such being the case, the payment of the rental fees by NKC-Phils, being a PEZA-registered
enterprise, to NMC, under the above Agreement, should be as it is hereby confirmed to be exempt from
VAT.
However, upon the importation of the subject machineries to be leased by NKC-Phils from NMC,
such importation is subject to VAT. Section 107 of the Tax Code of 1997 4 which provides as follows, viz:
Sec. 107. Value-added Tax on Importation of Goods. —
(A) In General. — There shall be levied, assessed and collected on every importation of
goods a value-added tax equivalent to ten percent (10%) 5 based on the total value used by the
Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if
any, and other charges, such tax to be paid by the importer prior to the release of such goods from
custody: Provided, That where the customs duties are determined on the basis the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any.
(emphasis supplied)
xxx xxx xxx
For purposes of the VAT law, the term "importer" refers to any person who brings goods into the
Philippines, whether or not in the course of his trade or business [Section 4.107-1(b), Revenue Regulations
No. 16-05].
In this case, NMC is deemed the importer of the machineries since it undertook to deliver the same
to NKC-Phils. Thus, in accordance with the aforequoted, NMC is liable to pay the VAT on the
importation.
To recapitulate, this Office is of the opinion as it hereby holds that:
(1) The rental fees to be paid by NKC to NMC are considered "business profits" taxable only in
the United States, and as such are not subject to the 7 1/2 % final withholding tax imposed
under Section 25(b)(4) of the tax Code of 1997, as amended.
(2) Such rental fees are exempt from VAT.
(3) The importation of the subject machineries .are subject to VAT.
herein parties are concerned. cEDaTS
Very truly yours,

Legal Service
Footnotes
2. Effective February 1, 2006, the rate shall be 12%
3. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K)], as amended by RA No.
9337]
June 1, 2006
Arts. 5 & 7, Philippines-Japan tax treaty;

VAT Review Committee Ruling No. 005-2003
Isla Lipana & Co.

8767 Paseo de Roxas
1226 Makati City
Attention: Atty. George J. Lavadia

Principal
Gentlemen :
This refers to your letter dated November 14, 2005 requesting confirmation that the service fees
paid by F. Tech Philippines Manufacturing, Inc. (FTP) to F. Tech, Inc. (FTI) are exempt from Philippine
income tax and from value-added tax (VAT) pursuant to the Philippines-Japan tax treaty.
It is represented that FTI is a nonresident foreign corporation taxable under the laws of Japan with
business address at 19 Showannma, Shoburmachi Minam-Saitamagun, Saitama Pref., Japan as evidenced
by its Articles of Incorporation; that FTI 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 November 11, 2005; that
FTP, on the other hand, is a company organized and existing under the laws of the Philippines with
principal office at 118 North Science Avenue, Laguna Technopark, Biñan, Laguna; that it was registered
with the then Export Processing Zone Authority, now Philippine Economic Zone Authority (PEZA) under
Certificate of Registration No. 94-42 dated June 17, 1994 as evidenced by the Certification issued by the
Deputy Director General for Operations of PEZA on January 18, 2005; that on April 1, 2005, FTP entered
into a Service Agreement (SA) with FTI; that under the said SA, FTI shall provide the following services
to FTP:
1. Management and administration:
(i) Assistance in defining and implementing FTP business strategies and policies;
(ii) Provision of data on international business trends;
(iii) Assistance in improving management and administration systems and provision of solutions
to problems encountered by FTP in its operations on an on-going basis;
(iv) Assistance in implementing and improving financial and management reporting systems,
operational and financial control reviews;
(v) Assistance in foreign exchange management as well as procurement of financial support and
facilities from both local and offshore sources; and
(vi) Evaluation of capital investment and risk management. IAEcCT
2. Marketing:
(i) Review and advise on FTP's marketing and promotional plans;
(ii) Organization and participation in promotional activities;
(iii) Analysis of potential market, clients, competitive factors, etc.
(iv) Preparation of advertising materials and assistance in advertising campaign;
(v) Provision of marketing financial analysis and assistance to FTP in developing and
implementing pricing and marketing strategies;
(vi) Advise and assistance in the framework of contracts with the clients and with the regional,
national and international organization; and
(vii) Assistance in the negotiation with potential customers for possible supply agreement.
3. Purchasing:
(i) Assistance in the purchase of services including but not limited to central sourcing for raw
material and negotiating with international suppliers to achieve competitive prices;
(ii) Assistance in the implementation of purchasing procedures; and
(iii) Provision of useful information relating to market conditions and costs saving;
that the foregoing services shall in no case involve the transfer of FTI's technology, know-how or other
intellectual property rights; that in general, FTI shall perform the aforementioned services in Japan; that in
cases where it would be necessary for FTI to send employees to the Philippines, the stay of these
individuals in the Philippines shall not, in any case, exceed six (6) months in a year; that in consideration
for the services, FTP will pay FTI in the amount of Thirty Six Million Eight Hundred Fifteen Thousand
Two Hundred Ninety Five Japanese Yen (Y36,815,295.00), which may be adjusted annually as agreed
upon by the parties; and that the SA shall be effective from April 1, 2005 and shall continue to be valid
unless terminated according to the provisions of the SA.
In reply, please be informed that Article 7(1) of the Philippines-Japan tax treaty provides:
"Article 7

xxx xxx xxx"
In view of the foregoing, the profits of a Japanese enterprise shall be taxable only in Japan unless
such enterprise carries on business in the Philippines through a permanent establishment situated therein.
If the Japanese 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 FTI for the services rendered in the Philippines shall be
taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the
activities giving rise to such income. HSaCcE
In relation thereto, Article 5 of the same tax treaty defines a permanent establishment as follows:
"Article 5
xxx xxx xxx
An enterprise of a Contracting State shall be deemed to have a permanent establishment in

the other Contracting State if it furnishes in that other Contracting State consultancy services, or
supervisory services in connection with a contract for a building, construction or installation project
through employees or other personnel other than an agent of an independent status to whom
paragraph (7) applies, provided that such activities continue (for the same project or two or more
year. . . ."
Inasmuch as it is represented that the services will generally be performed by FTI outside the
Philippines and that should it be necessary to send its employees to the Philippines, said employees will
not stay in the Philippines for more than six months in their rendition of services to FTP, FTI may be
considered as not having a permanent establishment in the Philippines. In other words, FTI is deemed not
to have a permanent establishment for as long as its employees do not stay in the Philippines for a period
or periods aggregating more than six months within any taxable year in the course of their rendition of
services to FTP. (BIR Ruling No. DA-ITAD 128-05 dated November 10, 2005) Thus, the income derived
by FTI from services rendered to FTP shall not be subject to Philippine income tax and, consequently, to
withholding tax.
Finally, as a PEZA registered enterprise, FTP is subject to the "5% special tax regime, in lieu of all
taxes". Hence, its payment for the services rendered by FTI are exempt from VAT, and consequently, from
the creditable VAT withholding prescribed under Section 114 (C), NIRC of 1997. (VAT Review
Committee Ruling No. 005-2003)
Very truly yours,
By:

Legal Service
June 1, 2006
Section 109 (q) of the Tax Code of 1997 [now Section 109 (K), as
amended by RA No. 9337; BIR Ruling No. ITAD 13-06

6760 Ayala Avenue
Tax Services
Gentlemen :
This refers to your letter dated November 23, 2005, requesting to amend DA-ITAD Ruling No.
ITAD-131-05 dated November 14, 2005 so that your royalty payments to Samsung Electronics Co., Ltd.
(SECL) be declared exempt from value-added tax, in view of the additional representation that Samsung
Electronics Philippines Manufacturing Corporation (SEPHIL) is duly registered with Philippine Economic
Zone Authority (PEZA); that it is still enjoying an extension of income tax holiday; and that it is not yet
under the 5% preferential tax on gross income regime.
It is represented that SECL is a nonresident foreign corporation duly organized and existing under
the laws of Korea with business address at 416 Maetan 3-dong, Paldal-ku, Suwon-City Kyungki-Do,
Korea 442-742; that SECL has a representative office in the Philippines, the activities of which are limited
to the conduct of market survey of electronics products, household appliances and other related products,
to find out the feasibility of undertaking a joint venture agreement in the Philippines, to act as
communication link between its head office and the customers in the country and to conduct such other
activities which are purely coordination work; that SECL has not engaged in any business activity in the
Philippines; that SEPHIL is a domestic corporation duly organized and existing under Philippine laws and
is duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration
No. 01-11 dated July 31, 2002, with principal office address at Block 6, Calamba Premiere International
Park, Batino, Calamba, Laguna; that SEPHIL is engaged in the design manufacture and sale of electronic
products including, but not limited to, optical disk drive products, their components and parts; that on
January 1, 2000, SEPHIL entered into an Optical Disc Drive License Agreement (Agreement) with SECL;
that under the Agreement, SECL grants to SEPHIL, during the term of the Agreement, the non-exclusive
rights to use the Technical Information 1 furnished by SECL to manufacture products in the Philippines
and to use, sell or otherwise dispose of the products in all countries of the world; that SEPHIL shall pay
SECL royalties on Licensed Products 2 which are manufactured, used, sold, leased and disposed by
SEPHIL; that the royalty on technical information and knowledge shall be paid at the rate of four percent
(4%) of Net Selling Price which shall be remitted to SECL within 60 days after each calendar quarter
ending with the last day of March, June, September and December; and that the Agreement shall be fully
effective for one (1) year from January 1, 2002, and annually prolonged with the option that SECL and
SEPHIL can renew the Agreement for another year.
It is further represented further and clarified that SEPHIL was still enjoying an income tax holiday
and was not yet under the 5% preferential tax on gross income regime when the request for ruling was
filed; that SEPHIL's commercial operations started last November 5, 2001 and its income tax holiday is
effective for four years from the start of its commercial operation; that it was granted by PEZA a one-year
extension of its income tax holiday from November 1, 2005 to October 31, 2006 per Notice of ITH
Extension Approval No. 06-003 issued by PEZA dated January 9, 2006; and that it is your contention that
SEPHIL is still exempt from withholding and remitting the 10% VAT on its payment and remittances of
royalties paid to SECL at the time it enjoys its income tax holiday. aHSTID
In reply, please be informed that, in general, under Section 108(A)[(1) and (5)] of the Tax Code,
"the use of certain 'know-how' formulations and technical informations" 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" both fall within the definition of sale or exchange of services subject to ten percent
(10%) value-added tax (VAT). Section 108 of the Tax Code of 1997 3 provides:
. . . . The phrase 'sale or exchange of services' shall likewise include:
xxx xxx xxx
(1) The lease or the use of, or the right to use any industrial, commercial or scientific
equipment;
xxx xxx xxx"
Based on the foregoing, the VAT should be generally imposed on the said royalties to be paid by
SEPHIL to SECL. SEPHIL is required to withhold such VAT and treat the same as a "passed on" VAT,
pursuant to Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of
Revenue Regulations No. 16-05].
xxx xxx xxx
xxx xxx xxx
internal revenue laws and regulations. HcDaAI
xxx xxx xxx"
No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling No. ITAD 13-06 dated
February 20, 2006)
In view of all the above and the additional representation that SEPHIL is a PEZA-registered
enterprise under an income tax holiday, and which is not yet under the 5% preferential tax on gross
income regime, this Office is of the opinion and so holds that the subject royalty payments by SEPHIL to
SECL are not subject to VAT. This ruling is deemed incorporated in DA-ITAD Ruling No. 131-05 to the
extent that the herein VAT exemption applies to the royalty payments of SEPHIL.
This ruling issued on the basis of the foregoing facts as represented. However, if upon
investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and
void.
Very truly yours,
By:

Legal Service
Footnotes
1. "Technical Information" means all the technical knowledge, know-how, data and information which are
available in the authorized file of Licensor and are used by Licensor for manufacturing products. (Section
1.04, Optical Disk Drive License Agreement)
2. "Licensed Product" means optical disc drive such as CD-ROM, CD-RW which shall be manufactured and
sold by Licensee in accordance with Licensor's technical information and assistance. (Section 1.03, ibid)
5. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K)], as amended by RA No.
9337]
May 30, 2006
Philippines-Japan Tax Treaty, Article 10;

Sagara Metro Plastic Industrial Corporation

Barangay Paciano Rizal,
Calamba, 4027, Laguna
Attention: Mr. Nobuatsu Sekino, President

Ms. Lilibeth Lourdes De Asis, Finance & Accounting Manager
Gentlemen :
This refers to your letter dated September 21, 2005 requesting relief from double taxation on
royalty payments to Sagara Plastics Industrial Company, Ltd. (Sagara Plastic) by Sagara Metro Plastics
Industrial Corporation (Sagara Metro), Inc. under the Philippines-Japan tax treaty.
It is represented that Sagara Plastic is a nonresident foreign corporation organized and existing
under the laws of Japan with business address at 1120 Hirooka Fukuroi-shi Shizuoka-Ken, Japan; that it is
not registered either as a corporation or a partnership in the Philippines per certification issued by the
Securities and Exchange Commission dated March 9, 2005; that Sagara Metro is a corporation organized
and existing under the laws of the Philippines with its place of business at Barangay Paciano Rizal,
Calamba, Laguna; that Sagara Metro is registered with the Board of Investments (BOI) as non-pioneer
under Certificate of Registration Nos. EP 2005-024 (February 16, 2005); EP 99-104 (August 11, 1999); EP
93-250 (September 9, 1993); EP 93-352 (November 16, 1993); that Sagara Metro is primarily engaged in
the manufacture of industrial plastic products and tubes, including plastic components for automotive
wiring harness, as well as in selling, exporting, and distributing the same in certain territories; that Sagara
Plastic is engaged in the business of manufacturing, selling and distributing various industrial plastic
products and tubes, as well as related tools and dies; that Sagara Metro and Sagara Plastic entered into a
License and Technical Assistance Agreement dated December 1, 2000 which was registered with the
Philippine Intellectual Property Office (IPO) under Certificate of Compliance No. 5-2001-00026 on
February 21, 2001, which shall be effective for a period of five (5) years commencing on January 2, 1999
up to and until January 2, 2004, and shall be renewable subject to the approval of, and registration with,
the Technology Transfer Registry of the IPO and, if required, by the Bangko Sentral ng Pilipinas; that
under the Agreement, Sagara Plastic agreed to furnish Sagara Metro know-how, technical information and
license to make, use, and sell licensed products, including the furnishing of technical advisory services,
assistance in export of products and training of Sagara Metro's personnel; that in consideration of the
foregoing, Sagara Metro agrees to pay to Sagara Plastic an amount ranging from Two Percent (2%) to Five
Percent (5%) of the net sales price of the products manufactured and sold plus a bonus royalty ranging
from One-half percent (0.5%) to two (2%) of net foreign exchange earnings by Sagara Metro during the
period of the Agreement.
"Article 12
royalties the tax so claimed shall not exceed: IAcTaC
radio or television broadcasting:
3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the

Philippines on the royalties paid by a company, being a resident of the Philippines, registered with
the Board of Investments and engaged in preferred pioneer areas of investment under the investment
incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the
royalties, shall not exceed 10 per cent of the gross amount of the royalties.
or scientific experience.
xxx xxx xxx
Based on the aforecited, royalty payments will be taxed at the preferential tax rate of ten percent
(10%), if the payor is a BOI-registered enterprise and engaged in preferred pioneer areas of investment;
fifteen percent (15%) if the payments are in respect of the use of or the right to use cinematograph films
and films or tapes for radio or television broadcasting; and in all other cases, twenty-five percent (25%) of
the gross amount of the royalties.
Such being the case and since Sagara Plastic is a not a BOI-registered enterprise engaged in
preferred pioneer areas of investment and that its payment of royalties to Sagara Metro are not in respect
of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting,
this Office is of the opinion and so holds that the said royalty payments are subject to the preferential tax
rate of twenty five per cent (25%) of the gross amount of royalties pursuant to Article 12(2)(b) of the
Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-98-05 dated September 7, 2005)
Very truly yours,
By:

Legal Service
May 30, 2006
Article 15, Philippines-UK tax treaty;

BIR Ruling 115-93
Tan Acut & Lopez Law Offices

23rd Floor, Philippine Stock Exchange Center
East Tower, Exchange Road, Ortigas Center
1604 Pasig City
Attention: Atty. Edmundo L. Tan & Atty. Maritoni Z. Liwanag
Gentlemen :
This refers to your letter dated May 9, 2005 on behalf of your client, Mr. Alan Donald Stevens (Mr.
Stevens), requesting confirmation that the remuneration of Mr. Stevens in acting as General Manager of
the Manila representative office of InventAsia Limited is not subject to Philippine income tax, pursuant to
the Republic of the Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty
(Philippines-United Kingdom tax treaty).
It is represented that Mr. Stevens is a citizen of the United Kingdom of Great Britain (UK), with
permanent address at 13 Lea Crescent, Longlevens, Gloucester, GL2, ODW, as confirmed by the letter
from Mrs. H. Galbraith, Revenue Executive of the Inland Revenue of UK dated October 21, 2005; that he
is presently employed as Operations Manager by InventAsia Limited (formerly MPP-Hongkong Limited as
confirmed by the Amended Securities and Exchange Commission License No. FS200408500 dated March
17, 2005), a nonresident foreign corporation duly registered and existing under the laws of Hongkong,
with registered office address at 12th Floor, China Merchants Tower; Shun Tak Center 168-200
Connaught Road, Central Hong Kong; that on June 9, 2004, InventAsia Limited was granted a license to
establish a representative office in Manila for the purpose of engaging in information dissemination and
support as confirmed by the License to Transact Business in the Philippines issued by the Securities and
Exchange Commission under Company Registration No. FS200408500 dated June 9, 2004; that on July 1,
2004 InventAsia Limited appointed Mr. Stevens to act as a General Manager of the said Manila
representative office; that in acting as a General Manager of the Manila representative office, Mr. Stevens
spends time in the Philippines to carry out his oversight functions; that for the period between January 1
and December 31, 2004, Mr. Stevens stayed in the Philippines for an aggregate period of less than 180
days; and that the remuneration of Mt. Steven paid for in Sterling and Hong Kong dollars, is borne by
InventAsia Limited.
In reply, please be informed of Article 14 of the Philippines-United Kingdom tax treaty which
"Article 14
Dependent Personal Services
1. Subject to the provisions of Articles 15, 16, 17, 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) of this Article, 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:
(a) the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in the fiscal year concerned; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a
resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed

base which the employer has in the other State. HEcaIC
3. Notwithstanding the preceding provisions of this Article, remuneration in respect of

employment as a member of the regular crew or complement or a ship or aircraft operation in
international traffic by an enterprise of a Contracting State shall be taxable only in that State.
Based on the above-quoted provisions, salaries, wages and other similar remuneration received by a
resident of the United Kingdom in respect of an employment performed in the Philippines shall be taxable
only in the United Kingdom when all these three (3) requirements are met, viz:. (1) he is present in the
Philippines for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned;
(2) the remuneration is paid by, or on behalf of, an employer who is not a resident of the Philippines; and
(3) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in
the Philippines.
Considering that Mr. Stevens stayed in the Philippines for an aggregate period of 99 days in the
year 2004, as attested to in the sworn statement by Ms. Liza C. Lara, another employee of the Manila
representative office, dated June 16, 2005, and that his remuneration is paid for by InventAsia Limited and
not borne by a permanent establishment of InventAsia Limited in the Philippines, thereby meeting all the
requirements stated under Article 14 of the Philippines-United Kingdom tax treaty, then, the remuneration
derived by Mr. Stevens as the acting General Manager of the Manila representative office is not subject to
Philippine income tax. (BIR Ruling No. 115-93 dated March 24, 1993)
Very truly yours,
By:

May 31, 2006
Article 11 of the Philippines-Singapore tax treaty; BIR Ruling No.

ITAD-21-99; BIR Ruling No. DA-ITAD-78-05
Philippine Japan Active Carbon Corporation

Malagamot, Panacan
P.O. Box 81316 Davao City
Attention: Mr. Masahiko Saeki

EVP & Gen. Manager
Gentlemen :
This refers to your application for relief from double taxation dated August 25, 2005, seeking
confirmation on. behalf of your creditor, Japan Bank for International Cooperation (JBIC), that the interest
income arising from the Loan Agreement between JBIC and your company Philippine Japan Active
Carbon Corporation (PJACC) is exempt from Philippine income tax pursuant to Article 11(4) of the
It is represented that PJACC is a Board of Investments (BOI)-registered (on a non-pioneer status)

corporation organized and existing under the laws of the Philippines with principal address at Malagamot,
Panacan, Bunawan, P.O. Box 81316 Davao City, Philippines; that on March 31, 2005, PJACC and JBIC
entered into a Loan Agreement (Agreement) wherein JBIC agrees to make available to PJACC, on and
subject to the terms and conditions of the Agreement, a loan facility in Yen in aggregate amount not
exceeding One Hundred and Fifty Million Yen (Y150,000,000); that the proceeds of the loan shall be
applied by PJACC for the sole purpose of financing the expenditures directly necessary for the due
implementation of the Project having the objective of expanding a production facility for activated carbon.
In reply, please be informed that Article 11(4) of the Philippines-Japan tax treaty provides as
follows:
"Article 11
xxx xxx xxx
4. Notwithstanding the provisions of paragraphs (2) and (3), interest arising in a

Contracting State and derived by the Government of the other Contracting State including political
subdivisions and local authorities thereof, the Central Bank of that other Contracting State or any
financial institution wholly owned by that Government, or by any resident of the other Contracting
State with respect to debt-claims guaranteed or indirectly financed by the Government of that other
Contracting State including political subdivisions and local authorities thereof, the Central Bank of
that other Contracting or any financial institution wholly owned by that Government shall be
exempt from tax in the first-mentioned Contracting State.
For the purposes of this paragraph, the term 'financial institution wholly owned by the
Government' means:
(a) In the case of Japan, the Export-Import Bank of Japan, the Overseas Economic
Cooperation Fund and the Japan International Cooperation Agency; (emphasis supplied)
(b) In the case of the Philippines, the Development Bank of the Philippines; and
(c) Any such financial institution the capital of which is wholly owned by the Government
of either Contracting State, other than those referred to in sub paragraphs (a) and (b) above, as may
be agreed from time to time between the Government of the two Contracting States." (emphasis
supplied)
Moreover, Section 32(B)(7)(a) of the National Internal Revenue Code of 1997 provides, viz:
"(B) Exclusion from Gross Income. — The following items shall not be included in gross
income and shall be exempt from taxation under this Title: aCIHAD
"xxx xxx xxx"
"(7) Miscellaneous Items. —
(a) Income Derived by Foreign Government — Income derived from

investments in the Philippines in loans, stocks, bonds or other domestic securities, or
from interest on deposits in banks in the Philippines by (i) foreign governments, (ii)
financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial institutions established by
foreign governments. (emphasis supplied)
"xxx xxx xxx"
In view of the foregoing provisions and considering that JBIC is the result of the merger of
Export-Import Bank of Japan and Overseas Economic Cooperation Fund, this Office is of the opinion and
hereby holds that the interest income that will be derived by JBIC, a financial institution wholly owned by
the Japanese Government, from the Loan Agreement it executed with PJACC, is exempt from Philippine
income tax. (BIR Ruling No. ITAD-21-99)
However, the Loan Agreement entered into by and between PJACC and JBIC dated March 31,
2005 is subject to documentary stamp tax imposed under Section 179 of the NIRC of 1997, as amended by
Republic Act No. 9243 1, at a rate of (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof,
of the issue price of any such loan contract.
Very truly yours,
By:
Legal Service
Footnotes
May 22, 2006
Article 11 of the Philippines-Japan tax treaty;

Enkei Philippines, Inc.

Lot 17 Carmelray Industrial
Canlubang, Calamba, Laguna
Attention: Mr. Ryusuke Onoki

Managing Director
Gentlemen :
This refers to your application for relief from double taxation dated November 11, 2005 seeking to
avail of the preferential tax rate of 10% on the interest payments of Enkei Philippines Inc., (Enkei-Phil) to
Enkei Corporation (Enkei-Japan), pursuant to Article 11 of the Philippines-Japan tax treaty.
It is represented that Enkei-Japan is a corporation duly organized and existing under the laws of
Japan, with principal address at Act Tower 26th Floor 111-2, Itayamachi Hamamatsu City, Shizuoka
Prefecture, Japan 430-7726; that it is a resident of Japan within the meaning of the Philippines-Japan tax
treaty per Residence Certificate dated February 24, 2006, issued by the District Director of
Hamamatsunishi Tax Office of Japan; that it is not registered either as a corporation or as a partnership in
the Philippines per certification issued by the Securities and Exchange Commission dated October 24,
2005; that Enkei-Phil is a corporation organized and existing under the laws of the Philippines, with
business address at 104 Industry Drive, Carmelray Industrial Park, Canlubang, Laguna, and is registered
with the Board of Investments, under a pioneer status under Certificate of Registration No. EP 95-119
dated July 14, 1995.
It is further represented that on June 16, 2005, Enkei-Phil issued a Promissory Note in favor of
Enkei-Japan for a loan in the amount of Yen Five Hundred Twenty Million (¥520,000,000.00), which shall
accrue an annual interest of 1.7 % per annum to be computed based on the outstanding principal loan
amount; that the payment on interests shall be made by Enkei-Phil to Enkei-Japan at the month-end of
every quarter of the calendar year which shall commence at the month-end of September 2005; that
Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's outstanding indebtedness through
Enkei-Japan's designated account on or before June 14, 2007; that on September 30, 2005, Enkei-Phil
issued another Promissory Note in favor of Enkei-Japan for a loan in the amount of Yen Six Hundred
Million (Y600,000,000.00), which shall accrue an annual interest of 1.7 % per annum to be computed
based on the outstanding principal loan amount; that the payment on interests shall be made by Enkei-Phil
to Enkei-Japan at the month-end of every quarter of the calendar year which shall commence at the
month-end of December 2005; and that Enkei-Phil shall pay Enkei-Japan the full amount of Enkei-Phil's
outstanding indebtedness through Enkei-Japan's designated account on or before September 30, 2007.
"Article 11
(1) Interest arising in a Contracting State and paid to a resident of the other Contracting
(2) However, such interest may also be taxed in the Contracting State in which it arises,
interest the tax so charged shall not exceed:
(a) 10 per cent of the gross amount of the interest if the interest is paid in
respect of Government securities, or bonds or debentures;
(b) 15 per cent of the gross amount of the interest in all other cases. HETDAC
(3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the
Philippines on the interest paid by a company, being a resident of the Philippines, registered with
incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the interest,
shall not exceed 10 per cent of the gross amount of the interest.
xxx xxx xxx
(5) The term 'interest' as used in this Article means income from debt-claims of every kind,
whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's
profits, and in particular, income from Government securities and income from bonds or
debentures, including premiums and prizes attaching to such securities, bonds or debentures.
xxx xxx xxx"
Based on the aforequoted provisions, interest payments will be taxed at a preferential rate not
exceeding ten percent (10%) if the interest is paid in respect of government securities, or bonds or
debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the
Board of Investments and engaged in preferred pioneer areas of investment under the investment
incentives laws of the Philippines; and in all other cases, fifteen per cent (15%) of the gross amount of the
interest.
Such being the case and since Enkei-Phil is a pioneer enterprise engaged in preferred pioneer areas
of investment under incentive laws of the Philippines, this Office is of the opinion and so holds that the
interest payments to be made by Enkei-Phil to Enkei-Japan are subject to a final withholding tax rate of 10
percent of the gross amount of interest, pursuant to Article 11(3) of the Philippines-Japan tax treaty. (BIR
Ruling No. 214-82 dated July 15, 1982)
Moreover, the above Promissory Notes are subject to the documentary stamp tax imposed under
Section 179 of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9243 1, at
the rate of One Peso (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof of the issue
price of the said Promissory Notes.
Very truly yours,
By:

Legal Service
Footnotes
May 22, 2006
Philippines-Singapore tax treaty Article 12
Bernaldo Mirador & Directo Law Offices

Unit 1807 Cityland Condominium 10-Tower 1
6815 Ayala Avenue corner H.V. Dela Costa St.
Makati City
Attention: Atty. Rosario S. Bernaldo

Managing Partner
Gentlemen :
This refers to your letter dated June 9, 2005, on behalf of your client, Cityneon Philippines, Inc.
(CPI), requesting confirmation that the service fees paid by CPI to Cityneon International Pte. Ltd. (CIPL)
in consideration for services performed by CIPL outside the Philippines are considered as income from
sources outside the Philippines and are not subject to Philippine income tax, expanded withholding tax and
value-added tax and that CPI shall be allowed to claim such service fees as deduction for income tax
purposes.
It is represented that CIPL is a nonresident foreign corporation duly organized and existing under
laws of Singapore, with principal address at 84 Genting Lane, No. 05-01 Singapore 349584; that CIPL is
not registered either as a corporation or as a partnership in the Philippines per certification issued by
Securities and Exchange Commission dated May 24, 2005; that CIPL is engaged in the business of
providing services for the conceptualization, designing and management of exhibitions and promotional as
well as social events; that CIPL possesses substantial valuable knowledge of a specialized nature relating
to the management and operation of CPI's business; that CIPL is willing to transfer certain "know-how",
technical information, and technical services and assistance related in the management and operation of
the business of CPI; that CPI is a corporation duly organized and existing under the laws of the Philippines
under SEC Registration No. A1997-5352 with principal office at RMT no. 7 Main Avenue, ACSIE
Compound, Severina Industrial Subdivision, Km. 16 West Service Road, South Super Highway,
Parañaque City, Metro Manila.
It is further represented that on May 12, 2005, CPI and CIPL entered into a Management Service
Agreement, whereby, considering the nature of the business of CIPL and its valuable knowledge of
specialized nature relating to the management and operation of such business and considering the financial
resources and technical exclusivity of the information directly related to the performance of the said
services which is being possessed by CIPL, CIPL undertook to transfer certain "know-how", technical
information, and technical services and assistance related to the management and operation of the
businesses of CPI; that under the Agreement, CIPL shall render services to CPI consisting of the
following:
a) The scope of the services is either fixed or based on actual consumption or use, but in either
case shall cover technical and administrative support for priority tasks, including but not
limited to the fields of project development, advertising, financing, controlling and IT as
applicable for the purposes of centralized coordination and consultations.
b) To determine operating policy, standards of service, the maintenance of assets and any other
matters affecting the business operation of CPI.
c) To recommend, prepare, supervise and direct all phases of marketing, advertising, sales and
business promotion of CPI.
d) To carry out all programs contemplated by the annual operating budget and to determine
credit policies.
e) To hire, supervise and discharge all personnel of CPI including the Executive Staff and to
determine employment policies including compensation and entering into any agreements
with labor unions, if any.
f) To purchase or lease all operating supplies and operating equipment, and additions to, and
replacements of, operating equipment and operating supplies. cSIADa
g) To hire such persons or organizations as CIPL may deem necessary to provide services,
supplies and advice with respect to the operation of CPI provided that such services are
previewed in the approved budget.
h) To enter into such contracts for the provision of supplies utilities maintenance repairs and
services to the operations of CPI as CIPL shall consider necessary or appropriate for its
proper operation and maintenance.
i) To introduce latest technical know-how on international administrative systems.
j) To provide such other related services.
that the term of the agreement shall be for a period of five (5) years commencing from January 1, 2005 up
to December 31, 2009, renewable upon agreement by both parties; that for the duration of this agreement,
Mr. Lim Poh Hock will be assigned to handle this account and that he shall visit the office of CPI not to
exceed an accumulative period of twenty (20) days per year or for a maximum of one hundred twenty five
(125) days; and that in consideration for the services rendered by the CIPL to CPI, CIPL shall charge CPI
annual management and service fees in the amount equivalent to 2% of the total sales plus reimbursable
out of pocket expenses, exclusive of 10% value-added tax.
In reply, please be informed that the subject payments by CPI to CIPL under their Management
Service Agreement are royalties and not business profits pursuant to Article 12 of the
Philippines-Singapore tax treaty which provides, as follows:
"Article 12
Royalties
and according to the law of that State, but if the recipient is the beneficial owner of the royalties, the
tax so charged shall not exceed:
(a) in the case of the Philippines, 15 per cent of the gross amount of the
royalties, where the royalties are paid by an enterprise registered with the Philippine
Board of Investments and engaged in preferred areas of activities and also royalties
in respect of cinematographic films or tapes for television or broadcasting;
(b) in the case of Singapore, where the royalties are approved under the
Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the
royalties shall be exempt;
(c) in all other cases, 25 per cent of the gross amount of the royalties.
xxx xxx xxx"
The treaty defines "royalties" to include "payment of any kind received as a consideration for
information concerning industrial, commercial or scientific experience." According to the commentaries
of the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD)
Committee on Fiscal Affairs on the Model Tax Convention [par. 11 and 12, Commentary on Article 12
(Royalties),  2003, p. 175], such information alludes to the concept of "know-how". The definition
adopted by the said Committee is, "all the undivulged technical information, whether capable of being
patented or not, that is necessary for the industrial reproduction of a product or process, directly and under
the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer
cannot know from mere examination of the product and mere knowledge of the progress of technique." In
a know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own
account, his special knowledge and experience which can remain unrevealed to the public. (BIR Ruling
DA-ITAD No. 57-05 dated June 17, 2005)
Further, in the case of Philippine Refining Company vs. CIR CTA Case No. 2872 dated January 15,
wit:
interest then the payment is royalty."
Applying the above discussions to the instant case, the herein services of CIPL to CPI under the
subject Management Service Agreement, includes the transfer into the Philippines of certain "know-how"/
technical information where CIPL has proprietary interest or which would permit CIPL to impart to CPI its
substantial valuable knowledge of a specialized nature which remain unrevealed to the public. Hence, the
herein payments constitute as consideration for the transfer of information concerning industrial,
commercial or scientific experience. Accordingly, the payments by CPI to CIPL are within the purview of
the definition of "royalties" under Article 12 of the Philippines-Singapore tax treaty, quoted as follows:
"The term 'royalties' as used in this Article means payments of any kind received as a
scientific experience."
Considering that CPI is not a BOI-registered enterprise, and that the payments are not in respect of
cinematographic films or tapes for radio or television or broadcasting, payments made by CPI to CIPL
under the Management Service Agreement are subject to tax at the rate of 25 percent of the gross amount
thereof. (BIR Ruling No. DA-ITAD 163-00 dated October 30, 2000)
Finally, the fees paid by CPI for the services to be rendered by CIPL in the Philippines are subject
to the value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997 1.
Regulations No. 14-2002, provide that CPI shall be responsible for the withholding of the VAT on the
service fees before remitting them to CIPL. In remitting to the Bureau of Internal Revenue the VAT
withheld on the service fees, CPI shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and
Other Percentage Taxes Withheld). If a VAT-registered taxpayer, CPI may use as documentary
accompanying it. If a non-VAT-registered taxpayer, CPI may include as part of the cost of the services
furnished to it by CIPL 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, CPI is required to issue the Certificate of
Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be
given to CIPL upon its request, and the fourth copy to be retained by CPI as its file copy.
As regards your opinion that the service fees to be paid by CPI to CIPL qualify as deductible
business expense under Section 34(a)(1) of the Tax Code of 1997, as amended, please be informed that we
decline to rule on the matter considering the factual nature of the issue raised.
parties are concerned. HTCDcS
Very truly yours,
Commissioner of Internal Revenue By:

Assistant Commissioner Legal Service
Footnotes
107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The
percent (1 1/2%).
May 15, 2006
Article 13 of the Philippines-Japan tax treaty;

Section 175 of the NIRC of 1997;
Platon Martinez Flores San Pedro & Leaño

6th & 7th Floor Tuscan Building,
114 V.A. Rufino Street (formerly Herrera)
Legaspi Village, Makati City
Attention: Atty. Anthony Brett M. Abenir

Atty. Joey Serrano Arcilla
Gentlemen :
This refers to your application for relief from double taxation dated August 30, 2005, on behalf of
your client, Dentsu, Inc. (Dentsu-Japan), requesting confirmation of your opinion that the sale of its shares
of stock in Dentsu, Young & Rubicam-Alcantara, Inc. (DYR-Phils) to Y & R Far East Holdings, Inc.
(Y&R-US) is exempt from the payment of capital gains tax, pursuant to Article 13 of the
It is represented that DYR-Phils is a corporation organized and existing in accordance with the laws
of the Republic of the Philippines with business address at the 20th Floor, Yuchengco Tower, RCBC
Plaza, Makati City; that Dentsu-Japan is a nonresident corporation organized and existing in accordance
with the laws of Japan with principal place of business at 1-8-1 Higashi-shimbashi, Minato-ku, Tokyo
105-7001, Japan; that Y&R-US is also a nonresident foreign corporation organized and existing under the
laws of the United States of America with business address at 285 Madison Avenue, New York 10017,
USA; that Dentsu-Japan is the registered owner of 16,980 common shares without par value in the capital
stock of DYR-Phils; that the said 16,980 common shares were originally issued by DYR-Phils on July 27,
1998; that on May 11, 2005, Dentsu-Japan executed and entered into a Deed of Absolute Sale of Shares
with Y&R-US, wherein the former sold, transferred, conveyed and delivered to the latter 8,490 shares out
of the said 16,980 common shares, for and in consideration of the amount of One Hundred Seven
Thousand Three Hundred and Eight U.S. Dollars (US$107,308.00); and that per audited financial
statements of DYR-Phils as of calendar year ending December 31, 2004, the properties of DYR-Phils do
not consist principally of immovable property located in the Philippines.
In reply, please be informed that Article 13 of the Philippines-Japan tax treaty provides as follows,
viz: HScaCT
"Article 13
xxx xxx xxx
"(4) Gains from the alienation of shares of a company, a partnership or a trust the property
of which consists principally of immovable property situated in a Contracting State, may be taxed in
that Contracting State.
"(5) Gains from the alienation of any property other than those referred to in paragraphs (1),
(2), (3) and (4) shall be taxable only in the Contracting State of which the alienator is a resident."
Based on the foregoing, the gains which will be realized by Dentsu-Japan from the transfer of its
shares of stock in DYR-Phils to Y&R-US shall be taxable only in Japan. However, under paragraph 4 of
the aforequoted provision, the Philippines may tax the gains derived from the disposition of interest in a
corporation if its entire assets consist principally of real property interest located in the Philippines. "Real
Property Interest" means interest on properties enumerated in Section 3 of Revenue Regulations No. 4-86
which are not, however, exclusive of others that are similarly situated. As used in the treaties and in the
Regulations, it shall be understood to include real properties as understood under Philippine laws.
Moreover, "Principally" means more than 50% of the entire assets in terms of value (Sec. 2 (a) and (b),
Revenue Regulations No. 4-86). (BIR Ruling No. 007-96)
Verification of the Financial Statements of DYR-Phils as of the date of the subject Deed of
Absolute Sale disclosed that its real property interest located in the Philippines represents less than 50% of
its total assets, thereby making the assets of DYR-Phils not consisting principally of real property interest
located in the Philippines.
Accordingly, your opinion that the gains from the sale of shares of stock by Dentsu-Japan to Y & R
Far East are not subject to capital gains tax is hereby confirmed.
However, the Deed of Absolute Sale executed by and between Dentsu-Japan and Y & R Far East
for the sale of the subject shares of stocks without par value shall be subject to the documentary stamp tax
(DST) equivalent to twenty-Five percent of the DST paid upon the original issue of said stock (BIR Ruling
No. 052-99 elated April 16, 1999) imposed under Section 175 of the Tax Code of 1997, as amended by
Republic Act No. 9243, viz:
"Section 175. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales.

Deliveries or Transfer of Shares or Certificates of Stock. — On all sales, or agreements to sell, or
memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association,
company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by
any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the
holder in any manner to the benefit of such stock, or to secure the future payment of money, or for
the future transfer of any stock, there shall be collected a documentary stamp tax of Seventy-five
centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof of the par value of
such stock: Provided, That only one tax shall be collected on each sale or transfer of stock is issued,
indorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case
of stock without par value the amount of the documentary stamp tax herein prescribed shall be
equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue
of said stock". (emphasis supplied)
In relation thereto, Section 175 (i.e., prior to the amendment of Republic Act No. 9243 1) of the Tax
Code of 1997, which was the law applicable on July 27, 1998, the date of the original issuance by
DYR-Phils of the subject shares, provides:
"Section 175. Stamp Tax on Original Issue of Shares of Stock. —
On every original issue, whether on organization, reorganization or for any lawful purpose,
of shares of stock by any association, company or corporation, there shall be collected a
documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part
thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of
shares of stock without par value, the amount of the documentary stamp tax herein prescribed shall
be based upon the actual consideration for the issuance of such shares of stock: . . ."
Accordingly, the DST due on the Deed of Absolute Sale between Dentsu-Japan and Y&R-US shall
be computed based on the aforequoted (old) provision in relation to the present Section 175 of the Tax
Code of 1997, as amended by Republic Act No. 9243.
No transfer of ownership of the subject shares shall be recorded unless the DST thereon has been
duly paid in accordance with Section 201 of the same Tax Code. (Section 4, Revenue Regulations No.
13-04)
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation, it will be disclosed that the facts are different, and/or any of the requirements imposed in
this letter are not complied with, then this ruling shall be considered null and void. EHaDIC
Very truly yours,

Legal Service
Footnotes
1. An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code
of 1997, As Amended, and For Other Purposes
May 11, 2006
Embassy of the People's Republic of China

4896 Pasay Road,
Dasmariñas Village
Makati City
Attention: Mr. Deng Xijun

DCM and Political Counsellor
Gentlemen :
This has reference to your Note No. (06)PG-066 dated March 27, 2006 referred to this Office by
the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the
exemption from payment of value-added tax (VAT) and ad valorem tax on the local purchase of one (1)
motor vehicle, for the personal use of Mr. Deng Xijun, DCM and Political Counsellor of the Embassy of
the People's Republic of China, specifically described as follows:
Make: Chevrolet Optra 1.6L M/T
Model Year: 2006
Color: Sterling Silver
Engine Number: F16D3-496645K
Chassis Number: KL1NF196E6H100588
reads:
"ARTICLE 34
services;
xxx xxx xxx"
words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax
prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National
the People's Republic of China and/or its personnel on their purchases of locally-assembled motor vehicles
it appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005 and as
confirmed by the Office of the Protocol (DFA) in its Indorsement letter dated October 17, 2005, that your
Government allows similar exemption to Philippine Embassy and its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2006 Chevrolet Optra 1.6L M/T for the personal use of
Mr. Deng Xijun, DCM and Political Counsellor of the Embassy of the People's Republic of China is
exempt from value-added tax and ad valorem tax. (BIR Ruling No. DA-ITAD-100-05 dated September 8,
2005)
herein parties are concerned. cDCaHA
Very truly yours,

Legal Service
May 11, 2006
Articles 3 (General Definitions) and 11 (Interest)

Philippines-Netherlands tax treaty; Section 28(B)(5)(a), National
Internal Revenue Code of 1997; Section 2, Introductory
Provisions, Administrative Code of 1987; Section 1, Article X
(Local Government), The 1987 Constitution of the Republic of the
Philippines

Attorneys at Law
8741 Paseo de Roxas
Makati
Gentlemen :
This refers to your letter dated September 21, 2005 on behalf of your client, NIB Capital Bank NV
(NIB Bank), requesting confirmation that the National Power Corporation (Napocor) and the Metropolitan
Waterworks and Sewerage System (MWSS) cannot be considered to fall under the term "Government" or
the phase "political subdivision or local authority thereof" as the terms are used under Article 11,
paragraph 3(a) of the Convention between the Kingdom of the Netherlands and the Republic of the
Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (Philippines-Netherlands tax treaty). Such confirmation is sought for the purpose of
determining NIB Bank's entitlement to tax credits under the tax laws of the Netherlands.
It is represented that NIB Bank is a foreign corporation, organized and existing under the laws of
the Netherlands, with office at 2517 KJ's-Gravenhage, Carnegieplein 4, the Netherlands, as confirmed by
the Certificate dated February 4, 2005 issued by the Netherlands Tax Administration at Amsterdam; that
NIB Bank is not registered either as a corporation or as a partnership in the Philippines, as confirmed by
the Certificate of Non-Registration of Corporation/Partnership dated November 7, 2005 issued by the
Securities and Exchange Commission; that, on the other hand, Napocor and MWSS are corporations
organized and existing under the laws of the Philippines, created by virtue of Republic Act No. 6395 (An
Act Revising the Charter of the National Power Corporation) and Republic Act No. 6234 (An Act Creating
the Metropolitan Waterworks and Sewerage System and Dissolving the National Waterworks and
Sewerage Authority; and for Other Purposes), respectively; that Napocor's primary objective is to
undertake the development of hydroelectric generation of power and the production of electricity from
nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis;
that MWSS' primary objective is to ensure the proper operation and maintenance of waterworks systems to
insure an uninterrupted and adequate supply and distribution of potable water for domestic and other
purposes, and to ensure the proper operation and maintenance of sewerage systems which are essential
public services because they are vital to public health and safety; that Napocor and MWSS have corporate
lives of fifty years from and after the expiration of their present corporate existence beginning, possibly,
from September 10, 1971 for Napocor and from June 19, 1971 for MWSS, the dates the Republic Acts
creating these corporations became effective; that Napocor issued Bonds 1 on December 11, 1995
amounting to Twelve Billion Japanese Yen (¥12,000,000,000), the proceeds of which to be used to finance
part of the Masinloc 1 Coal-Fired Power Plan Project and that of the Northern Luzon Generation and
Transmission Project; that the Bonds are serially numbered and in bearer form in the denomination of
¥100,000,000 each with coupons attached on issue; that the Bonds which have a redemption value of
¥12,000,000,000, have a bond rate of 4.65 percent per annum with interest payable semi-annually on
December 11 and June 11 of every year, and with maturity date on December 11, 2015; that the interest of
the Bonds are guaranteed by the Government of the Republic of the Philippines, and that the Asian
Development Bank will grant a 'put option' to J.P. Morgan Trustee Ltd. for the holders of the Bonds which
will entitle J.P. Morgan Trustee Ltd. to require the Asian Development Bank to purchase all of the then
outstanding Bonds at a price equal to 100 percent of the aggregate principal amount of the Bonds on or
after the maturity date; that the Bonds will be represented by a permanent global bond without interest
coupons which is expected to be deposited with a common depository for Morgan Guaranty Trust
Company of New York, Brussels Office, as operator of the Euroclear System and Cedel Bank, société
anonyme, on or about December 11, 1995; and that NIB Bank is a holder of the Bonds issued by Napocor,
and, previously, even of the Notes 2 issued by MWSS which NIB Bank sold on September 19, 2005.
In reply, please be informed that concerning income tax, the interests to be paid by Napocor and
MWSS on the Bonds and the Notes they issued to NIB Bank are generally subject to income tax of twenty
percent (20%) of the gross amount thereof, under Section 28(B)(5)(a) of the National Internal Revenue
Code of 1997 (Tax Code):
"SEC. 28. Rates of Income Tax on Foreign Corporation. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. — HaIESC
(a) Interest on Foreign Loan. — A final withholding tax at the rate of

twenty percent (20%) is hereby it imposed on the amount of interest on foreign loans
contracted on or after August 1, 1986;
xxx xxx xxx"
However, being a resident of the Netherlands, NIB Bank is entitled to the preferential income tax
rates on interests under Article 11 of the Philippines-Netherlands tax treaty:
"Article 11
INTEREST
1. Interest arising in one of the States and paid to a resident of the other State may be
taxed in that other State.
2. However, such interest may also be taxed in the State in which it arises and according
to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged
shall not exceed:
(i) in connection with the sale on credit of any industrial,

commercial or scientific equipment, or
(ii) on any loan of whatever kind granted by a bank, or any other

financial institution,
(iii) in respect of public issues of bonds, debentures or similar

obligations,
3. Notwithstanding the provisions of paragraph 2:
a) interest arising in one of the States and paid in respect of a bond,

debenture or other similar obligation of the Government of that State or of a political
subdivision or local authority thereof shall be exempt from tax in that State;
b) interest arising in one of the States and paid in respect of a loan made by
or guaranteed or insured by the Government of the other State, the central bank of
that other State or any agency or instrumentality (including a financial institution)
owned or controlled by that Government shall be exempt from tax in the
first-mentioned State.
4. The competent authorities of the States shall by mutual agreement settle the mode of
application of paragraphs 2 and 3.
5. The term "interest " as used in this Article means income from Government securities,
bonds or debentures, whether or not secured by mortgage but not carrying a right to participate in
profits, and debt-claims of every kind as well as all other income assimilated to income from money
lent by the taxation law of the State in which the income arises. Penalty charges for late payment
shall not be regarded as interest for the purpose of this Article.
xxx xxx xxx"
Under paragraph 5, the term "interest" subject to preferential tax treatment includes income from
bonds and income from debentures to which notes are generally categorized. In relation, under paragraph
2, interest is subject to the preferential income tax of (a) ten percent (10%) of the gross amount thereof if it
is paid (i) in connection with the sale on credit of any industrial, commercial or scientific equipment, (ii)
on a loan granted by a bank or other financial institution, or (iii) in respect of public issues of bonds,
debentures or similar obligations, and (b) fifteen percent (15%) of the gross amount thereof in all other
cases. More importantly, under paragraph 3, interest is exempt from income tax if (a) it is paid in respect
of a bond, debenture or other similar obligation of the Government of a State or a political subdivision or a
local authority thereof, or (b) it is paid in respect of a loan made by or guaranteed or insured by the
Government of the other State, the central bank thereof or any agency or instrumentality or a financial
institution owned or controlled by that Government.
In connection therewith, you inquire on whether the exemption under paragraph 3(a) of Article 11
applies to the interest to be paid by Napocor and MWSS to NIB Bank on the subject Bonds and Notes, by
reason that the word "Government" as used therein and applied to the Government of the Republic of the
Philippines may include therein a government-owned or controlled corporation like Napocor and MWSS.
Under paragraph 3(a), interest arising in the Philippines and derived by a resident of the Netherlands like
NIB Bank is exempt from income tax if it is paid in respect of a bond, debenture or other similar obligation
of the Government of the Republic of the Philippines, its political subdivision or local authority. The
words "Government", "political subdivision" and "local authority" are not expressly defined in the
Philippines-Netherlands tax treaty; hence, pursuant to paragraph 3, Article 3 (General Definitions) of the
Philippines-Netherlands tax treaty, they must be defined in accordance with the applicable laws of the
Philippines:
"Article 3
GENERAL DEFINITIONS
xxx xxx xxx
2. As regards the application of the Convention by either of the States, any term not
otherwise defined shall, unless the context otherwise requires, have the meaning which it has under
the laws of that State relating to the taxes which are the subject of this Convention."
Concerning such laws, it is noteworthy that the Administrative Code of 1987 (Executive Order No.
292) defines the words "Government of the Republic of the Philippines" and "local government" from
which the meaning of "political subdivision" and "local authority" are construed, particularly, under
Section 2 of the Code:
"INTRODUCTORY PROVISIONS
SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:
(1) Government of the Republic of the Philippines refers to the corporate governmental
entity through which the functions of government are exercised throughout the Philippines,
including, save as the contrary appears from the context, the various arms through which political
authority is made effective in the Philippines, whether pertaining to the autonomous regions, the
provincial, city, municipal or barangay subdivisions or other forms of local government.
xxx xxx xxx"
As to "Government", generally speaking, any entity through which the functions of government are
exercised is or can be included in the word "Government." Thus, the national government, the local
governments (which include "political subdivisions and local authorities), and the agencies of the
Government, all form part of Government. As to agencies of the Government, they refer to the various
units of the Government, including a department, bureau, office, instrumentality, a local government or a
distinct unit therein, and even a government-owned or controlled corporation like Napocor or MWSS
(Section 2(4), Ibid.) However, whether a government-owned or controlled corporation, being an agency of
the Government, can be considered as Government as it is, it should be understood that a
government-owned or controlled corporation cannot be considered as such because by its very nature it
does not perform governmental functions. This is made clear by the Supreme Court in National Power
Corporation vs. City of Cabanatuan (G.R. No. 149110 dated April 9, 2003), where the Court ruled, in
passing and among other things, that Napocor, a government-owned or controlled corporation, is an entity
that does not perform governmental functions. The Court ruled thus:
''Governmental functions are those pertaining to the administration of government, and as
such, are treated as absolute obligation on the part of the state to perform while proprietary
functions are those that are undertaken only by way of advancing the general interest of society, and
are merely optional on the government. Included in the GOCCs performing proprietary functions
are 'business-like' entities such as the National Steel Corporation (NSC), the National Development
Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System
(GSIS), and the National Water Sewerage Authority (NAWASA), among others.
Petitioner (Napocor) was created to 'undertake the development of hydroelectric generation

of power and the production of electricity from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis. Pursuant to this mandate, petitioner generate
power and sells electricity in bulk. Certainly, these activities do not partake of the sovereign
functions of the government. They are purely private and commercial undertakings, albeit imbued
with public interest. The public interest involved in its activities, however, does not distract from the
true nature of the petitioner as a commercial enterprise, in the same league with similar public
utilities like telephone and telegraph companies, railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice plant, among others; all of which are
declared by this Court as ministrant or proprietary functions of government aimed at advancing the
general interest of society.
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a 'business,' although it limits petitioner's profits to twelve percent (12%),
viz:
'(n) When essential to the proper administration of its corporate affairs or

necessary for the proper transaction of its business or to carry out the purposes for
which it was organized, to contract indebtedness and issue bonds subject to approval
of the President upon recommendation of the Secretary of Finance;
(o) to exercise such powers and do such things as may be reasonably

necessary to carry out the business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to be necessary, useful,
incidental or auxiliary to accomplish the said purpose . . ."
The following pronouncements of the Court are also worth mentioning:
"It is not necessary to write an extended dissertation on whether or not Napocor performs a
governmental function with respect to the management and operation of the Angat Dam. It is
sufficient to say that the government has organized a private corporation, put money in it and has
allowed it to sue and be sued in any court under its charter (R.A. No. 6395, Sec. 3(d).) As a
government owned and controlled corporation, it has a personality of its own, distinct and separate
from that of the Government. (See National Shipyards and Steel Corp. vs. CIR, et al., L-17874,
August 31, 1963, 8 SCRA 781.) Moreover, the charter provision that the Napocor can 'sue and be
sued in any court' is without qualification on the cause of action and accordingly it can include a tort
claim such as the one instituted by the petitioners." (Rayo vs. Court of First Instance of Bulacan,
L-55273-83) HTSAEa
"Government-owned or controlled corporations have a personality of their own, separate and

distinct from the government, their funds, therefore although considered to be public in character,
are not exempt from garnishment." (Philippine National Bank vs. Pabalan, 83 SCRA 595)
"Where the government engages in a particular business thru the instrumentality of a

corporation, it divests itself pro hoc vice of its sovereign character, so as to subject itself to the rules
governing private corporations." (Philippine National Bank vs. Pabalan, 83 SCRA 595)
"When the government enters into commercial business, it abandons its sovereign capacity
and is to be treated like any other corporation." (Philippine National Railways vs. Union de
Maquinistas, Fogoneros y Motormen, 84 SCRA 223).
In view of the fact that a government-owned or controlled corporation does not perform
governmental functions, it cannot be regarded as falling within the ambit of the term "Government"
pursuant to the Administrative Code of 1987 and other Philippine laws in general. By the same token, a
government-owned or controlled corporation like Napocor and MWSS cannot be regarded as Government
under paragraph 3(b), Article 11 of the Philippines-Netherlands tax treaty. A government-owned or
controlled corporation like Napocor and MWSS cannot be regarded also as a political subdivision or a
local authority as the terms are used in paragraph 3(b). A political (and territorial) subdivision refers to a
province, city, municipality, or barangay of the Republic of the Philippines (Section 1, Article X (Local
Government), The 1987 Constitution of the Republic of the Philippines). 3 A local authority, although such
term is uncommonly used in existing Philippine laws, can be taken synonymous with a local government
or a political subdivision (Section 2(2), Administrative Code of 1987). 4
This being so, where Napocor and MWSS cannot be regarded as a "Government," "political
subdivision," or "local authority" as the terms are used in paragraph 3(a), Article 11 of the
Philippines-Netherlands tax treaty, instead of being exempt from income tax, interests to be paid by
Napocor and MWSS on the Bonds and the Notes they issued to NIB Bank are subject to the lower tax of
10% based on the gross amount thereof, under paragraph 2(a)(iii) of Article 11, where such interests are
paid in respect of public issues of bonds, debentures or similar obligations.
However, it should be emphasized that the bonds issued under the authority of Napocor's Charter
are by themselves exempt from all taxes, as clearly stated in Section 8, Republic Act No. 6395:
"SEC. 8. Authority to Incur Indebtedness and Issue Bonds; Their Conditions, Privileges
and Exemptions; Sinking Funds; Guarantee. —
(a) Domestic Indebtedness. — Whenever the Board deems it necessary for the Corporation
to incur indebtedness by contracting loans with domestic financial institutions or to issue bonds to
carry out the purpose for which the Corporation has been organized, it shall, by resolution, approved
by at least four members of the Board, so declare and state the purpose for which the proposed debt
is to be incurred and such terms and conditions as it shall deem appropriate for the accomplishment
of the said purpose; Provided, That in case of bond issues, the same shall be subject to the approval
of the President of the Philippines upon recommendation of the Secretary of Finance.
The bonds issued under the authority of this subsection shall be exempt from the payment of
all taxes by the Republic of the Philippines, or by any authority, branch, division or political
subdivision thereof which facts shall be stated upon the face of said bonds. Said bonds shall be
receivable as security in any transaction with the Government in which such security is required.
(emphasis supplied)
xxx xxx xxx
(b) Foreign Loan. — The Corporation is hereby authorized to contract loans, credits, in
any convertible foreign currency, or capital goods, and indebtedness from time to time from foreign
governments, or any international financial institution or fund source, or to issue bonds, in such
amounts and in any foreign currency on such terms and conditions as it shall deem appropriate for
the accomplishment of its purposes and to enter into and execute agreements and other documents
specifying such terms and conditions.
xxx xxx xxx
The loans, credits and indebtedness contracted under this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery, equipment,
materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees,
imposts, other charges and restrictions, including import restrictions previously and presently
imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions." (emphasis supplied)
Section 8 provides, among others, that loans, credits and other indebtedness like bonds incurred by
Napocor, whether domestic or foreign, are exempt from all direct and indirect taxes imposed by the
Republic of the Philippines, its agencies, or political subdivisions. Thus, interest arising from the issuance
of the Bonds are exempt by virtue of Section 8 as aforequoted.
On the other hand, this particular tax privilege given to Napocor is not available to MWSS as such
privilege is lacking in Republic Act No. 6234. The Charter of MWSS simply provides:
"SEC. 18. Tax Exemptions. — All articles imported by the Metropolitan Waterworks and
Sewerage System or the local governments for the exclusive use of their waterworks and sewerage
systems particularly machineries, equipment, pipes, fire hydrants, and those related to, or connected
with, the construction, maintenance, and operation of dams, reservoirs, conduits, aqueducts, tunnels,
purification plants, water mains, pumping stations; or of artesian wells and springs within their
territorial jurisdictions, shall be exempt from the imposition of import duties and other taxes."
Therefore, interests to be paid by MWSS to NIB Bank are subject to 10% income tax.
herein parties are concerned. AICDSa
Very truly yours,

Commissioner
Footnotes
1. A bond is a written contract by a debtor to pay a final amount on an indicated future date, and to pay a
periodic interest based on the principal of the bond. When the bond is said to be redeemed at par, the
redemption price is equal to the face value. A bond is said to be redeemable at a premium when it contains
the promise that on redemption date it will be redeemed for more than its face value.
Definition of Terms
1. Face value or par value. It is the borrowed principal mentioned on the bond.
2. Redemption value. It is the final amount at which the bond will be paid on the redemption date.
3. Coupon. It is a contract of payment of interest on the face value of the bond on a corresponding date.
4. Redemption date. It is the indicated date of redeeming the bond. It may be the same as the maturity
date or a different date.
5. Bond rate. It is the stated rate at which the bond promises to pay interest on its face value.
6. Redemption rate. It is the rate on the principal of the bond and it is used in computing the redemption
value.
7. Investment rate or yield rate. It is the rate of profit realized by the purchaser of the bond.
(Mathematics of Investment, Copyright 1988, by Antonina C. Sta. Maria, Lorina G. Salamat, Pastor B.
Malaborbor, Pages 83-90.)
2. A note or promissory note is a written promise to pay a certain sum of money on a specified date. The sum
of money due is called the maturity value. The date on which the money is due is called the date of
maturity. If the note specifies the rate of interest, it is an interest-bearing note. If it does not, then it is a
non-interest bearing note. The maturity value, instead, is specified in the note. Other features of the note are
given, such as the date on which the note is made, the sum of money borrowed, the length of time until it
matures, the payee and the maker.
(Ibid., Page 14.)
3. "Section 1. The territorial and political subdivisions of the Republic of the Philippines are the provinces,
cities, municipalities, and barangays. There shall be autonomous regions in Muslim Mindanao and the
Cordilleras as hereinafter provided."
4. "(2) Local Government refers to the political subdivisions established by or in accordance with the
Constitution."
May 11, 2006
Sec 109 - National Internal Revenue Code 1997; Article III,

Section 10 - Vienna Convention on the Privileges and Immunities
of the Specialized Agencies of the United Nations; BIR Ruling No.
DA-ITAD-01-04
United Nations Fund for

Population Activities (UNFPA)
RCBC Plaza, 6819 Ayala Avenue
Makati City
Gentlemen :
This refers to your letter dated April 11, 2006, indorsed to this Office by the Department of Finance
(DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment of
value-added tax (VAT) on the purchase of eleven (11) locally-produced motorcycles, for the official use of
the United Nations Fund For Population Activities (UNFPA), specifically described as follows:
Make: Eleven (11) Kawasaki Motorcycles
Model Year: 2006
Color: (5) Five Black/(6) Six Red
Engine Number: QS157FMI-2*0505501750 / QS157FMI-2*0505501751

QS157FMI-2*0505501762 / QS157FMI-2*0505501761
QS157FMI-2*0505501753 / QS157FMI-2*0505501797
QS157FMI-2*0505501802 / QS157FMI-2*0505501796
QS157FMI-2*0505501725 / QS157FMI-2*0505501690
QS157FMI-2*0505501695
Chassis Number: NF41K-101735 / NF41K-101736 / NF41K-101737

NF41K-101738 / NF41K-101739 / NF41K-101793
NF41K-101794 / NF41K-101795 / NF41K-101796
NF41K-101797 / NF41K-101798
(NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005, provides as follows:
xxx xxx xxx
In relation thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the
"Article III
xxx xxx xxx
Section 10
remission or return of the amount of duty or tax. aTHCSE
xxx xxx xxx"
Based on the above provisions, important purchases of goods and service in the Philippines for
Such being the case, and since the UNFPA is a specialized agency of the UN, this Office is of the
opinion and so holds that aforementioned purchases of eleven (11) units 2006 Kawasaki Motorcycles for
the official use of the UNFPA, is exempt from VAT.
Very truly yours,
By:

Legal Service
May 11, 2006
Sec 109 - National Internal Revenue Code 1997; Article III,

Section 10 - Vienna Convention on the Privileges and Immunities
of the Specialized Agencies of the United Nations; BIR Ruling No.
DA-ITAD-01-04
United Nations Fund for

Population Activities (UNFPA)
RCBC Plaza, 6819 Ayala Avenue
Makati City
Gentlemen :
This refers to your letter dated February 24, 2006, indorsed to this Office by the Department of
Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from payment
of value-added tax (VAT) and ad valorem tax on the purchase of two (2) locally-produced motor vehicles,
for the official use of the United Nations Fund For Population Activities (UNFPA), specifically described
as follows:
Make: Two (2) Toyota Innova Diesel 2.5L M/T
Model Year: 2006
Color: Freedom White
2KD-9505271
KUN40-5006078
(NIRC), as amended by Section 7 of Republic Act No. 9337 dated November 1, 2005 provides as follows:
"SEC. 109. Exempt Transaction. — Subject to the provisions of Subsection (2) hereof, the
xxx xxx xxx
In relation, thereto, Section 10, Article III of the Convention on the Privileges and Immunities of the
"Article III
xxx xxx xxx
Section 10
remission or return of the amount of duty or tax. acIASE
"xxx xxx xxx"
Such being the case, and since the UNFPA is a specialized agency of the UN, this Office is of the
opinion and so holds that aforementioned purchases of two (2) units 2006 Toyota Innova Diesel 2. 5L M/T
for the official use of the UNFPA, is exempt from ad valorem and value-added taxes.
Very truly yours,
By:

Legal Service
May 10, 2006
Section 101, National Internal Revenue Code of 1997;

Southeast Asian Regional Center

for Graduate Study and Research
in Agriculture (SEARCA)
4031 College, Los Baños, Laguna
Attention: Mr. Gil C. Saguiguit, Jr.

Deputy Director for Administration
Gentlemen :
This refers to your letter dated December 9, 2005, indorsed to this Office by the Department of
Foreign Affairs and the Department of Finance for appropriate action, pertaining to your donation of one
(1) unit officially owned, locally purchased, motor vehicle to the Department of Agriculture-Bureau of
Agricultural Research (DA-BAR), specifically described as follows:
Make : 2000 Black Toyota Corolla
Motor No. : 7AH983904
Chassis No. : AE1127500034
Plate No. : OEV - 21809
In reply, please be informed that Section 101 of the National Internal Revenue Code (NIRC) of
1997 provides, viz:
SEC. 101. Exemption of Certain Gifts. — The following gifts or donations shall be exempt
from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. —
xxx xxx xxx
(2) Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government; and
xxx xxx xxx
Donor's tax is a direct tax imposed upon the transfer by any person, resident or nonresident, of a
property by gift. Based on the abovementioned provision and considering the fact that the donee of the
subject motor vehicle is a government entity, the Department of Agriculture-Bureau of Agricultural
Research, such transfer of ownership over the subject motor vehicle is exempt from tax, specifically
donor's tax.
herein parties are concerned. IDEHCa
Very truly yours,
By:

Legal Service
May 5, 2006
Sec 106, 108 & 149 of the National Internal Revenue Code of
1997;
Article 34, Vienna Convention;
Embassy of the Russian Federation

1245 Acacia Road, Dasmariñas Village
Makati City
Gentlemen :
This has reference to your Note No. 49 dated April 7, 2006, referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), Office of Protocol,
requesting for the exemption from payment of value-added tax (VAT) and ad valorem taxes on the local
purchases of six (6) units of motor vehicle for the official use of the Embassy of the Russian Federation,
Make And Model Color Frame/Chassis No. Motor/Engine No.
1. 2006 Toyota Night Mist ZZE121-9004179 1ZZ-4532421

Corolla Altis 1.8 G
A/T
2. 2006 Mitsubishi Silver/Gray Serial No: 4G64A041775

L400 SpaceGear W5045635
Gas A/T
3. 2006 Toyota Flaxen ZZE121-8019116 3ZZ-4552317

Corolla Altis 1.6 E
A/T
4. 2006 Toyota Quick Silver ZZE121-8019119 3ZZ-4552322

Corolla Altis 1.6 E
A/T
5. 2006 Toyota Flaxen ZZE121-8019088 3ZZ-4546368

Corolla 1.6 E A/T
6. 2006 Toyota Quick Silver MCV30-4500508 1MZ-1837961
Camry 3.0 V V6
A/T
reads:
"ARTICLE 34
services;
"xxx xxx xxx"
exemption from the VAT and ad valorem tax on its local purchases of goods and services. In other words,
purchases by that Embassy of goods and/or services shall, in general be subject to the value-added tax
prescribed under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National
the Russian Federation or its personnel on their local purchases of goods and/or services it appearing from
allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in
your country.
Hence, the local purchases of six (6) units of motor vehicle for the official use of the Embassy of
the Russian Federation are exempt from VAT and ad valorem taxes. (BIR Ruling No. ITAD-70-03 dated
May 6, 2003)
Very truly yours,

Legal Service
May 4, 2006
Section 109, Tax Code of 1997;

Trade Related Technical Assistance Programme

5th Floor NEDA Sa Pasig
12 St. Escriva St., Pasig City
Attention: Mr. Roberto B. Quintos

Programme Director
Gentlemen :
This refers to your letter dated October 19, 2005 requesting a ruling on whether the Trade Related
Technical Assistance Programme (TRTAP) funded by the European Commission (EC) is exempt from the
payment of Philippine taxes such as value-added tax (VAT).
Documents submitted show that the EC, represented by the Commission of the European
Communities, and the Republic of the Philippines, as the beneficiary, entered into a Financing Agreement
(Agreement) for the funding of the TRTAP; that under the Agreement, the TRTAP aims to assist the
Philippine authorities in enhancing conditions for international trade and investment and improve the
access of Philippine exports to the European Union market; that TRTAP will provide assistance to
agencies to enable compliance with the EU product standards and sanitary and phytosanitary requirements,
promote trade facilitation and customs reform, and build local capacity to address difficulties in
understanding, implementing and enforcing WTO Agreements; that the total cost of the funding is
estimated at 3,920,000 euro; that the EC undertakes to finance a maximum of 3,500,000 euro while the
beneficiary shall contribute the remaining 420,000 euro to the TRTAP; that under the Agreement, the EC
will be funding, among others, the procurement of hardware and software, laboratory equipment as well as
technical assistance activities for the Department of Trade and Industry (DTI), Department of Agriculture
(DA) and the Bureau of Customs (BOC); and that the National Economic Development Authority (NEDA)
is the Executing Authority of the TRTAP and will coordinate and implement the TRTAP together with the
DTI, DA and BOC.
In reply, please be informed that Title IV, Article 11 of the Agreement provides as follows:
"Article 11 — Tax and Customs Provisions
11.1 Save where otherwise provided in the Special Conditions, taxes, duties or other charges
(including value added tax- VAT- or equivalent taxes) shall be excluded from Community financing.
(Emphasis supplied)
11.2 The State of the Beneficiary shall apply to procurement contracts and grants financed
by the Community the most favoured tax and customs arrangements applied to States or
international development organisations with which it has relations.
11.3 Where the Framework Agreement or exchange of letters applicable includes more
detailed provisions on this subject, they shall apply as well."
Based on the above-quoted provision of the Agreement, the exclusion of taxes from community
financing means that no part of the fund can be used for the payment of Philippine taxes, customs duties,
or any other charges. Accordingly, in the purchase of goods and services for the implementation of the
TRTAP, the tax portion of the amount purchased shall neither accrue nor be chargeable to the subject
fund. (BIR Ruling No. DA-ITAD-107-05 dated September 21, 2005) CSEHIa
Be that as it may, the above provision does not, however, grant exemption or render the TRTAP
itself or its implementation exempt from Philippines taxes, more particularly from VAT. In other words,
said provision neither exempts the seller nor the buyer of the goods or services from taxation using the
subject funds. It is well settled that taxation is the rule and tax exemption being the exception and is
construed strictissimi juris against the taxpayer claiming tax exemption. In the absence of clear and
convincing words of the law granting tax exemption too plain to be mistaken, a taxable transaction will
remain subject to Philippine taxes. Moreover, since VAT is an indirect tax, the seller may pass on the
VAT to the Philippine buyer in the purchase of goods or services. Inasmuch as no part of the fund can be
utilized for the payment of taxes, the buyer shall be personally liable for the payment of VAT. (BIR
Ruling No. DA-ITAD-013-03 dated January 27, 2003)
Such being the case, this Office is of the opinion and so holds that since no part of the fund for the
TRTAP can be used for payment of Philippine taxes, customs duties, or any other charges, transactions
pursuant to the TRTAP remain subject to VAT imposed on the purchase of goods and services. However,
in case the seller opts to pass on the VAT to the buyer, the VAT component shall be borne by the buyer
recipient which may either be NEDA, DA, BOC or DTI, as the case may be.
herein parties are concerned. aCSTDc
Very truly yours,
By:

Legal Service
May 4, 2006
Articles 5 and 7, Philippines-Japan Tax Treaty;

Futaba Corporation of the Philippines

120 North Science Avenue, Laguna Technopark
SEPZ, Biñan, Laguna
Attention: Mr. Shoki Yoshimoto

President
Gentlemen :
This refers to your application for relief from double taxation dated January 12, 2004, requesting
confirmation of your opinion that the compensation for the technical services rendered by Futaba
Corporation (NF) Japan (Futaba-Japan) to Futaba Corporation of the Philippines (Futaba-Phils) is exempt
from Philippine income tax, pursuant to Articles 5 & 7 of the Philippines-Japan tax treaty.
It is represented that Futaba-Japan is a corporation organized and existing under the laws of Japan
with principal place of business at 629 Oshiba, Mobara City, Chiba-Prefecture 297-8588, Japan; that it is
not registered either as a corporation or as a partnership in the Philippines per certification issued by the
Securities and Exchange Commission dated July 15, 2004; that Futaba-Phils is registered with the then
Export Processing Zone Authority (EPZA), now Philippine Economic Zone Authority (PEZA), as an
Export Enterprise under Registration Certificate No. 95-28 dated March 13, 1995 as stated in Certificate
No. 2005-336 dated on January 14, 2005 issued by the Deputy Director General for Operations, PEZA;
that it is engaged in the manufacturing of vacuum fluorescent display; that Futaba-Japan and Futaba-Phils
entered into a Technical Service Agreement (Agreement) dated August 8, 2003, which took effect on
August 25, 2003 and expired on September 13, 2003; that pursuant to said Agreement, and with respect to
aspects of manufacturing and operations of said business, Futaba-Japan rendered the following technical
services to Futaba-Phils: a) provided skilled technicians with special diagnostic tools to perform the
required maintenance service/check-up and testing on jointly agreed schedules, b) conducted unit
inspection and operation check-up and performed servicing activities, and c) provided appropriate training
to operators regarding proper operation and maintenance procedures on site; that said services were
rendered in the Philippines by Futaba-Japan, through its personnel, from August 25, 2003 to September
13, 2003; and that in consideration for said services, Futaba-Phils agreed to pay Futaba-Japan the sum of
Twenty Four Thousand Two Hundred Three and 53/100 US Dollar (US$24,203.53) via telegraphic
transfer.
"Article 7
xxx xxx xxx"
Moreover, paragraphs (1) and (6) of the Article 5 of the same treaty provides, viz:
"Article 5
xxx xxx xxx

an independent status to whom paragraph (7) applies —, provided that such activities continue (for
six months within any taxable year. . . ." TASCEc
Based on the aforequoted provisions, it is clear that profits of a corporation which is a resident of
Japan and which carries on business in the Philippines through a permanent establishment situated therein,
shall be subject to Philippine income tax, but only so much of such profits as are attributable to that
have a permanent establishment in the Philippines if, among others, the furnishing of consultancy services
by such corporation, through its employees or other personnel, in the same or connected project, continue
within the Philippines for period or periods aggregating more than six (6) months in any taxable year.
Considering that the stay in the Philippines of the employees of Futaba-Japan to render the
above-stated services to Futaba-Phils under the Agreement did not exceed six (6) months for taxable year
2003, Futaba-Japan is not deemed to have a permanent establishment in the Philippines to which its
business profits may be attributed to. Therefore, the income derived by Futaba-Japan is not subject to
Philippine income tax in accordance with Article 7(1) in relation to Article 5(1) & (6) of the
Philippines-Japan tax treaty. (BIR Ruling No. 117-96 dated November 4, 1996)
As the regards the imposition of the VAT on the rendition of services of Futaba-Japan, please be
informed further that Section 108 of the Tax Code of 1997 1 provides as follows, to wit:
Thus, in general, the VAT should be imposed since "the said services were rendered in the
Philippines by Futuba-Japan, through its personnel, from August 25, 2003 to September 13, 2003."
Futuba-Phils is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to
Section 4.110-3(b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2(b) of Revenue
Regulations No. 16-05].
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
provision for exempt transactions under Section 109(q) [now Section 109 (K)] of the Tax Code of 1997
which provides VAT exemption for transactions that are exempt under specials law, e.g., Republic Act
No. 7916 or PEZA Law, is particularly applicable to the instant case. (BIR Ruling No. ITAD 13-06 dated
February 20, 2006)
Such being the case, the payment of services fees by Futuba-Phils, being an EPZA-registered (now
a PEZA-registered) export enterprise, to Futuba-Japan, under the above Agreement, should be as it is
hereby confirmed to be exempt from VAT.
herein parties are concerned. SEcAIC
Very truly yours,
By:

Legal Service
Footnotes
2. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109(K), as amended by RA. No.
9337]
April 26, 2006
ITAD-038-05
Royal Netherlands Embassy

9th Floor, King's Court Building
2129 Don Chino Roces Ave.
Makati City
Gentlemen :
This has reference to your Note No. MAN/CZ/019 dated February 6, 2006 referred to this Office by
the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption
from the payment of value-added tax (VAT) and ad valorem tax on the purchase of one (1)
locally-assembled motor vehicle, for the official use of the Royal Netherlands Embassy, specifically
described as follows:
Make: Motorstar Motorcycle Easyride 150-3

Model Year: 2005
Color: Maroon/Silver
Engine Number: BZ157QMJ0503M008
Chassis Number: LD5TCKPA951000047
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from the VAT and ad valorem tax on its local purchases of goods and services. In other words, purchases
by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections
106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997.
ADSTCa
However, applying the principle of reciprocity, this Office may grant VAT exemption to the Royal
Netherlands Embassy and/or its personnel on their local purchases of goods and/or services it appearing
from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your
Government allows similar exemption to Philippine Embassy and/or its personnel on their purchases of
Hence, the local purchase of one (1) unit of 2005 Motorstar Motorcycle Easyride 150-3 for the
official use of the Royal Netherlands Embassy is exempt from ad valorem and value-added taxes.
Very truly yours,

Legal Service
April 26, 2006
Level 23, Tower 2, RCBC Plaza
6819 Ayala Ave. cor. Sen. Gil Puyat Ave.
Makati City
Attention: Mr. Pablo Chiho Kang

Deputy Head Mission
Gentlemen :
This has reference to your Note No. 100/06 and File No. MN94/00109 dated March 21, 2006
referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA),
requesting for the exemption from payment of ad valorem and value-added taxes (VAT) on the local
purchase of one (1) unit motor vehicle for the personal use of Mr. Pablo Chiho Kang, Deputy Head
Mission of the Embassy of Australia in the Philippines specifically described as follows:
Make: Honda CRV 2.0 A/T 2WD 8 seater

Model Year: 2006
Color: Nighthawk Black
Engine Number: PNKD77-6401705
reads:
"ARTICLE 34
regional or municipal, except: TDCaSE
services;
"xxx xxx xxx"
by that Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and
108, and ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997.
Australia or its personnel on their local purchases of goods and/or services it appearing from the list
similar exemption to Philippine Embassy and its personnel on their purchases of goods and services in
your country.
Hence, the local purchase of one (1) unit of 2006 Honda CRV 2.0 A/T 2WD 8 seater for the
personal use of Mr. Pablo Chiho Kang, Deputy Head of Mission of the Embassy of Australia is exempt
from VAT and ad valorem taxes. (BIR Ruling No. ITAD-19-04 dated February 23, 2004)
Very truly yours,

Legal Service
April 25, 2006
1997;
Level 23, Tower 2, RCBC Plaza
6819 Ayala Ave. cor. Sen. Gil Puyat Ave.
Makati City
Attention: Mr. James Alan Braithwaite

First Secretary
Gentlemen :
This has reference to your Note No. 107/06 and File No. MN94/00109 dated March 27, 2006
referred to this Office by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA),
Office of Protocol, requesting for the exemption from payment of ad valorem and value-added taxes
(VAT) on the local purchase of one (1) unit motor vehicle for the personal use of Mr. James Alan
Braithwaite, First Secretary of the Embassy of Australia, specifically described as follows:
Make: Honda CRV 2.0 AT 2WD 8 seater

Model Year: 2006
Color: Nighthawk Black
reads:
"ARTICLE 34
regional or municipal, except: EScaIT
services;
"xxx xxx xxx"
by that Embassy of goods and/or services shall, in general be subject to the value-added tax prescribed
under Sections 106 and 108, and ad valorem taxes under Section 149, all of the National Internal Revenue
Code of 1997.
Australia or its personnel on their local purchases of goods and/or services it appearing from the list
similar exemption to Philippine Embassy personnel on their purchases of goods and services in your
country.
Hence, the herein local purchase of one (1) unit of 2006 Honda CRV 2.0 A/T 2WD 8 seater for the
personal use of Mr. James Alan Braithwaite is exempt from VAT and ad valorem tax. (BIR Ruling No.
ITAD-19-04 dated February 23, 2004)
Very truly yours,

Legal Service
April 11, 2006
Articles 5, 7 and 15 Philippines-Japan Tax Treaty

Sections 23 (F), 42 (A) (3) and 108 (A)
National Internal Revenue Code of 1997;
BIR Ruling Nos. DA-ITAD 63-05, 130-05 and 137-05
Aranas Consunji Barleta

Unit 106, Ground Floor, Le Metropole Building
326 Tordesillas corner De La Costa Streets
Attention: Atty. Jesus Clint O. Aranas
Gentlemen :
This refers to your letters both dated August 29, 2005 requesting our opinion on the tax treatment
of service fees to be paid by Kedica Philippines, Inc. (Kedica Philippines) (originally, Kedica Philippines
Corporation) to Kedica Company Ltd. (Kedica Japan) pursuant to a Service Support Agreement and a
Marketing Agreement.
It is represented that Kedica Japan is a foreign corporation organized and existing under the laws of
Japan, with headquarter at 3 Tyo-me, 20 Banchi, Akedori Izumi-ku, Sendai-shi, Miyagi-ken, Japan, as
confirmed by its Company Register Transcription dated July 5, 2005 1 ; that Kedica Japan's business
purposes are plating for electric parts and mechanical parts, real estate (rental and sales and management),
and other businesses related thereto; that Kedica Japan is not registered either as a corporation or as a
partnership in the Philippines, as confirmed by the Certificate of Non-Registration of
Corporation/Partnership dated September 5, 2005 issued by the Securities and Exchange Commission;
that, on the other hand, Kedica Philippines is a corporation organized and existing under the laws of the
Philippines, with principal office at Road 2, Lot 15-G, First Philippine Industrial Park, Sto. Tomas,
Batangas, Philippines, as confirmed by its Articles of Incorporation and by its Certificate of Incorporation,
dated May 26, 2003 and numbered CS200311681, issued by the Securities and Exchange Commission;
that Kedica Philippines' primary purpose is to engage in the business of manufacturing goods such as
electroplating of electronic and automobile parts and other related products and to trade them on
wholesale basis; that on April 1, 2005, Kedica Japan and Kedica Philippines entered into a Marketing
Agreement and a Service Support Agreement.
Marketing Agreement:
That under the Marketing Agreement, Kedica Japan agreed to provide Kedica Philippines
marketing services which consist of (1) promoting or marketing the services of Kedica Philippines to
Japanese and other foreign clients of Kedica Japan with Philippine operations, which includes making
regular visits and representations with the relevant corporate officers of such clients, (2) assisting Kedica
Philippines in developing a marketing strategy and specific marketing activities outside the Philippines,
and (3) undertaking such other incidental marketing activities as may be requested by Kedica Philippines
to promote its business activities in other countries; that the services shall be performed by Kedica Japan
outside the Philippines, primarily in Japan, and shall not involve any transfer of technology, know-how or
other intellectual property rights; that in consideration, Kedica Philippines shall pay Kedica Japan on a
quarterly basis a service fee of US$30,000 plus three percent (3%) of Kedica Philippines' total quarterly
sales; that the Marketing Agreement is effective for one (1) year, beginning April 1, 2005 and renewable
for like periods unless sooner terminated. SECcIH
Service Support Agreement:
That under the Service Support Agreement, Kedica Japan agreed to provide Kedica Philippines
services, primarily of an advisory and consultancy nature, which consist of (1) reviewing Kedica
Philippines' monthly financial reports and other business reports to identify the points to be improved, (2)
assisting Kedica Philippines in developing its organization and creating its annual business plan, (3)
counseling Kedica Philippines' capital investment plan and creating its annual investment plan, (4)
providing various ISO 2 certificates and securing advise and maintenance of ISO certificates, (5)
undertaking the whole managemental function of Kedica Philippines, and (6) providing such other
incidental advise as may be requested by Kedica Philippines to improve its operation in general; that the
services shall be performed by Kedica Japan in the Philippines and outside the Philippines, mostly in
Japan; that for services to be performed in the Philippines, Kedica Japan shall send qualified
administration professionals to Kedica Philippines, and the duration of the services shall in no case exceed
an aggregate period of six months in a calendar year; that in consideration thereof, Kedica Philippines
shall pay Kedica Japan a service fee of US$90,000 on a quarterly basis; and that the Service Support
Agreement is effective for one (1) year, beginning April 1, 2005 and renewable for like periods unless
sooner terminated.
With respect to the service fee pursuant to the Marketing Agreement where the services involved
will be performed by Kedica Japan outside the Philippines, such fee is not subject to income tax because it
constitutes income derived by a foreign corporation from sources without the Philippines, as provided
under Sections 23(F) and 42(A)(3) of the National Internal Revenue Code of 1997 (Tax Code):
xxx xxx xxx
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is
(A) Gross Income from Sources Within the Philippines. — The following items of gross
xxx xxx xxx
xxx xxx xxx"
Section 23(F) states that a foreign corporation like Kedica Japan, is taxable only on income derived
from sources within the Philippines. In relation, Section 42(A)(3) states that in order for the service fee
pursuant to the Marketing Agreement to be considered derived from sources within the Philippines, and
therefore subject to income tax, the services involved must be performed in the Philippines. Accordingly,
by reason that Kedica Japan will not perform the services in the Philippines, the service fee to be paid
therefor by Kedica Philippines to Kedica Japan is therefore not subject to income tax. (BIR Ruling No.
DA-ITAD 63-05 dated June 27, 2005) acIASE
Similarly, the service fee pursuant to the Marketing Agreement is not subject to value-added tax
(VAT) imposed under Section 108(A) of the Tax Code, as amended, which provides:
including the use or lease of properties
the Philippines for others for a fee, remuneration or consideration . . ." 3
This is because the sale or exchange of services subject to VAT includes only services that are performed
in the Philippines. In the case of the services involved in the Marketing Agreement, the services will not be
performed in the Philippines. Therefore, the service fee to be paid by Kedica Philippines to Kedica Japan
is exempt from VAT. (BIR Ruling No. DA-ITAD 63-05 dated June 27, 2005)
On the other hand, with respect to the service fee pursuant to the Service Support Agreement where
the services involved will be performed generally by Kedica Japan in the Philippines, such fee is subject
to income tax because it constitutes income derived by a foreign corporation from sources within the
Philippines, as provided under Sections 23(F) and 42(A)(3) of the Tax Code.
However, Kedica Japan, being a resident of Japan, is entitled to apply the provisions of the
Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty) with
respect to the taxation of the service fee. Articles 5 and 7 of the tax treaty provide:
"Article 5
fixed place of business through which the business of an enterprise is wholly or partly carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse;

resources. CSDcTH
xxx xxx xxx

six months within any taxable year. However, if the furnishing of such services is effected under an
xxx xxx xxx"
"Article 7

xxx xxx xxx"
Paragraph 1 of Article 7 states that the service fee pursuant to the Service Support Agreement is
subject to income tax if it is attributable to a permanent establishment which Kedica Japan has in the
Philippines. In relation, a permanent establishment, as defined in paragraphs 1, 2 and 6 of Article 5, means
"a fixed place of business through which the business of an enterprise is wholly or partly carried on", and
includes, for example, a store or other sales outlet, a branch, an office, a factory, a workshop, and a
warehouse; it also includes the furnishing of services in a Contracting State by an enterprise of the other
Contracting State, through employees or other personnel thereof, where such activity continues for a
period or periods aggregating more than six months within any taxable year.
Accordingly, since Kedica Japan does not have an office, a branch, or any other fixed place of
business in the Philippines and since it will not perform the subject services for a. period that will exceed
an aggregate period of six months in a calendar year, Kedica Japan, in both cases, will not be deemed to
have a permanent establishment in the Philippines. This being so, the service fee pursuant to the Service
Support Agreement to be paid by Kedica Philippines to Kedica Japan is therefore exempt from income
tax. (BIR Ruling No. DA-ITAD 130-05 dated November 14, 2005)
It must be stressed, however, that the Service Support Agreement is renewable for like periods of
one (1) year, unless sooner terminated. Should the activities involved in carrying out the provisions of the
agreement give rise to a permanent establishment pursuant to Article 5 of the Philippines-Japan tax treaty,
then Kedica Japan shall be subject to Philippine income tax for payments in consideration of these
activities. HTCDcS
On the other hand, the remuneration of the qualified administration professionals Kedica Japan will
send to the Philippines to render to subject services is generally subject to income tax, unless the
conditions set forth in paragraph 2, Article 15 of the Philippines-Japan tax treaty below are all complied
with:
"Article 15
1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, 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 Contracting State unless the employment is exercised in the other
Contracting State. If the employment is so exercised, such remuneration as is derived therefrom
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 Contracting State if:
a) the recipient is present in that other Contracting State for a period or
periods not exceeding in the aggregate 183 days in the calendar year concerned, and
b) the remuneration is paid by, or on behalf of, an employer who is not a

resident of that other Contracting State, and
c) the remuneration is not borne by a permanent establishment or a fixed

base which the employer has in that other Contracting State.
xxx xxx xxx"
Accordingly, the remuneration of the professionals (taken individually) may be exempt from
income tax for as long as the above conditions are or continue to be present in their case, to wit: (a) their
length of stay in the Philippines does not exceed 183 days in a calendar year, since, as represented, the
duration of services to be performed in the Philippines shall in no case exceed an aggregate period of 183
days in a calendar year, (b) their employer, Kedica Japan, is not a resident of the Philippines but of Japan,
and (c) their remuneration is not borne by a permanent establishment which Kedica Japan has in the
Philippines, because, as mentioned above, Kedica Japan cannot have a permanent establishment in the
Philippines. (BIR Ruling No. DA-ITAD 130-05 dated November 14, 2005)
Finally, the service fee pursuant to the Service Support Agreement is subject to VAT because the
services involved will be performed generally in the Philippines, as provided under Section 108(A) of the
Tax Code, as amended. (BIR Ruling No. DA-ITAD 137-05 dated November 15, 2005)
Regulations No. 14-2002, provide that Kedica Philippines shall be responsible for the withholding of the
VAT on the service fees before remitting them to Kedica Japan. In remitting to the Bureau of Internal
Revenue the VAT withheld on the service fees, Kedica Philippines shall use BIR Form No. 1600
(Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered
taxpayer, Kedica 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,
Kedica Philippines may include as part of the cost of the services furnished to it by Kedica Japan 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, Kedica Philippines is required to issue the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to
Kedica Japan upon its request, and the fourth copy to be retained by Kedica Philippines as its file copy.
CIAcSa
Very truly yours,
By:
(SGD.) PABLO M. BASTES, JR.
OIC, Head Revenue Executive Assistant
Footnotes
1. The name 'KEDC Corporation Ltd.', as appearing in the Translation of the Company Register
Transcription, is one and the same company as 'Kedica Company Ltd.', according to the notarized letter
dated September 2005 issued by Mr. Shuichi Miura, President of Kedica Company Ltd.
2. International Standardization Organization.
Amended, And For Other Purposes), signed into law on May 24, 2005 and became effective on November
1, 2005, amended Section 108(A), which now reads:
previous year exceeds one and one-half percent (1 1/2%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 1/2%).
for others for a fee, remuneration or consideration . . ."
April 11, 2006

and 12 (Royalties) Philippines-Belgium tax treaty;
BIR Ruling Nos. DA-ITAD 14-04 and 14-06
Securities Clearing Corporation of the Philippines

2nd Floor, Philippine Stock Exchange Plaza
Ayala Triangle, Ayala Avenue
Makati City
Attention: Mr. William L. Ang

Chairman and Officer-in-Charge
Gentlemen :
This refers to your letter dated November 18, 2004 (which was received by this Office on May 14,
2005) requesting confirmation that payments received by The Capital Markets Company NV (Capital
Markets) resulting from the sale of its software to a domestic corporation is not subject to Philippine tax
within the purview of the Agreement between the Republic of the Philippines and the Kingdom of
Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income (Philippines-Belgium tax treaty).
It is represented that Capital Markets is a foreign corporation, organized and existing under the
laws of Belgium, with principal office at Prins Boudewijnlaan 43, 2650 Antwerp-Edegem, Belgium, as
confirmed by its Articles of Association; that Capital Markets' business activities consist of, among others,
the development and the provision of advice and services on information technology and software projects
in all industrial, commercial and services sectors; that Capital Markets is not registered either as a
corporation or as a partnership in the Philippines, as confirmed by the Certification of Non-Registration of
Corporation/Partnership dated February 14, 2005 issued by the Securities and Exchange Commission; that
on October 14, 2004, Capital Markets entered into a License Agreement for Software (Central Clearing
and Central Settlement) (hereinafter referred to as the "Agreement") with Securities Clearing Corporation
of the Philippines (Securities Clearing), a corporation organized and existing under the laws of the
Philippines with business office at the 2nd Floor, Philippine Stock Exchange Plaza, Ayala Triangle, Ayala
Avenue, Makati City, Philippines; that under the Agreement, Capital Markets grants to Securities
Clearing a non-exclusive, non-transferable (unless Capital Markets consents), non-sublicensable,
unencumbered and non-assignable (unless Capital Markets consents) license to use the Licensed Software
Materials in connection with the latter's clearing and settlement activities and/or in furtherance of its
day-to-day operations; that the Agreement does not grant to Securities Clearing any title, right of
ownership or any proprietary interest in or to the Licensed Software Materials other than those set out in
the Agreement; that Securities Clearing shall not without the prior written consent of Capital Markets:
(a) market, exploit or make the Licensed Software Materials available to another person or
permit another person to use the Licensed Software Materials, except as permitted under the
Agreement;
(b) use the Licensed Software Materials on behalf of or for the benefit of another person or
company (including for the provision of commercial timesharing, retail or bureau services).
Notwithstanding the foregoing, Securities Clearing shall be authorized to grant any person
involved in the clearing and settlement activities of Securities Clearing, such as but not
limited to the custodians, depository institution, settlement banks, transfer agents, and
trading brokers/dealers of the Philippine Stock Exchange in the Philippines, functional
access to and use of the Licensed Software, provided that Securities Clearing shall ensure
that the terms of the Agreement are complied with by such clearing and settlement
participants;
(c) decompile, disassemble or reverse-engineer the program code or any other part of the
Licensed Software except to the extent permitted by law or unless otherwise agreed by the
parties;
(d) make copies of the Licensed Software Materials except those copies intended for backup
purposes;
(e) charge or otherwise deal in or encumber the Licensed Software Materials;
(f) delete, remove or in any way obscure Capital Markets' proprietary notices on any copy of
the Licensed Software Materials; or ICTDEa
(g) use the Licensed Software other than the Location 1 and on the Designated Equipment 2 ;
that the Licensed Software Materials and/or Licensed Software is the Central Clearing and Central
Settlement Software and related documentation thereto; and that the license fee for its use is US$ 500,000
for twelve months commencing on the effective date of the Agreement on March 19, 2004, and will
automatically continue thereafter for additional renewal terms of twelve (12) months unless terminated.
Memorandum Circulars (RMCs) that govern the taxation of software payments. The first Circular, RMC
77-2003 (Classification of Payments for Software for Income Tax Purposes), which covers software
payments made from November 18, 2003 to September 7, 2005, generally treats software payments as
royalties. It provides:
The term "royalties" as generally used means payment of any kind received as a
commercial or scientific experience. The term "use" as contained herein shall include the reselling
or distribution of software.

royalties."
On the other hand, the second Circular, RMC 44-2005 (Taxation of Payments for Software), which
covers software payments made from September 8, 2005 and thereafter, substantially amends the first
Circular by treating software payments either as business income, royalties, rental income, or capital gains,
depending on the nature of the transaction out of which such payments are made. Software payments are
treated as royalties only if the transaction does not constitute a sale or exchange and not all substantial
rights in the software have been transferred, but are merely for the transfer of copyright rights in the
software. It provides:

a. Transfer of copyright rights. A transfer of software is classified as a

transfer of a copyright right if, as a result of the transaction, a person acquires any
one or more of the rights described below:
i. The right to make copies of the software for purposes of

distribution to the public by sale or other transfer of ownership, or by rental,
lease or lending;
ii. The right to prepare derivative computer programs based upon

the copyrighted software;


b. Transfer of copyrighted articles. A copyrighted article incorporating a

software includes a copy of the software from which the work can be perceived,
reproduced, or otherwise communicated, either directly or with the aid of a machine
or device. The copy of the software may be fixed in the magnetic medium of a floppy
disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any
other medium.
If a person acquires a copy of a software but does not acquire any of the
rights described above (or only acquires a de minimis grant of such rights), and the
transaction does not involve the provision of services or of know-how, the transfer of
the copy of the software is classified solely as a transfer of a copyrighted article and
payments for which constitute business income.
xxx xxx xxx"
A significant difference between the two Circulars lies in the characterization of payments made for
the purchase of a copyrighted article incorporating a software, like the license fee for the Licensed
Software where Securities Clearing, the licensee, is merely granted access to and use of the Licensed
Software and not readily the right to market or exploit the Licensed Software. Under the first Circular, the
license fee is treated as royalties and taxable as such, while under the second Circular, the license fee is
treated as business income (or business profits for tax treaty purposes) and taxable as such, as described
above. AISHcD
Accordingly, the license fees paid or payable to Capital Markets by Securities Clearing for the
latter's use of the Licensed Software from the effective date of the Agreement on March 19, 2004 up to
September 7, 2005, which fees are treated as royalties under RMC 77-2003, are subject to the reduced tax
rate under paragraph 2, Article 12 of the Philippines-Belgium tax treaty, as amended by a Protocol, to wit:
"Article 12
ROYALTIES
2. However, such royalties may also be taxed in the Contracting State in which they arise
and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the
other Contracting State, the tax so charged shall not exceed 15 per cent of the gross amount of the
royalties.
consideration for the use of or the right to use, any copyright of literary, artistic or scientific work
including cinematograph films and films or tapes for television or radio broadcasting, any patent,
xxx xxx xxx"
Based on the aforequoted provision, the license fees paid by Securities Clearing to Capital Markets are
subject to the reduced income tax of fifteen percent (15%) of the gross amount thereof. (BIR Ruling No.
DA-ITAD 14-04 dated February 20, 2004)
On the other hand, the license fees paid or payable to Capital Markets by Securities Clearing for
the latter's use of the Licensed Software from the effective date of RMC 44-2005 on September 8, 2005
and thereafter, which fees are treated as business profits under this RMC, are subject to income tax only if
the same are attributable to a permanent establishment which Capital Markets has in the Philippines, in
accordance with paragraph 1, Article 7 of the Philippines-Belgium tax treaty, to wit:
"Article 7
BUSINESS PROFITS

profits of the enterprise may be taxed in the other Contracting State but only so much of them as
attributable to that permanent establishment or are derived within such other Contracting State from
sales of goods or merchandise of the same kind as those sold, or from other business transactions of
the same kind as those effected, through the permanent establishment.
xxx xxx xxx"
A "permanent establishment" is defined in paragraphs 1 and 2, Article 5 of the Philippines-Belgium tax

treaty as a fixed place of business in which the business of an enterprise is wholly or partly carried on, and
includes, for example, a place of management, a branch, an office, a factory, a workshop, and premises
used as a sales outlet, thus:
"Article 5
1. For the purposes of this Agreement, the term "permanent establishment" means a fixed
2. The term "permanent establishment" shall include especially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) premises used as a sales outlet;
g) a mine, an oil-well, or other place of extraction of natural resources;
h) a building site or construction, installation or assembly project or

supervisory activities in connection therewith, where such site, project or activity
continues for a period of more than six months;
i) the furnishing of services including consultancy services by an

enterprise through an employee or other personnel where activities of that nature
continue within a Contracting State for a period or periods exceeding in the aggregate
183 days within any twelve-month period.
xxx xxx xxx"
Based on the foregoing, in order for the business profits derived by Capital Markets from its
transaction with Securities Clearing to be taxed in the Philippines, Capital Markets must have a
permanent establishment in the Philippines through which said profits must be attributed to, and for
Capital Markets to have a permanent establishment in the Philippines, it must meet the following
conditions:
certain degree of permanence; aDACcH
situated. 3
Since Capital Markets, based on the documents submitted, does not appear to have in the
Philippines a place of business at its disposal which is fixed or established at a distinct place, which has a
certain degree of permanence, and through which it may use for carrying out its business, Capital Markets
in this case does not have a permanent establishment in the Philippines to which business profits may be
attributed. Moreover, Capital Markets is not registered either as a corporation or partnership in the
Philippines, as confirmed by the relevant Certification issued by the Securities and Exchange Commission.
Accordingly, the license fees paid or payable to Capital Markets by Securities Clearing for the
latter's use of the Licensed Software from September 8, 2005 and thereafter are not subject to income tax.
(BIR Ruling No. DA-ITAD 14-06 dated February 24, 2006)
Finally, the sale of the Licensed Software is subject to value-added tax (VAT) under Section
106(A) of the Tax Code, as amended, to wit:
such tax to be paid by the seller or transferor.
xxx xxx xxx" 4
Because the payment for the sale of the Licensed Software is not on a one-time and lump-sum basis
but on a regular and annual payment of License Fees to Capital Markets, the gross amount of the license
fees constitutes the gross receipts of the Licensed Software on which the VAT is imposed. Accordingly,
the License Fees payable to Capital Markets before February 1, 2006 are subject to VAT at the rate of
10% while the License Fees payable to Capital Markets beginning February 1, 2006 and thereafter are
subject to VAT at the rate of 12%.
Regulations No. 14-2002, provide that Securities Clearing shall be responsible for the withholding of the
VAT on the license fees before remitting them to Capital Markets. In remitting to the Bureau of Internal
Revenue the VAT withheld on such fees, Securities Clearing shall use BIR Form No. 1600 (Monthly
Securities Clearing 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, Securities
Clearing may include as part of the cost of the copy of the Licensed Software sold to it by Capital
Markets the VAT consequently shifted or passed on to it and may treat such VAT either as expense or
asset, whichever is applicable. In addition, Securities Clearing is required to issue the Certificate of Final
Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to
Capital Markets upon its request, and the fourth copy to be retained by Securities Clearing as its file copy
Very truly yours,
By:

Footnotes
1. 'Location' means Securities Clearing's offices.
2. 'Designated Equipment' means the computer hardware and third party software required for Securities
Clearing to operate the Licensed Software.
3. Model Tax Convention on Income and on Capital (January 2003) by the Organisation for Economic
Cooperation and Development, Page 85.
November 1, 2005, amended Section 106(A) to read as:
previous year exceeds one and one-half percent (1 1/2%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 1/2%).
xxx xxx xxx
April 10, 2006
Sec 106 & 108, Sec 149 of the Tax Code of 1997; Article 34,
Vienna Convention on Diplomatic Relations; BIR Ruling No.
DA-098-03
Embassy of Brunei Darussalam

11th Floor, BPI Building
Ayala Ave. Cor. Paseo de Roxas
1226 Makati City
Gentlemen :
This has reference to your Note No. 018/2006 dated February 8, 2006 referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting exemption from
payment of value-added tax (VAT) and ad valorem tax on the purchase of one (1) locally-assembled motor
vehicle, for the official use of the Embassy of Brunei Darussalam, specifically described as follows:
Make: Toyota Hi-Ace Commuter 2.5 DSL M/T
Model Year: 2006
Color: White
Chassis Number: JTFJS02P5-00006330
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from value-added tax (VAT) and ad valorem tax on its purchases of locally-assembled motor vehicles. In
other words, purchases by that Embassy and its diplomatic agents of locally-assembled motor vehicles
shall be subject to the value-added tax prescribed under Sections 106 and 108, and ad valorem tax under
Section 149, all of the National Internal Revenue Code of 1997.
Embassy of Brunei Darussalam and/or its personnel on their purchases of locally-assembled motor
purchase of locally-assembled motor vehicles in your country. CTaIHE
Hence, the local purchase of one (1) unit of 2005 Toyota Hi-Ace Commuter 2.5 DSL M/T For the
official use of the Embassy of Brunei Darussalam is exempt from ad valorem and value-added taxes.
be disclosed that the Facts are different, then this ruling shall be without force and effect insofar as the
Very truly yours,

Legal Service
April 4, 2006
Sec. 28 & 108, Tax Code of 1997; BIR Ruling No. ITAD-086-05

6760 Ayala Avenue
1226 Makati City
Attention: Atty. E.C. Alcantara

Tax Division
Gentlemen :
This refers to your letter dated September 27, 2005 requesting a ruling on the tax consequences of
the Service Agreement entered into by and between Marubeni Corporation (MC) and Marubeni
Philippines Corporation (MPC).
It is represented that MC is a corporation duly organized and existing under the laws of Japan with
principal business address at 4-2 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo, Japan; that MC is licensed to
do business in the Philippines through its Philippine branch, Marubeni Corporation — Manila Branch
(MC-Manila) duly registered with the Securities and Exchange Commission (SEC); that MPC is a
corporation duly organized and existing under and by virtue of the laws of the Philippines with registered
office and principal place of business at 8th and 9th Floors, L.V. Locsin Bldg. Ayala Avenue corner
Makati Avenue, Makati City; that MPC is a 100% subsidiary of MC; that pursuant to the intra-group
services (IGS) charge policy between MC and its domestic and foreign subsidiaries, MC and MPC entered
into a Service Agreement dated April 1, 2005 whereby MC's Corporate Staff Division shall perform
services in favor of MPC, consisting of:
1. Information and advice with respect to general administration, human resources, media
relations & advertisement, accounting, finance, risk management and information with
respect to legal matters and economic & industrial research;
2. Services with respect to payroll and welfare for Japanese expatriates;
3. Advice and assistance with regard to certain information peculiar to each country by
Regional Strategy & Coordination Department of MC. HSIaAT
It is further represented that for all the abovementioned services which will be performed by MC
outside the Philippines, MPC shall pay MC compensation for services to be semi-annually agreed in
writing by the parties based on agreed allocation ratios without additional mark-up or profit; that such
compensation for services represents allocation or reimbursement of actual costs by MC to MPC based on
actual costs and expenses incurred by staff of MC in providing the service to MPC; and that such
compensation for services to be paid by MPC to MC is not in any way attributable to MC-Manila.
In this regard, you are requesting confirmation of your opinion of the following:
1. Such compensation for services is not subject to income as well as to value-added tax (VAT)
since the same are: a) mere reimbursement of costs without mark-up or profit and; b) the
services are to be performed by MC outside the Philippines;
2. The compensation for services is not in the nature of royalties; HCSEIT
3. The compensation for services to be paid by MPC is deductible from MPC's gross income as
valid expense
In reply, this Office is of the opinion and so holds:
1. The service fees payable by MPC to MC under the Service Agreement are ordinary business
profits and not royalties.
Article 12 of the Philippines-Japan tax treaty defines the term "royalties", as follows:
"Article 12
including cinematographic film and films or tapes for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret, formula or process, or for the use of, or the right to use
The treaty defines "royalties" to include "payment of any kind received as a consideration for
information concerning industrial, commercial or scientific experience." According to the commentaries of
the ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) Committee
on Fiscal Affairs on the Model Tax Convention [par. 11 and 12, Commentary on Article 12 (Royalties), ©
2003, p. 175), such information alludes to the concept of "know-how". The definition adopted by the said
Committee is, "all the undivulged technical information, whether capable of being patented or not, that is
necessary for the industrial reproduction of a product or process, directly and under the same conditions;
inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from
mere examination of the product and mere knowledge of the progress of technique." In a know-how
contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his
special knowledge and experience which can remain unrevealed to the public. (BIR Ruling DA-ITAD No.
57-05 dated June 17, 2005)
wit:
"To distinguish between compensation for service and royalty payments, one must inquire on
whether the payee has proprietary interest in the property giving rise to the income. If the payee has
none, then the payment is a compensation for personal services, if the payee has proprietary interest
then the payment is royalty."
Applying the above discussions to the instant case, there is nothing in the subject Service
Agreement that would require transfer into the Philippines of technology, equipment or other property
where MC has proprietary interest or would otherwise permit MC to impart to MPC their special
knowledge and experience which remain unrevealed to the public. Likewise, inasmuch as MC shall render
these services using their customary skills, then the compensation to be received therefor shall not
constitute as consideration for the use of, or the right to use, any copyright, patent, trademark, design or
model, plan, secret formula or process, or for the transfer of technology. Accordingly, the service fees to
be paid by MPC to MC are not within the purview of the definition of "royalties" under Article 13 of
Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-39-03 dated March 4, 2003)
2. The service fees being derived from sources outside the Philippines shall be exempt from
Philippine income tax. SEIcAD
Inasmuch as it has been represented that the subject services are to be performed by MC,
exclusively in Japan, then the Philippines-Japan tax treaty does not apply as the herein transaction does
not result in a case of double taxation for which a tax treaty relief is sought. (BIR Ruling No.
DA-ITAD-63-03 dated April 15, 2003). In this regard, Section 28(B)(1), in relation to Section 42(A)(3),
both of the National Internal Revenue Code provide, viz:
"SEC. 28. Rates of Income Tax on Foreign Corporations. —
"xxx xxx xxx"
"(B) Tax on Nonresident Foreign Corporation. —
"(1) In General. — Except as otherwise provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of
the gross income received during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance, premiums), annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999,
the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter; the rate
shall be thirty-two percent (32%).
"SEC. 42. Income from Sources Within the Philippines. —
"(A) Gross Income From Sources Within the Philippines. — The following items of gross
"xxx xxx xxx
"(3) Services. — Compensation for labor or personal services performed in the Philippines;
"xxx xxx xxx"
Under the afore-cited provisions, a nonresident foreign corporation is taxable only on income
derived from sources within the Philippines. Considering that the aforementioned services under the
Service Agreement are to be performed by MC exclusively in Japan, the subject service fees are deemed
income derived from sources outside the Philippines. Accordingly, the service fees by MPC to MC are
considered income derived from sources outside the Philippines and are, therefore, not subject to
Philippine income tax and consequently to withholding tax, pursuant to Section 28(B)(1) of the Tax Code.
TacSAE
However, while the service fees are represented to be allocation or reimbursement of actual cost by
MC to MPC, the matter of identifying the said expense as accurately pertaining to the said Service
Agreement and ascertaining that the allocation is based on actual cost and expenses incurred by staff of
MC in providing the service to MPC is a question of fact subject to confirmation through audit or
investigation, as the case may be. (BIR Ruling No. ITAD-086-05 dated August 26, 2005)
3. Since the subject services will be performed outside the Philippines, the said service fees are
not subject to the 10% value-added tax. IaDSEA
In defining the phase "sale or exchange of services" subject to 10% VAT, Section 108 of the
National Internal Revenue Code (NIRC) provides:
"The phrase "sale or exchange of services" means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, . . ." (emphasis supplied)
Clearly, the VAT imposed under Section 108 of the Tax Code applies only to services performed in
the Philippines and not to services rendered outside the Philippines. Accordingly, since the services are
exclusively to be performed by MC in the Japan, the subject service fees to be paid by the MPC to MC are
not subject to VAT. (BIR Ruling No. DA-ITAD 39-03 dated March 4, 2003)
4. Whether compensation for services is deductible from MPC's gross income as a valid expense
cannot be ruled upon.
As regards the deductibility of the compensation for services as valid expense of MPC, please be
informed that we decline to rule on the matter considering the factual nature of the issue pursuant to
Section 1 of Revenue Bulletin No. 1-2003.
investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without
force and effect insofar as the herein parties are concerned. ESDHCa
Very truly yours,
By:

OIC-Head Revenue Executive Assistant
Legal Service
March 27, 2006

559-88
Chun Chiang Enterprises Manufacturing Co., Inc.

Men's Trousers & Jeans
Bataan Economic Zone
2106 Mariveles, Bataan
Attention: Raquel Z. Andalis

Accountant
Gentlemen/Ladies :
This refers to your application for relief from double taxation dated August 26, 2005 1, requesting
for confirmation of your opinion that the dividend payments of Chun Chiang Enterprises Manufacturing
Co., Inc. (Chun Chiang) to Freestyle Fashion GmbH (Freestyle Fashion) are subject to a 10% preferential
withholding tax rate, pursuant to the Philippines-Germany tax treaty.
It is represented that Freestyle Fashion is a company with residence in Germany, which has its
registered office at Rheiner Str. 28 Salzbergen, 48499 Germany, per Certificate dated December 22, 2005
issued by the German Finanzamt (Tax Office), Lingen, Germany; that it is not registered as a corporation
or as a partnership per Certification dated September 29, 2005 issued by the Securities and Exchange
Commission (SEC); that Chun Chiang is a domestic corporation duly registered with the SEC and this
Bureau and operating at the Bataan Economic Zone, Mariveles, Bataan; that as of September 30, 2005,
Freestyle Fashion owns and holds Seven Hundred Ninety Five (795) shares in Chun Chiang, representing
99.375% of the authorized capital stock of the latter; that in a meeting held on October 14, 2005, the
Board of Directors of Chun Chiang approved the declaration of cash dividends in the aggregate amount of
PhP 40,000,000.00 payable on or before January 31, 2006 to stockholders of record as of September 30,
2005; and that the issue/s or transaction subject of the above request is not under investigation, neither is it
subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate,
collection proceedings nor a judicial appeal. DTAESI
follows, viz:
"Article 10
Dividends

the other Contracting State may be taxed in that other State.
paying the dividends is a resident, and according to the law of that State, but the tax so charged shall
not exceed:
(a) 10 per cent of the gross amount of the dividends if the recipient is a
company (excluding partnerships) which owns directly at least 25 per cent of the
capital of the company paying the dividends;
(b) in all other cases, 15 per cent of the gross amount of dividends.
xxx xxx xxx
4. The term 'dividends' as used in this Article means income from shares, mining shares,
founders' 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 law of the State of
which the company making the distribution is a resident, and income derived by a sleeping partner
from his participation as such and distributions on certificates of an investment-trust.
xxx xxx xxx."
whenever the recipient of the dividend owns directly at least 25 percent of the capital of the paying
considering that Freestyle Fashion holds 99.375% of the authorized capital stock of Chun Chiang, this
Office is of the opinion and so holds that the dividend payments by Chun Chiang to Freestyle Fashion
shall be subject to the preferential rate of 10 percent, based on the gross amount thereof, pursuant to
Article 10(2)(a) of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988)
effect insofar as the herein parties are concerned. cIADaC
Very truly yours,
By:

Legal Service
Footnotes
1. Received by the International Tax Affairs Division on November 3, 2005.
March 27, 2006

Bataan International Garment Inc.

Bataan Export Processing Zone
2106, BEPZ, Mariveles, Bataan
Attention: Raquel Z. Andalis

Accountant
Gentlemen/Ladies :
This refers to your application for relief from double taxation dated August 26, 2005 1, requesting
for confirmation of your opinion that the dividend payments of Bataan International Garment Inc.
(Bataan) to Bueltel Bekleidungswerke GmbH (BBG) are subject to a 10% preferential withholding tax rate,
pursuant to the Philippines-Germany tax treaty.
It is represented that BBG is a company with residence in Germany, which has its registered office
at Rheiner Str. 28 Salzbergen, 48499 Germany, per Certificate dated December 22, 2005 issued by the
German Finanzamt (Tax Office), Lingen, Germany; that it is not registered as a corporation or as a
partnership per Certification dated September 29, 2005 issued by the Securities and Exchange
Commission (SEC); that Bataan is a domestic corporation duly registered with the SEC and this Bureau
and operating at the Bataan Economic Zone, Mariveles, Bataan; that as of November 25, 2003, BBG owns
and holds Ninety Five (95) shares in Bataan, representing 95% of the authorized capital stock of the latter;
that in a meeting held on November 25, 2003, the Board of Directors of Bataan approved the declaration
of cash dividends in the aggregate amount of PhP 4,500,000.00 payable on or before December 31, 2003
to stockholders of record as of November 25, 2003; and that the issue/s or transaction subject of the above
request is not under investigation, neither is it subject of an on-going audit, administrative protest, claim
for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. THaDEA
follows, viz:
"Article 10
Dividends

the other Contracting State may be taxed in that other State.
paying the dividends is a resident, and according to the law of that State, but the tax so charged shall
not exceed:
(a) 10 per cent of the gross amount of the dividends if the recipient is a
company (excluding partnerships) which owns directly at least 25 per cent of the
capital of the company paying the dividends;
(b) in all other cases, 15 per cent of the gross amount of dividends.
xxx xxx xxx
4. The term 'dividends' as used in this Article means income from shares, mining shares,
founders' 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 law of the State of
which the company making the distribution is a resident, and income derived by a sleeping partner
from his participation as such and distributions on certificates of an investment-trust.
xxx xxx xxx."
whenever the recipient of the dividend owns directly at least 25 percent of the capital of the paying
considering that BBG holds 95% of the authorized capital stock of Bataan, this Office is of the opinion
and so holds that the dividend payments by Bataan to BBG shall be subject to the preferential rate of 10
percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Germany tax
treaty. (BIR Ruling No. 559-88 dated November 24, 1988)
effect insofar as the herein parties are concerned. ASHaTc
Very truly yours,
By:

Legal Service
Footnotes
1. Received by the International Tax Affairs Division on November 3, 2005.
March 27, 2006
Art. 12 of the Philippines-Singapore tax treaty;

Nagase Philippines Corporation

18-B Trafalgar Plaza
H.V. Dela Costa St.,
Attention: Mr. Masanao Furuse
President
Gentlemen :
This refers to your letter dated December 16, 2004, requesting for the availment of 25% preferential
tax rate for the management fees paid to Nagase Singapore Pte. Ltd. (Nagase-Singapore) by Nagase
Philippines Corporation (Nagase-Phil) pursuant to Article 12 of the Philippines-Singapore tax treaty.
It is represented that Nagase-Singapore is a nonresident foreign corporation duly organized and

existing under the laws of Singapore, with office address at 300 Beach Road No. 39-00 The Concourse,
Singapore; that it is incorporated on April 3, 1975 as a private company limited by shares as evidenced by
its Memorandum and Articles of Association issued by the office of The Registrar of Companies,
Singapore; that Nagase-Singapore was licensed to transact business in the Philippines on September 21,
1995, however, said license was cancelled per Certificate of Cancellation of License of a Foreign
Corporation approved on February 3, 1999 per certification dated November 17, 2004 issued by the
Securities and Exchange Commission; that Nagase-Phil is a corporation duly organized and existing under
the laws of the Philippines with principal address at 18-B Trafalgar Plaza, H.V. Dela Costa St., Salcedo
Village, Makati City 1227; that on April 1, 2004, Nagase-Singapore and Nagase-Phil entered into a
Service Agreement (Agreement) wherein Nagase-Singapore rendered the following services to
Nagase-Phil, viz:
"1.1 Procurement Business support
1.1.1 To provide NPH (i.e., Nagase-Phil) with a business know-how of

procurement business; such as, but not limited to, standard sales/purchase terms
agreement, quality control and warranty policy, production control know-how,
substantial risk protection by legal documentation, effective and controllable
logistics preparation, prototype of process control system. DEICTS
1.1.2 To provide business development support; such as, but not limited to,
obtention of manufacture's production information, production process information,
Material specification and its price information, search for potential supplier,
obtention of approval from customer for sample provided by supplier, search for
reliable and substitutable logistics supplier, price negotiation, with specific customer
designated by NPH.
1.1.3 To manage project progress and advise NPH management of the

updated progress periodically.
1.1.4 To design, maintain the supplier information database (herein called

'DB') and produce access rights to this DB to the staff of NPH.
1.2 e-nagase.com
1.2.1 To enhance e-nagase.com website to introduce Nagase's activity to

English/Chinese speaking customer/supplier.
1.3 Specific project support
1.3.1 To provide specific project implementation support of which scope of
project is new to NPH, and agreed separately."
that Nagase-Singapore shall assign its staff to the Services as set forth in the Agreement; that in
consideration of the services rendered by Nagase-Singapore, Nagase-Phil shall pay Nagase-Singapore the
amount of Twenty Two Thousand Eight Hundred Eighty Seven Singapore dollars (22,887SGD) for every
three (3) months as Service Fee; that the Agreement shall be effective for one year beginning retroactively
from April 1, 2004 and, thereafter, shall be automatically extended for successive period for one (1) year.
In reply, please be informed that Article 12 of the Philippines-Singapore tax treaty provides as
follows:
"Article 12
Royalties
State may be taxed in that other State. STcDIE
and according to the law of that Contracting State, but, if the recipient is the beneficial owner of the
(a) in the case of the Philippines, 15 per cent of the gross amount of the
royalties, where the royalties are paid by an enterprise registered with the Philippine
Board of Investments and engaged in preferred areas of activities and also royalties
in respect of cinematographic films or tapes for television or broadcasting;
(b) in the case of Singapore, where the royalties are approved under the
Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the
royalties shall be exempt;
(c) in all other cases, 25 per cent of the gross amount of the royalties.
including cinematograph films or tapes for television or broadcasting, any patent, trade mark, design
or model, plan, secret formula or process, or for the use of, or the right to use, industrial,
xxx xxx xxx"
Based on the abovecited provisions, royalties arising from sources within the Philippines and
derived by a resident of Singapore shall be subject to the following preferential tax rates: (a) a rate not
exceeding 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in preferred areas of activities and for
royalties in respect of cinematographic films or tapes for television or broadcasting; or (b) in all other
cases, a rate not to exceed 25 percent of the gross amount of the royalties. aCSHDI
Such being the case, and since Nagase-Phil is not a corporation registered with the Philippine Board
of Investments which is engaged in preferred areas of activities and that the subject fees are not in respect
of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds
that the fees paid by Nagase-Phil to Nagase-Singapore pursuant to their Service Agreement, being
royalties, shall be subject to income tax at the rate of 25 percent, based on the gross amount thereof. (BIR
Ruling No. ITAD-024-00 dated January 29, 2000)
Furthermore, the fees paid by Nagase-Phil are subject to the 10% value-added tax (VAT) pursuant
to Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337. Accordingly,
Nagase-Phil, being the payor in control of the payment shall be responsible for the withholding of VAT on
such fees on behalf of Nagase-Singapore by filing a separate VAT return for and on behalf of
Nagase-Singapore using BIR Form No. 1600 (Monthly Remittance Return of Value-Added tax and Other
Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as
sufficient basis for the claim of input tax to be applied against the output tax that may be due from
Nagase-Phil, if it is a VAT-registered taxpayer. In case Nagase-Phil is a non-VAT registered taxpayer, the
an "asset", whichever is applicable. In addition, Nagase-Phil is required to issue the Certificate of Final
Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to
Nagase-Singapore upon its request, and the fourth copy to be retained by Nagase-Phil as its file copy.
[Section 4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02
(now Section 4, 114-2(b), RR No. 16-05); Section 4.114(D), RR No. 2-98, as last amended by RR No.
28-03]
Very truly yours,
By:

Legal Service
March 27, 2006
Arts. 5 & 7, Philippines-Netherlands Tax Treaty; BIR Ruling No.

DA-ITAD 134-02
Isla Lipana & Co

29TH Floor, Philamlife Tower
8767 Paseo de Roxas
1226, Makati City
Attention: Ms. Tammy H. Lipana

Managing Partner Tax Services
Gentlemen :
This refers to your letter dated 03 January 2006 requesting that BIR Ruling No. DA-ITAD No.
161-05 be supplemented to confirm that the management fees paid by Manila Mandarin Hotel, Inc.
(Mandarin Philippines) to Mandarin Oriental Management B.V. (Mandarin Management Netherlands)
under the Offshore Management Agreement (Agreement) entered into by the parties are exempt from
income tax pursuant to Article 7 in relation to Article 5 of the Philippines-Netherlands tax treaty.
The factual representations recited in BIR Ruling No. DA-ITAD 161-05 are hereby adopted, and
that as an additional representation, the service under the Agreement includes the infrequent and
occasional visits to the Philippines of the employees of Mandarin Management Netherlands for a few
times in a year with each visit not exceeding two to three days in duration and in the aggregate, not more
than 183 days within any twelve-month period. In support thereto, you offer a certification issued by the
General Manager of Mandarin Philippines attesting to such fact.
In reply, please be informed that Article 7 of the Philippines-Netherlands tax treaty provides:
"Article 7
Business Profits
1. The profits of an enterprise of one of the States shall be taxed only in that State unless
the enterprise carries on business in the other 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 that permanent establishment. ISTCHE
xxx xxx xxx."
In relation thereto, Article 5 of the same tax treaty defines a permanent establishment, thus:
"Article 5
fixed place of business in which the business of the enterprise is wholly or partly carried on.
xxx xxx xxx
(h) the furnishing of services including consultancy services to an enterprise through

employee or other personnel where activities of that nature continue (for the same or connected
project) for a period or periods exceeding in the aggregate 183 days within any twelve-month
period.
xxx xxx xxx."
Under the aforequoted provisions, it is clear that if a resident corporation of The Netherlands
carries on business in the Philippines through a permanent establishment situated in the latter, the profits
of the said corporation attributable to such permanent establishment shall be subject to Philippine income
tax. For this purpose, a corporation which is a resident of The Netherlands may be deemed to have a
permanent establishment in the Philippines if, among others, the furnishing of services by such corporation
through its personnel, continue (for the same or a connected project) within the Philippines for a period or
periods exceeding in the aggregate 183 days within any twelve-month period. IEcDCa
Inasmuch as it is represented that the Agreement shall continue until terminated by either party, the
whole of such Agreement, including its continuance, upon its renewal for four additional terms each of
five years until August 31, 2026, shall be regarded as being the "same or connected project" for the
purpose of counting the aggregate period of 183 days within any twelve-month period. In other words,
Mandarin Management Netherlands is deemed not to have a permanent establishment for as long as its
employees do not stay in the Philippines for a period or periods exceeding in the aggregate 183 days
within any twelve-month period in the course of their rendition of services to Mandarin Philippines. In
such a case, the income derived by Mandarin Management Netherlands from services rendered to
Mandarin Philippines shall not be subject to income tax and, consequently, to withholding tax. (BIR
Finally, while the compensation for services rendered outside the Philippines is not subject to the
10% VAT, the fees paid for that portion of the services rendered by Mandarin Management Netherlands in
the Philippines are, however, subject to 10% VAT pursuant to Section 108 of the Tax Code of 1997.
Accordingly, Mandarin 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
Mandarin Management Netherlands. In remitting the VAT withheld, Mandarin Philippines shall use the
substantiation for the claim of input tax to be applied against the output tax that may be due from
Mandarin Philippines if it is a VAT-registered taxpayer. In case Mandarin 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, Mandarin Philippines is
required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in
quadruplicate, the first three copies thereof be given to Mandarin Management Netherlands and the fourth
copy to be retained by Mandarin Philippines. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002;
Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002)
Very truly yours,
By:

Legal Service
March 21, 2006

Sections 108 (A) (3) and 109 (q) National Internal Revenue Code
of 1997;
BIR Ruling Nos. DA-ITAD 139-04 and 112-05
Jglaw — Attorneys and Counsellors at Law

6th Floor, SOL Building
112 Amorsolo Street, Legaspi Village
1229 Makati City
Attention: Atty. Mary Jane A. Delgado

Atty. Maria Melisa G. Tan
Gentlemen :
This refers to your letter dated August 9, 2005 requesting confirmation that royalties to be paid by
Mactan Steel Corporation, Inc. (Mactan Steel) (formerly, JS Steel Cebu Corporation) to NS Fellows
Corporation (NS Fellows) pursuant to a Technical Assistance Agreement are subject to twenty-five
percent (25%) preferential tax rate under Article 12 of the Convention between the Republic of the
Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income (Philippines-Japan tax treaty). IaEASH
It is represented that NS Fellows, an engineering and consulting company for steel, is registered as a
taxable person in Japan under Tax Reference No. 00067539, with address at 2-26-32 Hongo, Seya-ku,
Yokohama City, Kanagawa Prefecture, Japan, as confirmed by the Certificate of Status of Taxable Person
issued by the Hodogaya Taxation Office Bureau on September 27, 2005; that NS Fellows is not registered
either as a corporation or as a partnership in the Philippines, as confirmed by the Certificate of
Non-Registration of Corporation/Partnership dated September 20, 2005 issued by the Securities and
Exchange Commission; that, on the other hand, Mactan Steel is a corporation organized and existing under
the laws of the Philippines, registered with the Philippine Economic Zone Authority (PEZA) under
Registration Certificate No. 94-76 dated July 31, 2001, and has its principal business office at the
Philippine Economic Zone, Lapu-lapu City, Cebu, Philippines; that Mactan Steel's business activity as an
Ecozone Export Enterprise consists in the manufacture and processing of metal sheets and of coil into
sheared and slitted metal sheets, for sale to enterprises; that on March 1, 2005, NS Fellows and Mactan
Steel entered into a Technical Assistance Agreement (Agreement) whereby NS Fellows agreed to provide
Mactan Steel (1) information and assistance on factory management, production control, quality control,
and other dairy management and operations, (2) information and assistance on general maintenance, repair
and amendment of machinery equipment, (3) information and assistance on equipment, fast moving spare
parts, and the like, and (4) information and assistance to deal with and solve quality claims; that in
consideration of the foregoing, Mactan Steel shall pay NS Fellows royalties at an amount of One Million
Japanese yen (JPY 1,000,000), which shall be due and owing on the last day of the Agreement on August
31, 2005; and that the Agreement may be extended as the parties may mutually agree. ACTaDH
In reply, please be informed that as regards income tax, Article 12 of the Philippines-Japan tax
treaty provides as follows:
"Article 12
a) 15 per cent of the gross amount of the royalties if the royalties are paid in
on the royalties paid by a company, being a resident of the Philippines, registered with the
investment incentives laws of the Philippines to a resident of Japan, who is the beneficial
xxx xxx xxx"
Payments made by Mactan Steel to NS Fellows for the subject assistance and information are
considered "payments as consideration for information concerning industrial, commercial or scientific
experience" and as such are royalties under paragraph 3 of Article 12 above. This being so, this Office
hereby confirms your opinion that such payments are subject to an income tax of 25% percent based on
the gross amount thereof, under paragraph 2(b) of Article 12 as aforequoted. (BIR Ruling No. DA-ITAD
On the other hand, as regards value-added tax (VAT), the provision by NS Fellows to Mactan Steel
of the subject assistance and information is generally subject to VAT under Section 108(A)(3) of National
Internal Revenue Code of 1997 (Tax Code):
services, including the use or lease of properties
The phrase 'sale or exchange of services' shall likewise include:
xxx xxx xxx

(emphasis added)
xxx xxx xxx" 1
However, Section 109(q) of the Tax Code exempts from VAT transactions which are exempt under
international agreements or under special laws:
tax:
xxx xxx xxx
1590;
xxx xxx xxx 2
Concerning special laws relevant to Mactan Steel and other PEZA-registered enterprises, Section
24 of Republic Act No. 7916 (An Act Providing for the Legal Framework and Mechanism for the
Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines,
Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes) and
Section 1, Rule XIV (Incentives to ECOZONE Developers/Operators) of the Rules and Regulations to
Implement this Act are worth mentioning:
"Section 24. Exemption from Taxes Under the National Internal Revenue Code. — Any
provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed on business establishments operating within the ECOZONE. In lieu of
paying taxes, five percent of the gross income earned by all business and enterprises within the
ECOZONE shall be remitted to the national government. . ."
"Section 1. ECOZONE Developers/Operators. — ECOZONE Developers/Operators shall

be entitled to the following incentives:

Developer/Operator shall to the extent of its construction and operation, be exempt from payment of
all national internal revenue taxes and local government impost, fees, licenses or taxes, including
but not limited to the following:
1. Internal revenue taxes such as gross receipts tax, value-added tax, ad valorem and
excise taxes;
2. Franchise, common carrier or value added taxes and other percentage taxes on public
and service utilities and enterprises.
xxx xxx xxx"
Accordingly, since VAT is an indirect tax and as such, the amount of tax may be shifted or passed
on to Mactan Steel (Section 105, Tax Code), Mactan Steel, by reason that it is exempt from national
internal revenue taxes like VAT under Section 24 of Republic Act No. 7916, cannot be obliged by NS
Fellows to shoulder the payment of VAT on the provision of the subject information. This is emphasized
in VAT Ruling No. 100-99 dated September 16, 1999, the dispositive portion of which provides: "In the
case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and
paying the same rests on the payor. However, since PEZA-registered export enterprise may not be passed
on with nor claim input VAT, then payment of royalties to a non-resident lessor, . . . , should be as it is
hereby confirmed to be, exempt from VAT." (BIR Ruling No. DA-ITAD 112-05 dated September 30, 2005)
Very truly yours,
By:

Assistant Commissioner, Legal Service
Footnotes
effective on November 1, 2005, amends Section 108(A)(3), thus:
"SEC 106. Value-added Tax on Sale of Goods or Properties. —
xxx xxx xxx
xxx xxx xxx"
2. Republic Act No. 9337 amends Section 109(q), thus:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529;
xxx xxx xxx"
March 20, 2006
Article 10(2)(a), Philippines-Netherlands tax treaty;

Hoya Glass Disk Philippines, Inc.

111 East Main Avenue, SEPZ
Laguna Technopark
Biñan, Laguna 4024
Attention: Ms. Ma. Anita A. Policarpio
Finance & Accounting Manager
Gentlemen :
This refers to your application for relief from double taxation dated March 1, 2006, requesting
confirmation of your opinion that the dividend payments of Hoya Glass Disk Philippines, Inc. (Hoya
Philippines) to Hoya Holdings N.V. (Hoya Netherlands) are subject to a 10% preferential withholding tax
rate, pursuant to Article 10(2)(a) of the Philippines-Netherlands tax treaty.
It is represented that Hoya Netherlands is a nonresident foreign corporation organized and existing
under the laws of The Netherlands with office address at Amsterdamseweg 29, 1422 AC Uithoorn, P.O.
Box 250, 1420 AG Uithoon, The Netherlands; that it is not registered either as a corporation or a
partnership in the Philippines per Certification dated February 22, 2006 issued by the Securities and
Exchange Commission; that Hoya Philippines (formerly NSG Philippines, Inc.) is a corporation duly
organized and existing under laws of the Philippines, with principal office and place of business at 111
East Main Avenue, Special Economic Philippine Zone, Laguna Technopark, Biñan, Laguna 4024,
Philippines; that Hoya Netherlands is the registered owner of 548,795 common shares of Hoya Philippines
with a par value of PhP1,000.00 per share or an aggregate value of PhP548,795,000.00 representing
99.99% ownership in Hoya Philippines; that Hoya Philippines has an authorized capital stock of
PhP548,800,000.00 consisting of 548,800 shares with a par value of PhP1,000 per share; that on February
14, 2006, the Board of Directors of Hoya Philippines unanimously approved and declared cash dividends
in the amount of PhP569,459,966.00 in favor of stockholders of record as of February 14, 2006, payable
on or before March 31, 2006; and that the issue/s or transaction subject of the above request for ruling 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 of the taxpayer/s involved.
follows, viz:
"Article 10
DIVIDENDS
other State may be taxed in that other State. DHcEAa
dividends;
b) 15 percent of the gross amount of the dividends in all other cases.
xxx xxx xxx
taxation law of the State of which the company making that distribution is a resident.
xxx xxx xxx"
whenever the beneficial owner of the dividend owns directly at least 10 percent of the capital of the paying
considering that Hoya Netherlands holds 99.99% of the capital of Hoya Philippines, this Office is of the
opinion and so holds that the dividend payments by Hoya Philippines to Hoya Netherlands shall be subject
to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of
the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD 28-99; see also BIR Ruling No. 559-88)
be disclosed that the facts are different, then this ruling shall be without force effect insofar as the herein
Very truly yours,
By:

Legal Service
March 20, 2006
Section 28 (B) (5) (b), National Internal Revenue Code of 1997;

BIR Ruling No. ITAD-008-00;
Picazo Buyco Tan Fider & Santos Law Offices
18th, 19th & 17th Floors, Liberty Center
104 H.V. del Costa Streets
Attention: Atty. Peter D. A. Barot
Gentlemen :
This refers to your letter dated September 2, 2005 requesting confirmation, on behalf of your
clients, Marina Trading Corp. (Marina) and Steel Bonnets Holding Pte. Ltd (Steel Bonnets), that the
dividends to be paid by Marina to Steel Bonnets are subject to fifteen percent (15%) income tax pursuant
to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (NIRC).
It is represented that Steel Bonnets is a nonresident foreign corporation organized and existing
under the laws of Singapore per certification issued by the Accounting and Corporate Regulatory
Authority of Singapore issued on August 23, 2005 and has its business address at 18 Cross Street, #08-03
Marsh & McLennan Center, Singapore 048423; that it is not registered either as a corporation or as a
September 6, 2005; that Marina is a corporation organized and existing under the laws of the Philippines
with its place of business at 6/F CG Building, 101 Aguirre St., Legaspi Village, Makati City; that as of
September 2, 2005, Steel Bonnets owned One Hundred Sixty Five Thousand One Hundred Sixty Six
(165,166) shares of Marina which constitute thirty and 14/100 (30.14%) of the Five Hundred Forty Seven
Thousand Nine Hundred Seventy Four (547,974) total outstanding shares of the latter; that on August 12,
2005 the Board of Directors of Marina declared cash dividends in the total amount of One Hundred Thirty
Eight Pesos (P138.00) per share, to stockholders of record as of September 14, 2005 payable on or before
September 14, 2005; and that under the tax laws of Singapore, dividends derived by a resident of
Singapore beginning June 1, 2003, from sources outside Singapore, are exempt from Singapore income tax
if the income tax imposed by the source country on such dividends is at least 15%, as confirmed by the
Inland Revenue Authority of Singapore (IRAS) Circular on Tax Exemption for Foreign-Sourced Dividend,
Foreign Branch Profits and Foreign-Sourced Service Income, published on 21 May 2003.
In reply, please be informed that Section 28(B)(5)(b) of the NIRC provides as follows:
Section 28. Rates of income tax on foreign corporation. —
"xxx xxx xxx
"(B) Tax Nonresident Foreign Corporation. —
"xxx xxx xxx
"(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. —
"xxx xxx xxx
"(b) Intercorporate Dividends. — A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic
the condition that the country in which the nonresident foreign corporation is domiciled, shall allow
a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid
in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998,
eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the
difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent
(34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on
corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph."
"xxx xxx xxx
Pursuant to Section 28(B)(5)(b), dividends to be paid by Marina to Steel Bonnets, beginning year
2000 and onwards, are subject to 15 percent Philippine income tax if the latter's country of domicile,
Singapore, shall allow Steel Bonnets a 17 percent deemed paid tax credit against its Singapore income tax
due on such dividends. The Supreme Court (SC), on two separate occasions, had ruled on the applicability
of the 15 percent income tax on dividends, first, in Commissioner of Internal Revenue vs. Wander
Philippines, Inc. and the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) and second, in
Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation (G.R.
No. 66838, December 2, 1991). DaScCH
dividends to Glaro S. A. Ltd (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under
tax. Given this, the Supreme Court ruled that the subject dividends were subject to 15 percent income tax
by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the
required (minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends. On the
other hand, in the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G
U.S.A.), a nonresident foreign corporation domiciled in the U.S.A. But unlike the Wander case where the
Swiss law exempts dividends derived by its residents from sources outside Switzerland, in the P&G
Philippines case, the applicable U.S. law provides that dividends derived by P&G U.S.A. from sources
outside the U.S. are allowed U.S. tax credits equivalent to the sum of the Philippines income tax actually
paid on the dividends by P&G U.S.A. and the deemed paid tax credit proportionate to the corporate
income tax actually paid by P&G U.S.A. Given this, the Supreme Court ruled that the subject dividends
were subject to 15 percent income tax only if the total U.S. income tax credits on such dividends were
equal to or greater than the required (minimum) 20 percent deemed paid tax credit.
Applying the pronouncement in the above SC cases, and provided that under Singapore law
dividends derived by a resident of Singapore from sources outside Singapore are, as represented, exempt
from Singapore income tax at the time of the declaration of subject dividends and since Philippine income
tax on such dividends is equal to or greater than 15 percent under Section 28(B)(5)(b) or 32 percent under
Section 28(B)(1) 1 of the NIRC at the time of declaration of the dividends, such dividends paid by Marina
to Steel Bonnets on or before September 14, 2005 are therefore subject to 15 percent Philippine income
tax pursuant to Section 28(B)(5)(b) of the Tax Code. (BIR Ruling No. 008-00 dated January 25, 2000; BIR
Ruling No. 105-92 dated March 30, 1992)
However, in line with Revenue Memorandum Circular No. 80-91, you are required to submit to this
Bureau, through the International Tax Affairs Division the following documents:
1) an authenticated certification issued by the Singapore tax authority that no income tax is
imposed on dividends received by Singapore corporation from corporations domiciled in foreign
countries; (2) an authenticated copy of the income tax return of Steel Bonnets for the taxable year when
the dividends were received; (3) an authenticated document issued by the Singapore tax authority showing
that it credited 17% of the tax deemed paid in the Philippines. Failure to submit these documents within a
reasonable time would result in the imposition of deficiency assessment for the seventeen (17) percentage
points differential.
parties are concerned. TAcCDI
Very truly yours,
By:

Legal Service
Footnotes
1. "(1). In General. — Except as otherwise provided in this Code, a foreign corporation not engaged in trade
or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains
subject to tax under subparagraphs 5(c): Provided, That effective January 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three (33%); and,
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%)."
March 17, 2006
World Health Organization
United Nations Avenue
P.O. Box 2932
1000 Manila
Gentlemen :
This refers to your letters, both dated January 18, 2006, indorsed to this Office by the Department
of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the exemption from
payment of value-added tax (VAT) and ad valorem tax on the purchase of (2) locally-produced motor
vehicles, for the official use of World Health Organization, specifically described as follows:
Make: Toyota Camry 2.4V A/T

Model Year: 2005
Color: Black
Make: Toyota Hi-Lux 2.5E 4X2 Diesel M/T

Model Year: 2006
Color: White
Chassis Number: MROES19G5-04001581
In reply, please be informed that Section 12, Article IV of the Host Agreement between the
Republic of the Philippines and the World Health Organization (WHO) provides, viz:
"Section 12
While the Organization will not, as a general rule, in the case of minor purchases, claim
exemption from exercise duties, and from taxes on the movable and immovable property which
form part of the price to be paid, nevertheless, when the Organization is making important
purchases for official use of property on which such duties and taxes have been charges or are
chargeable, the Government of the Republic of the Philippines shall make appropriate
administrative arrangements for the remission or return of the amount of duty or tax."
Based on the aforecited provision, the Government of the Republic of the Philippines shall make
appropriate administrative arrangements for the remission or return of the amount of tax, forming part of
the price to be paid, for important purchases of WHO for its official use. In lieu of the provision on the
remission and return of the amount of tax due, a tax exemption privilege can instead be granted to WHO.
And since VAT and ad valorem are taxes forming part of the purchase price of the vehicle which WHO
intends to purchase for its official use, then WHO is exempt therefrom. (VAT Ruling No. 143-90)
Moreover, the WHO, being one of the specialized agencies of the United Nations (UN), shall enjoy
the privileges and immunities contained in the Convention on the Privileges and Immunities of the
Specialized Agencies of the United Nations adopted by the General Assembly on November 21, 1947 to
which the Philippines is a member. Such privileges and immunities also include the exemption from
taxation. (Article III Sections 9 & 10, Convention on the Privileges and Immunities of the United Nations)
Such being the case, your request is hereby granted. The World Health Organization is entitled to
exemption from VAT and ad valorem tax on the above-mentioned purchase of one (1) 2005 Black Toyota
Camry 2.4V A/T and one (1) 2006 White Toyota Hi-Lux 2.5E 4X2 Diesel M/T.
World Health Organization.
herein parties are concerned. AHaETS
Very truly yours,

Legal Service
March 16, 2006
Arts. 4 & 10, Philippines-UK tax treaty;

PNOC Energy Development Corporation

Energy Center, Merritt Road
Fort Bonifacio, Taguig, Metro Manila
Attention: Mr. Felicito A. Gesite

Treasury Manager
Gentlemen :
This refers to your letter dated July 14, 2005 requesting confirmation of your opinion that the
interest to be paid by PNOC Energy Development Corporation (PNOC-EDC) to Moscow Narodny Bank
Limited is subject to a fifteen percent (15%) preferential tax rate pursuant to Article 10 of the
Philippines-United Kingdom tax treaty (RP-UK tax treaty).
It is represented that Moscow Narodny Bank Ltd. Singapore is a nonresident foreign corporation
with office address located at MNB Building, 50 Robinson Road, Singapore, 068882 and is a resident of
The United Kingdom within the meaning of Article 4 of the RP-UK tax treaty per Certification issued by
Ian Pugh, HM Inspector of Taxes, Inland Revenue, South Yorkshire Area Compliance, Concept House, 5
Young Street Sheffield, South Yorkshire S1 4LB, on January 5, 2004; that Moscow Narodny Bank Ltd.
Singapore is not registered either as a corporation or as a partnership in the Philippines as confirmed by
the Certification of Non-Registration issued by the Securities and Exchange Commission on June 2, 2005;
that on January 22, 2003, PNOC EDC entered into a Loan Agreement in the total amount of US$90
million (Five Years Guaranteed Loan Facility) with The Bank of Nova Scotia Asia Limited, Barclays
Capital, The Investment Banking Division of Barclays Bank PLC, BDO Capital & Investment
Corporation, BNP Paribas and ING Bank N.V. as the Coordinating Arrangers, The Banks and other
Financial Institutions as the Lenders, and BNP Paribas Hong Kong Branch as Facility Agent; that BNP
Paribas Hong Kong Branch remitted the fund as provided by the list of Lenders under Attachment A
through the Federal Reserve Bank of New York account of the Bangko Sentral ng Pilipinas (BSP) for the
account of PNOC EDC on February 20, 2003; that the loan is fully registered and guaranteed by the
Republic of the Philippines through the Department of Finance (DOF); and that under the Loan
Agreement, PNOC-EDC would pay in full (without deductions or withholding any related tax) the lenders
through BNP Paribas Hong Kong Branch periodic interest based on specific rates.
It is further represented that by virtue of a Novation Certificate (which was accepted by Facility
Agent and the Transfer Date confirmed as October 20, 2004), BNP Paribas Hong Kong Branch (as agent
for itself and on behalf of the Lenders and the Borrower under the Loan Agreement) agreed to transfer to
Moscow Narodny Bank Ltd. Singapore by novation its commitment under the Loan agreement amounting
to US$3,333,334.
In reply, please be informed that Article 4 of the RP-UK tax treaty provides:
"Article 4
FISCAL DOMICILE
1. For the purposes of this Convention, the term 'resident of a Contracting State' means,
subject to the provisions of paragraphs 2 and 3 of this Article, any person who, under the law of that
State, is liable to taxation therein by reason of his domicile, residence, place of management or any
other criterion of a similar nature; an individual who is a member of the diplomatic, consular or
permanent mission of a Contracting State which is situated in the other Contracting State and who is
subject to tax in that other State only if he derives income from sources therein, shall not be deemed
to be a resident of that other State. The terms 'resident of the Philippines' and 'resident of the United
Kingdom' shall be construed accordingly. aDSHCc
"xxx xxx xxx"
It is clear from the aforequoted Article 4 that the term "resident of the United Kingdom of Great
Britain and the Northern Ireland" shall include any person who, under the law of the United Kingdom of
Great Britain and the Northern Ireland, is liable to taxation therein by reason of his domicile, residence,
place of management or any other criterion of a similar nature. Per Certification issued by the Inland
Revenue, through its HM Inspector of Taxes, of UK, it has been confirmed that Moscow Narodny Bank
Ltd. Singapore is a resident of UK, and as such is entitled to avail of the provisions of the RP-UK tax
treaty.
With respect to interest paid by PNOC-EDC to Moscow Narodny Bank Ltd., Singapore, Article 10
of the RP-UK tax treaty provides:
"Article 10
INTEREST
1. Interest arising in a Contracting State which is derived and beneficially owned by a

resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises,
and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the
gross amount of the interest.
xxx xxx xxx
5. The term 'interest' as used in this Article means income from Government securities,
bonds or debentures, including premiums and prizes attaching to such securities, whether or not
secured by mortgage and whether or not carrying a right to participate in profits, and other
debt-claims of every kind as well as all other income assimilated to income from money lent by the
taxation law of the State in which the income arises. Penalty charges for late payment shall not be
regarded as interest for the purpose of this Article.
xxx xxx xxx"
Based on the foregoing, the interest arising in the Philippines and paid to a resident of the United
Kingdom may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount thereof.
Such being the case, the interest to be paid by PNOC EDC to Moscow Narodny Bank Ltd., Singapore shall
be subject to a preferential tax rate of fifteen percent (15%) based on the gross amount thereof. (BIR
Ruling No. DA-ITAD 78-01 dated September 19, 2001)
Moreover, the subject Loan Agreement is subject to documentary stamp tax imposed under Section
180 of the Tax Code of 1997.
herein parties are concerned. CEaDAc
Very truly yours,
By:

March 16, 2006


#75 Swaziland St., Better Living Subdivision
Parañaque City

Administrator
Gentlemen :
This refers to your letter dated September 9, 2005 applying for tax treaty relief on the salaries
and/or other emoluments received by teachers engaged to teach in Deutsche Schule Manila (DSM)
namely: Mr. Volker Siegfried Schlieske, Ms. Annett Schwadke, Ms. Michaela Weber and Ms. Kerstin
Denise Wiens, for a period not exceeding two (2) years pursuant to Article 20 of the Philippines-Germany
tax treaty.
principal address at No. 75 Swaziland St., Better Living Subd., Parañaque City; that the above-named
teachers are, at present or immediately before, were residents of the Federal Republic of Germany as
evidenced by the Certification letter issued by Mr. Henning Hansen, Third Secretary, Press and Cultural
Affairs of the Embassy of the Federal Republic of Germany in Manila; that DSM entered into a Contract
of Employment for a Limited Period of Time with each of the above-named teachers for a period not
exceeding two years, as follows:
Name Duration of Contract

1. Mr. Volker Siegfried Schlieske September 1, 2005 — July 31, 2007
2. Ms. Annett Schwadke September 1, 2005 — July 31, 2007
3. Ms. Michaela Weber September 1, 2005 — July 31, 2007
4. Ms. Kerstin Denise Wiens September 1, 2005 — July 31, 2007
follows:
"Article 20
1. Remuneration which a professor or teacher, who is or immediately before was a resident of a

Contracting State and who visits the other Contracting State for a period not exceeding two
years for the purpose of carrying out advanced study or research or for teaching at a
university, college, school or other educational institution, receives for such work shall not
be taxed in that Contracting State. AECacT
general interest but primarily for the private benefit of a specific person or persons."
immediately before, were residents of Germany and who stay in the Philippines for the purpose of
teaching for a period not exceeding two years shall not be subject to Philippine income tax. In view
thereof, this Office is of the opinion and so holds that the subject remuneration of the above-named
German teachers for teaching in DSM for a period not exceeding two (2) years shall not be subject to
Very truly yours,
By:

Legal Service
March 16, 2006
Article 21, Philippines-France tax treaty;

Ecole Francaise de Manille
75 Swaziland St., Better Living Subdivision
Attention: Odile Malay

Administrator, Ecole Francaise de Manille
Gentlemen :
This refers to your letter dated September 9, 2005 requesting confirmation of your opinion that the
remuneration of Mr. Joel Marc Chaplet (Mr. Chaplet) as visiting teaching staff in the Philippines is not
subject to Philippine income tax pursuant to the Philippines-France tax treaty. ATcaEH
It is represented that Mr. Chaplet, immediately before his employment in the Philippines, was a
resident of the French Republic with address at 27 Rue Jean Emile Laboureur 44000 Nantes, France; that
the European International School (Ecole Francaise de Manille) (hereinafter referred to as EIS-EFM) and
Mr. Chaplet entered into a Contract of Employment whereby Mr. Chaplet is engaged to teach Economics
at EIS-EFM for the school year 2005-2006 from September 1, 2005 to August 31, 2006; that the
employment automatically ends on the 31st of August 2006 without requiring a resignation or further
notice from EIS-EFM; that in consideration of Mr. Chaplet's services, he shall receive a monthly salary
and will receive a 13th month pay in December pro rata to his months of service with the school.
In reply, please be informed that Article 21 of the Philippines-France tax treaty provides as follows:
"Article 21
1. A teacher or a researcher who, resident of a Contracting State, visits the other Contracting
State for the purpose of teaching or engaging in research shall be exempt from tax in that
other Contracting State for a period not exceeding two years on remuneration in respect of
such activities. IHAcCS
general interest but primarily for the private benefit of a specific person or Persons."
Based on the aforequoted provision, it is clear that the remuneration paid to teachers who are
residents of France and who stay in the Philippines for the purpose of teaching for a period not exceeding
two (2) years shall not be subject to Philippine income tax. Such being the case, this Office is of the
opinion and so holds that the subject remuneration of Mr. Chaplet for teaching in EIS-EFM for a period
not exceeding two (2) years, more particularly from September 1, 2005 to August 31, 2006, shall not be
subject to Philippine income tax pursuant to Article 21 of the Philippines-France tax treaty. (BIR Ruling
No. DA-ITAD 85-05 dated August 23, 2005)
force and effect insofar as the herein parties are concerned.
Very truly yours,
By:

Legal Service
March 16, 2006
Article 21, Philippines-Austria tax treaty;


75 Swaziland St., Better Living Subdivision

Administrator, Deutsche Schule Manila
Gentlemen :
This refers to your letter dated September 9, 2005 requesting confirmation of your opinion that the
remuneration of Mr. Gerald Egger (Mr. Egger) as visiting teaching staff in the Philippines is not subject to
Philippine income tax pursuant to the Philippines-Austria tax treaty.
It is represented that Mr. Egger, with Passport No. L0372538, was, immediately before his
employment in the Philippines, a resident of the Republic of Austria with address at Prellerbergstrasse 23,
8063 Hart-Purgstall bei Gra2, Austria; that the European International School Deutsche Schule Manila
(EIS-DSM) and Mr. Egger entered into a Contract of Local Employment whereby Mr. Egger is engaged to
teach at EIS-DSM for a duration starting from September 1, 2005 to July 31, 2007; that the employment
ends on the 31st of July 2007 without requiring a written termination of contract or resignation; and that in
consideration of Mr. Egger's services to EIS-DSM, Mr. Egger shall receive a monthly salary of P57,777.78
including school breaks and will receive a 13th month pay in December.
In reply, please be informed that Article 21 of the Philippines-Austria tax treaty provides as
follows:
"Article 21
PROFESSORS AND TEACHERS
1. Remuneration which a professor or a teacher, who is a resident of one of the

Contracting States and who visits the other Contracting State for a period not exceeding two years
for the purpose of teaching or carrying out advanced study or research at a university, college,
school or other educational institution, receives for those activities shall be taxable only in the
first-mentioned State. HTASIa
2. This Article shall not apply to remuneration which a professor or a teacher receives for
conducting research if the research is undertaken primarily for the private benefit of a specific
person or persons.
3. For the purposes of paragraph 1 of this Article, the term "remuneration" shall include
remittances from sources outside the other State sent to enable the professor or teacher to carry out
the purposes referred to in paragraph 1."
immediately before, were residents of Austria and who stay in the Philippines for the purpose of teaching
for a period not exceeding two (2) years shall not be subject to Philippine income tax. Such being the case,
this Office is of the opinion and so holds that, pursuant to Article 21 of the Philippines-Austria tax treaty,
the subject remuneration of Mr. Gerald Egger for teaching in EIS-DSM for a period not exceeding two (2)
years, more particularly from September 1, 2005 to July 31, 2007, shall not be subject to Philippine
income tax. (BIR Ruling No. DA-ITAD 85-05 dated August 23, 2005)
force and effect insofar as the herein parties are concerned.
Very truly yours,
By:

Legal Service
March 16, 2006

Section 180, National Internal Revenue Code of 1997;

Certified Public Accountants
20th Floor, Tower 1
6766 Ayala avenue
1200 Makati City
Attention: Atty. Maria Victoria C. Españo

Tax Partner
Gentlemen :
This refers to your letter dated September 29, 2005 requesting confirmation that interests to be paid
by K.T. Sakurai Corporation (K.T. Sakurai) to Kenko Co., Ltd. (Kenko) under the two (2) Loan
Agreements are subject to fifteen percent (15%) income tax pursuant to the Convention between the
Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty). THESAD
It is represented that Kenko is a foreign corporation organized and existing under the laws of Japan,
with address at 3-9-19 Nishiochiai, Shinjyuku-ku, Tokyo, Japan, and Tax Reference Number 165077, as
confirmed by the Certificate of Status of Taxable Person dated January 28, 2005 issued by the Shinjyuku
Tax Office in Japan; that Kenko is not registered as a corporation or as a partnership licensed to engage in
business in the Philippines, as confirmed by the Certificate of Corporate Filing/Information dated May 27,
2005 issued by the Securities and Exchange Commission; that, on the other hand, K.T. Sakurai is a
corporation organized and existing under the laws of the Philippines, with principal address at Mactan
Export Processing Zone I, Lapu-lapu City, Cebu, Philippines; that on February 19, 2001, Kenko and K.T.
Sakurai entered into a Loan Agreement whereby Kenko granted K.T. Sakurai a loan in the principal
amount of 131,657,168.00 Japanese Yen, whose term of payment is for a period of seventy-one (71)
months commencing in August 2001 until June 2007, with the balance, if any, to be deemed as
automatically renewed for a year upon maturity until full amount has been made by K.T. Sakurai to Kenko;
and that this loan bears an interest of 2.3% per annum payable on a yearly basis starting February 2001.
It is further represented that on February 11, 2002, Kenko and K.T. Sakurai entered into another
Loan Agreement whereby Kenko granted K.T. Sakurai another loan in the principal amount of
15,000,000.00 Japanese Yen, whose term of payment is for a period of thirty-six (36) months commencing
in August 2002 until July 2005, with the balance, if any, to be deemed as automatically renewed for a year
upon maturity until full amount has been made by K.T. Sakurai to Kenko; and that this other loan bears an
interest of 2.3% per annum payable on a yearly basis starting February 2001.
In reply, please be informed that interests to be paid by K.T. Sakurai to Kenko under the
aforementioned Loan Agreements are subject to the reduced rate of tax under Article 11 of the
Philippines-Japan tax treaty, to wit:
"Article 11
on the interest paid by a company, being a resident of the Philippines, registered with the
owner of the interest, shall not exceed 10 per cent of the gross amount of the interest.
xxx xxx xxx"
Accordingly, since the subject interests are neither paid in respect of government securities, bonds,
or debentures, nor paid by a company registered with the Board of Investments, such interests to be paid
by K.T. Sakurai to Kenko under the aforementioned Loan Agreements are therefore subject to 15% income
tax, based on the gross amount thereof. (BIR Ruling No. DA-ITAD 75-05 dated July 27, 2005).
Further, the Loan Agreements between K.T. Sakurai and Kenko are subject to documentary stamp
tax (DST) imposed under Section 180 of the National Internal Revenue Code of 1997:
"SEC. 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of
Exchange, Drafts, Instruments and Securities Issued by the Government or Any of Its
Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and
Others Not Payable on Sight or Demand. — On all bonds, loan agreements, including those signed
abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange
(between points within the Philippines), drafts, instruments and securities issued by the Government
or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing
interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all
promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation,
and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty
centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of
any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That only one
documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to
secure such loan, whichever will yield a higher tax: Provided, however, That loan agreements or
promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos
(P250,000) executed by an individual for his purchase on installment for his personal use or that of
his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or
furniture shall be exempt from the payment of the documentary stamp tax provided under this
Section." 1 (BIR Ruling No. DA-ITAD 75-05 dated July 27, 2005)
Finally, we take note of your report to The Board of Directors of K.T. Sakurai dated April 25, 2005
wherein you disclosed, among other things, that pursuant to K.T. Sakurai's board resolution dated January
17, 2005, 108,203,816.64 Japanese yen (PHP 55,000,000.00) of the outstanding advances of K.T. Sakurai
from Kenko as of September 30, 2004 amounting to 123,178,168.00 Japanese Yen (PHP 62,611,462.79)
will be converted to equity and will be recorded in K.T. Sakurai's general ledger as Additional Paid-in
Capital account. Relative thereto, please be informed that income that will be derived by Kenko under this
arrangement with respect to the converted advances is no longer in the nature of interest but shall be
considered as dividends and shall be taxable as such. In this case, K.T. Sakurai should apply for a new tax
treaty relief with respect to the converted advances for the purpose of giving the proper tax treatment
thereto. The application would be accompanied by the relevant documents enumerated in BIR Form 0901
for income in the form of dividends and by other related documents which the International Tax Affairs
Division of this Bureau might request.
herein parties are concerned. AaDSEC
Very truly yours,
By:

Legal Service
Footnotes
1. Republic Act No. 9243 (An Act Rationalizing the Provisions on the Documentary Stamp Tax of the
National Internal Revenue Code of 1997, as Amended, and for Other Purposes) renumbered Section 180 to
Section 179 and modified the same, thus:
"SEC. 179. Stamp Tax on All Debt Instruments. — On every original issue of debt instruments, there
shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or
fractional part thereof, of the issue price of any such debt instrument: Provided, That for such debt
instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a
proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty-five
(365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure such loan.
For purposes of this section, the term debt instrument shall mean instruments representing borrowing
and lending transactions including but not limited to debentures, certificates of indebtedness, due bills,
bonds, loan agreements, including those signed abroad wherein the object of the contract is located or used
in the Philippines, instruments and securities issued by the government or any of its instrumentalities,
deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing
interest significantly higher than the regular savings deposit taking into consideration the size of the deposit
and the risks involved or drawing interest and having a specific maturity date, orders for payment of any
sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or
non-negotiable, except bank notes issued for circulation.
Apparently, the Act, which was signed into law on February 17, 2004, applies only to transactions or
to documents/instruments executed or issued as of March 20, 2004 and does not cover the above Loan
Agreements.
March 16, 2006
Article 10 (Dividends) Philippines-Singapore tax treaty;

Cochingyan & Peralta Law Offices

12th Floor, 139 Corporate Center
139 Valero Street, Salcedo Village
Makati City
Attention: Atty. Jose Cochingyan, III
Gentlemen :
This refers to your letter dated July 20, 2005 requesting confirmation that dividends to be paid by
Rohde & Schwarz (Philippines), Inc. (Rohde Philippines) to Rohde & Schwarz Regional Headquarters
Singapore Pte. Ltd. (Rohde Singapore) are subject to fifteen percent (15%) income tax pursuant to Article
10 (Dividends) of the Convention between the Republic of the Philippines and the Republic of Singapore
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income (Philippines-Singapore tax treaty).
It is represented that Rohde Singapore is a foreign corporation, organized and existing under the
laws of Singapore, as confirmed by its Memorandum and Articles of Association dated May 15, 2002,
with office address at 1 Kaki Bukit View, Nos. 04-05/07 Techview, Singapore; that Rohde Singapore is
not registered either as a corporation or as a partnership in the Philippines, as confirmed by the
Certification of Non-Registration dated July 18, 2005 issued by the Securities and Exchange Commission;
that, on the other hand, Rohde Philippines is a corporation organized and existing under the laws of the
Philippines with principal office at Suite 2301, PBCOM Tower, 6765 Ayala Avenue, Makati City,
Philippines; that from July 17, 2003 up to July 20, 2005, Rohde Singapore owns One Hundred Seven
Thousand Seven Hundred and Sixty-two (107,762) shares of stock of the total issued and outstanding
shares and which represents more than 99.99% of Rohde Philippines' total outstanding shares, each share
with a par value of P100.00; that the balance for five shares not recorded in the name of Rohde Singapore
are held by nominee directors who have all executed a Declaration of Trust in favor of Rohde Singapore;
and that according to the notarized Secretary's Certificate dated July 20, 2005 executed by Rohde
Philippines' Corporate Secretary, the Board of Directors of Rohde Philippines unanimously approved on
June 24, 2005 Resolution No. 2005-0624 authorizing the declaration of cash dividends in the amount of
P129.91 per share, the total amount of which is P14,000,010.97, to the stockholders of record as of that
date.
In reply, please be informed that paragraph 2, Article 10 of the Philippines-Singapore tax treaty
"Article 10
DIVIDENDS

the other Contracting State may be taxed in that other State. DCTHaS
paying the dividends is a resident, and according to the law of that State, but if the recipient is the
a) 15 per cent of the gross amount of the dividends if the recipient is a

company (including partnership) and during the part of the paying company's taxable
year which precedes the date of payment of the dividend and during the whole of its
prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting
stock of the paying company was owned by the recipient company; and
b) in all other cases, 25 per cent of the gross amount of the dividends.
The competent authorities of the Contracting States shall by mutual agreement settle the
mode of application of this limitation.
xxx xxx xxx"
Based on the abovementioned paragraph 2, the 15% income tax on dividends applies if the recipient
who is the beneficial owner of the dividends is a company or a partnership who owns at least 15% of the
outstanding shares of the voting stock of the company paying the dividends, during the part of the latter
company's taxable year preceding the payment of dividends and during the whole of the company's prior
taxable year.
Accordingly, by reason that Rohde Singapore (the recipient company who is the beneficial owner
of the dividends) owns more than 99.99% of Rohde Philippines' outstanding shares (the company paying
the dividends) during the part of Rohde Philippines' taxable year preceding the payment of the dividends
in 2005 and during the whole of Rohde Philippines' prior taxable year in 2004, dividends to be paid by
Rohde Philippines to Rohde Singapore are therefor subject to 15% income tax based on the gross amount
thereof. The 15% income tax also applies to dividends to be paid by Rohde Philippines to the five nominee
directors who merely hold the shares in trust for Rohde Singapore, the latter remaining the beneficial
owner of those shares and, consequently, of any dividends arising therefrom. (BIR Ruling No. DA-ITAD
119-04 date October 27, 2004)
herein parties are concerned. cCSEaA
Very truly yours,
By:

Legal Service
March 16, 2006

Sections 108 (A) (3) and 109 (K) National Internal Revenue Code
of 1997;
BIR Ruling Nos. DA-ITAD 79-02, 15-04 and 130-05
ABC Asia Pacific Business Legal Accounting

2nd Floor, Building B, Mactan Marina Mall
Mactan Economic Zone 1
Pusok, Lapu-lapu City, Cebu
Attention: Atty. Lauris L. Dela Peña

Partner
Gentlemen :
This refers to your letters both dated November 2, 2005 requesting confirmation that royalties to be
paid by NEC Telecom Software Philippines, Inc. (NEC Philippines) to NEC Corporation (NEC Japan, in
Japanese, Nippon Denki Kabushiki Kaisha) pursuant to the Patent and License Agreements and the
Addenda thereto are subject to twenty five percent (25%) income tax under Article 12 of the Convention
between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty).
It is represented that NEC Japan is a foreign corporation organized and existing under the laws of
Japan, with principal office at 7-1, Shiba 5-chome, Minato-ku, Tokyo 108-8001, Japan, as confirmed by its
Articles of Incorporation; that NEC Japan's business activities consist, among others, in the
manufacturing, selling or otherwise disposition of telecommunications equipment, machinery, and
instruments, electronic computers and other electronics application equipment, machinery and
instruments, electrical equipment, machinery and instruments, and all kinds of equipment, machinery,
instruments and systems related to electricity; that under the Certificate of Corporate Filing/Information
dated November 8, 2005 issued by the Securities and Exchange Commission (SEC), NEC Japan, with
SEC No. F-875, was licensed to engage in business in the Philippines on October 19, 1979, but such
license was cancelled under Certificate of Cancellation of License of a Foreign Corporation approved on
July 29, 1998; that, on the other hand, NEC Philippines is a corporation organized and existing under the
laws of the Philippines, with office at Asiatown I.T. Park, Apas, Cebu City, 6000, Philippines; that under
Certificate of Registration No. 01-018-IT dated December 21, 2001 issued by the Philippine Economic
Zone Authority (PEZA), NEC Philippines is registered with PEZA as an Ecozone IT Enterprise at the
CCTC IT Park.
Patent Agreement and the Addendum thereto
That on April 1, 2005, NEC Japan and NEC Philippines entered into a Patent Agreement whereby
NEC Japan granted NEC Philippines non-exclusive, non-transferable sublicenses and other rights (not
including a right to grant a sublicense to its subsidiaries) under patents and patent applications under
which NEC Japan is granted licenses or other rights by such License Agreements 1 ; that in addition to
such payments as may be agreed upon between NEC Japan and NEC Philippines, if the License
Agreements require payments of royalties or other monetary consideration to third parties or other parties
set forth in the License Agreements, NEC Philippines shall, upon NEC Japan's request, pay NEC Japan
such royalties and other consideration which are reasonably allocable to NEC Philippines; that the Patent
Agreement is effective on April 1, 2005 and will terminate on the date when NEC Japan loses its
ownership or control over NEC Philippines; that, also, on April 1, 2005, NEC Japan and NEC Philippines
entered into an Addendum to the Patent Agreement whereby both parties agreed, among others, that the
Patent Cross License Fee (PCL Fee) (royalty) to be paid by NEC Philippines to NEC Japan shall be
calculated as follows:
PCL Fee = [GSA] x 0.1 % x [PPR]

Where:
[GSA]: the total gross sales amount of NEC Philippines during a
reporting period minus the total purchase price paid by
NEC Philippines to NEC Japan and its Majority
Controlled Subsidiaries during the reporting period
[PPR] = ([PN] - [PA])/[PN]
[PN]: the total number of NEC Japan's patents newly registered

in Japan during a period of five (5) calendar years
(January-December) immediately preceding the fiscal year
to which the reporting period in question belongs
[PA]: the total number of NEC Philippines' patents newly

registered in the Philippines during a period of five (5)
calendar years (January-December) immediately preceding
the fiscal year to which the reporting period in question
belongs.
That under the Certificate dated August 9, 2005 issued by the Intellectual Property Office of the
Philippines, the Patent Agreement and the Addendum thereto comply with the provisions of Sections 87
and 88, Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on Voluntary
Licensing. aATHES
License Agreement and the Amendment thereto
That on April 1, 2005, NEC Japan and NEC Philippines entered into a License Agreement whereby
NEC Japan granted NEC Philippines: (1) an authority to use the NEC Letters 2 in its trade name as
approved by NEC Japan, (2) a non-transferable and non-exclusive right to use the NEC Mark in the
Territory 3 of the Products 4 and Services 5, and in catalogues, pamphlets, promotional materials, and other
advertisement media, to be utilized by NEC Philippines for the marketing, distribution, and/or provision of
the Products and Services, and (3) an authority to use the NEC Mark as its corporate mark in advertising,
outdoor signs, vehicles, business cards for employees, displays, office stationery goods, and the like; that
in consideration for the authorization and grant of license, NEC Philippines shall pay NEC Japan a royalty
which shall be calculated as follows:
(i) 0.21% of NEC Philippines' gross sales amount to customers other than NEC and/or NEC
SEC Consolidated Subsidiaries, plus
(ii) 0.21% of NEC Philippines' total gross sales amount.
That the License Agreement is effective on April 1, 2005 and shall be in force for a period of one (1) year
and extended automatically for subsequent one-year periods, unless either party notifies the other in
writing at least thirty days prior to the expiration or any extended period that such party does not wish
extension; that on August 12, 2005, NEC Japan and NEC Philippines entered into an Amendment to the
License Agreement whereby both parties agreed to amend the provision of the License Agreement on
infringement; and that under the Certificate dated October 28, 2005 issued by the Intellectual Property
Office of the Philippines, the License Agreement and the Amendment thereto comply with the provisions
of Sections 87 and 88, Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on
Voluntary Licensing.
Concerning income tax, the royalties on patents and trademarks to be paid by NEC Philippines to
NEC Japan under the Patent and License Agreements and the Addenda thereto are subject to the
preferential income tax rates on royalties, as applicable, under Article 12 of the Philippines-Japan tax
treaty:
"Article 12
a) 15, per cent of the gross amount of the royalties if the royalties are paid in
on the royalties paid by a company, being a resident of the Philippines, registered with the
xxx xxx xxx"
Under paragraph 4, the term "royalties" subject to preferential tax treatment includes royalties on
patents and trademarks. In relation thereto, paragraphs 2 and 3 provide that royalties are subject to the
preferential tax rate not exceeding (a) ten percent (10%) of the gross amount of the royalties if they are
paid by a Philippine company who is registered with the Board of Investments and engaged in preferred
pioneer areas of investment under the investment incentives laws of the Philippines, (b) fifteen percent
(15%) of the gross amount of the royalties if they are paid in respect of the use or the right to use of
cinematograph films and films or tapes for radio or television broadcasting, or (c) twenty-five percent
(25%) of the gross amount of the royalties in all other cases.
Applying the provisions of paragraphs 2 and 3, the royalties on patents and trademarks to be paid
by NEC Philippines to NEC Japan cannot be subject to the lowest tax rate of 10% because NEC
Philippines, the company paying the royalties, is not registered with the Board of Investments and engaged
in preferred pioneer areas of investment under the investment incentives laws of the Philippines, nor to the
lower rate of 15% because such royalties are not paid in respect of the use of or the right to use of
cinematograph films and films or tapes for radio or television broadcasting. Instead, the royalties on
patents and trademarks to be paid by NEC Philippines to NEC Japan are therefore subject to 25% income
tax based on the gross amount thereof. (BIR Ruling Nos. DA-ITAD 79-02 dated May 2, 2002 and 15-04
dated February 20, 2004)
On the other hand, concerning value-added tax (VAT), the grant by NEC Japan to NEC Philippines
of the right to use the patents and trademarks under the Patent and License Agreements and the Addenda
thereto is generally subject to VAT under Section 108(A)(3) of the National Internal Revenue Code of
1997 (Tax Code), as amended by Republic Act No. 9337 6 :
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 one and one-half percent (1 1/2%); or TDcAIH
(ii) National government deficit as a percentage of GDP of the previous year

exceeds one and one-half percent (1 1/2%). 7
xxx xxx xxx
(3) The supply of scientific, technical, industrial or commercial knowledge or

information;
xxx xxx xxx"
However, Section 109(K) of the Tax Code, as amended, exempts from VAT transactions which are
exempt under international agreements or under special laws:
tax:
xxx xxx xxx
(K) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529; 8
xxx xxx xxx"
Concerning special laws relevant to NEC Philippines and other PEZA-registered enterprises,
Section 24 of Republic Act No. 7916 (An Act Providing for the Legal Framework and Mechanism for the
Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines,
Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes) and
Section 1, Rule XIV (Incentives to ECOZONE Developers/Operators) of the Rules and Regulations to
Implement this Act are worth mentioning:
"Section 24. Exemption from Taxes Under the National Internal Revenue Code. — Any
provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed on business establishments operating within the ECOZONE. In lieu of
paying taxes, five percent of the gross income earned by all business and enterprises within the
ECOZONE shall be remitted to the national government. . ."
"Section 1. ECOZONE Developers/Operators. — ECOZONE Developers/Operators shall
be entitled to the following incentives:

Developer/Operator shall to the extent of its construction and operation, be exempt from payment of
all national internal revenue taxes and local government impost, fees, licenses or taxes, including
but not limited to the following:
1. Internal revenue taxes such as gross receipts tax, value-added tax, ad

valorem and excise taxes;
2. Franchise, common carrier or value added taxes and other percentage

taxes on public and service utilities and enterprises.
xxx xxx xxx"
Accordingly, since VAT is an indirect tax and as such, the amount of tax may be shifted or
passed-on to NEC Philippines (Section 105, Tax Code), NEC Philippines, by reason that it is exempt from
national internal revenue taxes like VAT under Section 24 of Republic Act No. 7916, cannot be obliged by
NEC Japan to shoulder the payment of VAT on the grant of the right to use the patents and the
trademarks. This is emphasized in VAT Ruling No. 100-99 dated September 16, 1999, the dispositive
portion of which provides: "In the case of payment for royalties to a non-resident owner, the responsibility
for withholding the VAT and paying the same rests on the payor. However, since PEZA-registered export
enterprise may not be passed on with nor claim input VAT, then payment of royalties to a non-resident
lessor, . . . , should be as it is hereby confirmed to be, exempt from VAT." (BIR Ruling No. DA-ITAD
Very truly yours,
By:

Legal Service
Footnotes
1. License Agreements means all agreements between or among NEC Japan and third parties, which are in
effect at any time during the Relevant Period and which include the grant of licenses or other rights (such
as, for example, a release, a covenant not to sue, an immunity from suit, or a license option) under patents
(the term "patent" used in this agreement including (i) a utility model and (ii) to the extent included in a
License Agreement, a design patent) or patent applications. Relevant Period means the period starting with
the Commencement Date and ending with the Termination Date. Commencement Date means the date on
which NEC Japan acquired the ownership or control, direct or indirect, of more than fifty percent (50%) of
the outstanding shares or other securities entitled to vote for the election of directors (or other managing
authority) of NEC Philippines (in case NEC Philippines does not have outstanding shares or securities, the
ownership interest representing the right to manage NEC Japan).
2. NEC Letters means the three letters of alphabet for NEC.
3. Territory means the geographical area of the Republic of the Philippines and such other countries or
regions as NEC Japan agreed in writing.
4. Products means any and all telecommunication products (i) to be manufactured by or for NEC Philippines
or (ii) to be sold by NEC Philippines to which the NEC Mark is affixed by NEC Japan or NEC Japan's
authorized trademark licensees.
5. Services means (i) any and all services relating to Products and (ii) other services to be provided by NEC
Philippines as its business activities.
6. Entitled, 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 took effect on November 1, 2005.
7. The VAT rate is increased to 12% on February 1, 2006, in accordance with the Memorandum of the
Section 108(A) originally read as:
the use or lease of properties
xxx xxx xxx
8. Section 109(K) originally renumbered and read as:
xxx xxx xxx
signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590;
xxx xxx xxx
March 16, 2006
Art. 10, Philippines-Japan Tax Treaty;

Sanyo Denki Philippines, Inc.

Block F-1 Subic Techno Park
Along Argonaut Highway Boton Area
SBFZ, Philippines
Attention: Mr. Toshio Shinohara

President
Gentlemen :
This refers to your application for relief from double taxation dated May 6, 2005, requesting
confirmation of your opinion that dividend payments by Sanyo Denki Philippines, Inc. (Sanyo-Denki
Phils) to Sanyo Denki Company, Ltd. (Sanyo-Denki Japan) is subject to ten percent (10%) preferential tax
rate pursuant to the Philippines-Japan tax treaty.
It is represented that Sanyo-Denki Japan is a nonresident foreign corporation with head office at
1-15-1 Kita-Otsuka, Toshima-ku, Tokyo, Japan and is a resident of Japan within the meaning of the
Philippines-Japan tax treaty and is subject to taxation in Japan as certified by the District Director of the
Toshima Tax Office, Japan on April 25, 2005; that it is not registered either as a corporation or as a
May 3, 2005; that Sanyo-Denki Phils is a corporation organized and existing under the laws of the
Philippines with principal address at No. 2, Block F-1 Subic Techno Park, Argonaut Highway, Boton
Area, Subic Bay Freeport Zone, Olongapo City; that six (6) months preceding February 8, 2004,
Sanyo-Denki Japan owns One Million Five Hundred Ninety Nine Thousand and Nine Hundred Ninety
Five (1,599,995) shares of stock with par value of One Hundred Pesos (P100) per share which constitutes
99.99% of the total ownership in Sanyo-Denki Phils; and that on February 8, 2005, the Board of Directors
of Sanyo-Denki Phils, resolved that cash dividends of P16.45 per share in the total amount of
P23,319,945.00 is declared in favor of all stockholders of record as of February 8, 2004.
"Article 10

other Contracting State may be taxed in that other Contracting State. IDTSEH
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
xxx xxx xxx
xxx xxx xxx"
Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company
which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if
the last-mentioned company holds directly at least 25 percent of the voting shares or of the total shares of
the first-mentioned company for a period of six months immediately preceding the date of payment of the
dividends.
In view thereof and considering that Sanyo-Denki Japan holds 99.99% of the total outstanding
shares of stock of Sanyo-Denki Phils for a period of six months immediately preceding the date of
payment, said dividends paid by Sanyo-Denki Phils to Sanyo-Denki Japan are subject to 10 percent
preferential tax rate, pursuant to the Philippines-Japan tax treaty. (BIR Ruling No. 156-81 dated July 12,
1981)
herein parties are concerned. ETIcHa
Very truly yours,
By:

Legal Service
March 16, 2006
Article 10, Philippines-Netherlands tax treaty;

SyCip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City
Philippines
Attention: Atty. W. U. Villanueva

Gentlemen :
This refers to your application for tax treaty relief dated November 24, 2005, on behalf of your
client, Bristol-Myers Squibb (Philippines), Inc. (BMS Phils), requesting confirmation of your opinion that
the cash dividends declared and to be paid by BMS Phils to its sole stockholder, BMS Pharmaceuticals
Asia Holdings B.V. (BMS Asia BV), formerly Pucara Holding B.V., are subject to the preferential tax rate
of 10%, pursuant to Article 10(2)(a) of the Philippines-Netherlands tax treaty.
It is represented that BMS Asia BV is a nonresident foreign corporation organized and existing
under the laws of the Netherlands with address at Vijzelmolenlaan 9, 3447 GX Woerden, the Netherlands;
that it is not registered either as a corporation or as a Partnership in the Philippines per certification dated
November 15, 2005 issued by the Securities and Exchange Commission; that BMS Phils is a corporation
duly organized and existing under and by virtue of Philippine laws, with principal office address at 2309
Don Chino Roces Avenue Extension, Makati City, Philippines; that BMS Phils has an authorized capital
stock (ACS) of Four Hundred Million Pesos (PhP 400,000,000.00) divided into Four Million (4,000,000)
shares at One Hundred Pesos (PhP 100) per share; that out of the ACS, only One Million Three Hundred
Ninety Seven Thousand Five Hundred (1,397,500) shares have been issued and outstanding; that BMS
Asia BV holds One Million Three Hundred Ninety Seven Thousand Four Hundred Ninety Five
(1,397,495) shares or a total of One Hundred Thirty Nine Million Seven Hundred Forty Nine Thousand
Five Hundred Pesos (PhP 139,749,500) which constitute 99.999999% of the total number of shares
subscribed in BMS Phils; and that on November 22, 2005, the Board of Directors of BMS Phils
unanimously approved and declared cash dividends in the amount of Two Billion Two Hundred Sixty One
Million Pesos (PhP 2,261,000,000.00) to all stockholders of record as of November 22, 2005 in the
amount of Two Billion Two Hundred Sixty One Million Pesos (PhP 2,261,000,000.00), payable on or
before December 15, 2005.
follows, viz:
"Article 10
DIVIDENDS
other State may be taxed in that other State. aDHCEA
dividends;
xxx xxx xxx
taxation law of the State of which the company making that distribution is a resident.
xxx xxx xxx"
Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies
whenever the beneficial owner of the dividends owns at least 10 percent of the outstanding voting shares
of the paying company. In all other cases the 15 percent preferential tax rate applies. Such being the case
and considering that BMS Asia BV holds 1,397,495 shares out of 4,000,000 shares constituting the total
authorized capital stock of BMS Phils, which is 35% of such total authorized capital stock and
99.999999% of the total number of shares subscribed in BMS Phils, this Office is of the opinion and so
holds that the dividend payments by BMS Phils pertaining to BMS Asia BV shall be subject to the
preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10(2)(a) of
the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 028-99)
Very truly yours,
By:

Legal Service
March 14, 2006

Royal Embassy of Saudi Arabia

389 Sen. Gil J. Puyat Avenue Extension
Makati City
Gentlemen :
This has reference to your Note No. DFA/1427H/004 dated February 6, 2006 referred to this Office
by the Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for the
exemption from payment of value-added tax (VAT) on the local purchase of one (1) motor vehicle, for the
official use of the Royal Embassy of Saudi Arabia, specifically described as follows:
Make: Ford Everest 4X2 A/T

Model Year: 2006
Color: Black
Chassis Number: MNCLS4D405W115477
Engine Number: WLAT635581
reads:
"ARTICLE 34
goods or services;
"xxx xxx xxx"
Thus, tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from
the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that
Embassy and its diplomatic agents of goods and/or services shall be subject to the value-added tax
prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. IaEHSD
However, applying the principle of reciprocity, this Office may grant exemption to the Royal
Embassy of Saudi Arabia and/or its personnel on their local purchases of goods and/or services it
appearing from the list submitted by the Department of Foreign Affairs as of October 18, 2005, that your
Government allows similar exemption to Philippine Embassy and its personnel on their purchase of goods
and services in your country.
Hence, the local purchase of one (1) unit of 2006 Ford Everest 4X2 A/T for the official use of the
Royal Embassy of Saudi Arabia is exempt from VAT. (BIR Ruling No. ITAD-141-04 dated December 9,
2004)
Very truly yours,

Legal Service
March 13, 2006
Section 3, R.R. No. 11-99;

Section 52, NIRC of 1997
Nobleship Overseas Corporation

59 Dasmariñas Street
Binondo, Manila
Attention: Ms. Teresita Beltran

MS Manager
Gentlemen :
This refers to your letter dated June 30, 2000 requesting clarifications on some matters concerning
your company, NOBLESHIP OVERSEAS CORPORATION (Nobleship).
It is represented that Nobleship is a shipping agent of foreign shipping lines; that its primary
responsibility is to solicit cargoes for loading to its principal's vessels, attend to the crews' needs, supervise
vessel's operations while at port, receive freight payments from shippers/exporters and
consignee/importers, pay expenses on behalf of its principal, and on a case to case basis, perform other
tasks as its principal may request; that its acts are guided by, and its commission as agent is based on, an
agency agreement; that on behalf, and with the approval, of its principal in accordance with such agency
agreement, Nobleship remits tax imposed on their Gross Philippine Billings at 2 1/2% or 1 1/2% (if there
is an applicable tax treaty); that upon filing of the corresponding return, Nobleship writes on the box
assigned for the dame of the corporation "<NAME OF PRINCIPAL> c/o Nobleship Overseas
Corporation"; that on the same return, Nobleship writes its own Tax Identification Number (TIN); that
pursuant to Section 57 (B) of the National Internal Revenue Code (Tax Code) of 1997, Nobleship's
shipper/exporter customers withhold tax at 1% on outgoing freight payments and local handling charges;
that subsequently, such customers issue copies of Certificate of Tax Withheld at Source (BIR Form No.
2307) in the name of Nobleship; and that said Certificates are attached to the Income Tax Return (ITR) of
Nobleship when filed with the Bureau of Internal Revenue (BIR), and not on the ITR of its principal on
their 2 1/2% or 1 1/2% tax on Gross Philippine Billings for the following reasons: ETDHSa
a) the outgoing freight and total handling charges that Nobleship reports to its principal are at
gross, thus, the 2 1/2% income tax on Gross Philippine Billings is also paid at total amount
due;
b) since customers demand a receipt for payment made, Nobleship issues its own official
receipt;
c) in the past, most of Nobleship's customers prepare BIR Form No. 2307 once a year whereas
Nobleship prepares the incoming and outgoing freight collection and total handling charges
summary per voyage which is reported monthly to the principal; and
d) conflicting stand by BIR personnel on your phone inquiries.
Based on the foregoing, you posed the following queries, viz:
"1. Is the TIN of Nobleship, their agent in the Philippines sufficient? On the other hand, is
there a need to get a separate TIN for our principal who will be used in filing the return?"
"2. Can we effect immediately the change in practice of deducting the 1% creditable tax
withheld from the corporate income tax due of Nobleship to the 2 1/2% tax due imposed on our
principal?"
1. Section 3 of Revenue Regulations No. 11-99 1 provides, viz:
"Section 3. TIN Application — All taxpayers required to make, render or file a return,
statement or other document with the BIR shall apply for the issuance of the TIN. This include new
taxpayers and persons required to present TIN Cards to government agencies by virtue of E.O. 98
and this Regulations. The application for the issuance of TIN shall be filed with the Revenue
District Office having jurisdiction over the residence, place of office or place of business of the
applicant."
Further, Section 52 (A) of the Tax Code of 1997 provides, viz:
"SEC. 52. Corporation Returns. —
"(A) Requirements. — Every corporation subject to the (income) tax herein imposed,
except foreign corporations not engaged in trade or business in the Philippines, shall render,
duplicate, a true and accurate quarterly income tax return and final or adjustment return in
accordance with the provisions of Chapter XII of this Title. The return shall be filed by the
president, vice-president or other principal officer, and shall be sworn to by such officer and by the
treasurer or assistant treasurer." cDCaTS
In view of the foregoing provisions, since resident foreign corporations are required to file tax
returns, they are mandated to apply for the issuance of the TIN. Upon the issuance thereof, such TIN must
be provided whenever a return, statement or other document is filed with this Office, or any other
government office or agency.
In view thereof, the TIN of Nobleship is not compliant with the requirements of Section 52(A) of
the Tax Code of 1997. Such being the case, the principal of Nobleship is required to apply for the issuance
of a TIN.
2. Please be informed further that the 1% creditable tax withheld by the customers of Nobleship
may not be deducted from the 2 1/2% tax on the Gross Philippine Billings imposed on its principal which
is a separate and distinct legal personality. Nobleship and its principal cannot be treated as one entity.
Consequently, the income earned and corresponding tax pertaining to each entity must not be merged or
confused with that of the other and vice-versa. Thus, any creditable tax withheld on the income of
Nobleship or its principal is deductible only from its respective corporate income tax due.
In view thereof, Nobleship should refrain from the practice of deducting the 1% creditable tax
withheld from its corporate income tax due as said deduction cannot be made to apply to the 2 1/2% tax
due imposed on its principal.
Please be guided accordingly.
Very truly yours,

Commissioner
Footnotes
1. Regulations Prescribing the Issuance of Taxpayer Identification Number (TIN) to all Taxpayers and
Qualified Applicants and the Mandatory Incorporation of TIN in Government Forms, Papers or
Documents.
March 13, 2006
Section 24 (A) (1), NIRC of 1997

Article 12, Philippines-UK tax treaty
Midas-Kapiti International, Inc.

8th Floor, Rufino Building
6784 Ayala Avenue
Makati City
Attention: Ma. Mimosa M. Catral

Finance Manager
Gentlemen :
This refers to your letter dated April 14, 2000 requesting for a ruling regarding the tax liability of
the employees of Midas-Kapiti International, Inc. (MIDAS) pertaining to their purchase and sale of the
stocks of MISYS.
It is represented that MIDAS is a corporation organized and existing under the laws of the
Philippines and is owned by MISYS of the United Kingdom of Great Britain and Northern Ireland (UK);
that MISYS provided a Sharesave Scheme Program wherein qualified employees of MIDAS can opt to
save for future acquisition of stocks of MISYS; that Sharesave is a regular savings scheme which offers
the employees of the subsidiaries of MISYS the chance to buy shares in MISYS at a fixed price, at a future
date; that Sharesave, involves two elements — savings and shares; that to join Sharesave, interested
employees need to make a commitment to save a fixed amount in Philippine currency from their net pay
for a fixed period; that the money saved is held in a savings account under the name of the respective
employees with a local savings carrier; that through Sharesave, interested employees shall have the
opportunity (option) to buy ordinary shares in MISYS at a fixed sterling price (option price) at a future
date; that the option price shall be fixed before the employee starts saving, using the average market price
of a MISYS share just before the date of invitation, or if greater, the market value of a share on the actual
date of grant; that in each case, this value is then discounted by 20%; that the number of shares which the
concerned employee shall have the option to buy is calculated in the following manner: (1) the option
price is fixed as set above, (2) the conversion rate to sterling for the savings amount is set on the date of
invitation, and (3) the total savings (in sterling) are multiplied by 1.056 (3-year contract) or 1.103 (5-year
contract) and divided by the sterling option price; and that at the end of the savings period, the concerned
employee may either: CAcEaS
(1) Buy shares at the option price using all or part of the money saved under the Sharesave
contract. The amount to be used in exercising the option shall be taken from the amount of
savings and interest (if any) in the savings account. If, following the conversion of this
savings into sterling, the concerned employee has insufficient funds to purchase all of the
shares under option, such employee may add money from another source to purchase
additional shares. If there are excess funds, the surplus shall be returned to the employee; or
(2) Simply take the cash from the Sharesave contract, plus any interest, for personal use.
However, the employee loses the option to buy shares.
Based on the foregoing, you are now requesting for a ruling on the following queries:
1. At the time of acquisition of the UK stocks, are the employees required to pay any tax for the
difference between the acquisition cost and market value at the time of purchase? If so, at
what rate should it be?
2. At the time of sale of the acquired UK stocks, are the employees required to pay another tax
for the difference between the market value at time of acquisition and time of sale? If so, at
what rate should it be?
3. What is the liability of the company? Is it liable to withhold tax from employees?
1. The three elements for the imposition of income tax are: (1) there must be gain or profit, (2)
that the gain or profit is realized or received, either actually or constructively, and (3) the gain is not
exempted by law or treaty from income tax (Commissioner of Internal Revenue vs. Court of Appeals, et
al., G.R. No. 108576, January 20, 1999, 102 SCAD 119).
Income in tax law is an amount of money coming to a person within a specified time, whether as
payment for services, interest or profit from investment. It means cash or its equivalent. It is gain derived
and severed from capital, from labor or from both combined. (Ibid.) AIaSTE
It should be noted that capital and income are different. Capital is wealth or fund; whereas income
is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction. (Ibid.)
In this case, the employees of MIDAS, who shall be exercising their stock option, shall be using the
money or fund they saved under the Sharesave Scheme Program of MISYS. This fund is considered
capital. No income or flow of wealth, therefore, shall actually or constructively be realized or received
despite the grant of a 20% discount based on the average market price of a MISYS share or the market
value thereof, as this discount did not arise from "payment for services, interest or profit from investment".
Neither does the said discount "derived and severed from capital, from labor or from both combined".
Also, under Section 24 of the National Internal Revenue Code (Tax Code) of 1997, no tax
whatsoever is imposed on the acquisition of shares of stock of a non-resident foreign corporation by a
resident of the Philippines. Such being the case, the acquisition of shares is deemed exempt as they fall
outside the taxing provision of the law.
Accordingly, the employees of MIDAS are not required to pay income tax on the difference
between the acquisition cost and market value at the time of exercising the stock option or of the purchase
of MYSIS shares.
2. The rule, however, is different when MYSIS shares are sold by the MIDAS employees.
Section 24 of the Tax Code of 1997 provides, viz:
"SEC. 24. Income Tax Rates. —
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines. —
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to
tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all
sources within and without the Philippines by every individual citizen of the Philippines residing
therein; aSTcCE
(b) On the taxable income defined in Section 31 of this Code, other than income subject to
sources within the Philippines by an individual citizen of the Philippines who is residing outside of
the Philippines including overseas contract workers referred to in Subsection (C) of Section 23
hereof; and
(c) On the taxable income defined in Section 31 of this Code other than income subject to
sources within the Philippines by an individual alien who is a resident of the Philippines.
The tax shall be computed in accordance with and at the rates established in the following
schedule:
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of the

excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the

excess over P30,000

excess over P70,000

excess over P140,000

excess over P250,000
Over P500,000 P125,000 + 34% of

the excess over
P500,000 in 1998.
Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent
(33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).
xxx xxx xxx."
As stated above, profit or gain is necessary for the existence of taxable income. The latter is defined
by the Tax Code of 1997 as the pertinent items of gross income less deductions and/or personal and
additional exemptions, if any, authorized by the same Code or other special laws. Gross income in turn is
defined as all income derived from whatever source, including gains from dealings in property.
In view of the above, any gain (i.e., the selling price less the cost of the shares) realized by the
employees of MIDAS from the sale of their shares of stock in MISYS shall be subject to Philippine
income tax under Section 24 (A)(1) of the Tax Code of 1997 at the rates stated therein.
In this light, please be informed, however, of the existing RP-United Kingdom tax treaty, Article 12
of which provides, viz:
"Article 12
Gains from the Alienation of Property
"1. Capital gains from the alienation of immovable property, as defined in paragraph 2 of
Article 6, may be taxed in the Contracting State in which such property is situated. DCAHcT
2. Capital gains from the alienation of movable property forming part of the business
property of a permanent establishment which an enterprise of a Contracting State has in the other
Contracting State or of movable property pertaining to a fixed base available to a resident of a
Contracting State in the other Contracting State for the purpose of performing professional services,
including such gains from the alienation of such a permanent establishment (alone or together with
the whole enterprise) or of such a fixed base, may be taxed in the other State.
3. Notwithstanding the provisions of paragraph 2 of this Article, capital gains derived by

a resident of a Contracting State from the alienation of ships and aircraft operated in international
traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable
only in that Contracting State.
4. Capital gains from the alienation of any property other than those mentioned in
paragraphs 1, 2 and 3 of this Article shall be taxable only in the Contracting State of which the
alienator is a resident.
5. The provisions of paragraph 4 of this Article shall not affect the right of a Contracting
State to levy according to its own a law a tax on capital gains from the alienation of movable
property derived by an individual who is resident of the other Contracting State and has been a
resident of the first-mentioned Contracting State at any time during the six years immediately
preceding the alienation of the property."
The employees of MIDAS may avail of the above provision provided they comply therewith or fall
under the same. It must be stressed, however, that the issue on whether the employees of MIDAS, who are
residents of the Philippines, are entitled to the benefits of the RP-United Kingdom tax treaty shall be
determined by the tax authorities of the United Kingdom.
Moreover, upon the issuance of the shares of stock of MISYS, the same shall be subject to the
documentary stamp tax imposed under Section 173 in relation to Section 175 of the Tax Code of 1997, as
amended by Republic Act No. 9243 1, beginning March 20, 2004. For issuances of the shares of stock of
MISYS prior to such date, the old Section 176 of the Tax Code of 1997 shall govern the imposition of the
documentary stamp tax. SHcDAI
3. A withholding agent is any person or entity who is in control of the payment subject to
withholding tax and therefore is required to deduct and remit the taxes withheld to the government. A
withholding agent can be an individual, a corporation, a financial institution or a government agency.
In view of the above definition, since MIDAS is not "in control" of the payment but the employees
themselves, and such payment is not subject to withholding tax, MIDAS is not liable to withhold from its
employees insofar as the acquisition and disposition of said shares of MISYS are concerned.
Please be guided accordingly.
Very truly yours,

Commissioner
Footnotes
1. An Act Rationalizing The Provisions On The Documentary Stamp Tax of the National Internal Revenue
Code of 1997, As Amended, And For Other Purposes.
March 10, 2006

British Embassy
15-17th Floor, LV Locsin Building
6752, Ayala Avenue,
1226 Makati, Manila
Gentlemen :
This has reference to your Note No. 06-0125 dated January 20, 2006, referred to this Office by the
from payment of value-added tax (VAT) on the purchase of one (1) locally-assembled motor vehicle, for
the official use of the British Embassy, specifically described as follows:
Make: Chevrolet Tahoe 4.8L V8 A/T
Model Year: 2005
Color: Onyx Black
Engine Number: C5J254950
Chassis Number: IGNEC13VX5J254950
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from VAT on its purchases of locally-assembled motor vehicles. In other words, purchases by that
Embassy and/or its diplomatic agents of locally-assembled motor vehicles shall be subject to the VAT
prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. HCaDET
However, applying the principle of reciprocity, this Office may grant VAT exemption to the British
Embassy and/or its personnel on their purchases of locally-assembled motor vehicles it appearing from the
list submitted by the Department of Foreign Affairs as of October 18, 2005 and as confirmed by the Office
of the Protocol (DFA) in its Indorsement letter dated December 16, 2005, that your Government allows
similar exemption to Philippine Embassy and/or its personnel on their purchase of locally-assembled
motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2005 Chevrolet Tahoe 4.8L V8 A/T for the official use
of the British Embassy is exempt from VAT. (ITAD Ruling No. 150-04 dated December 20, 2004)
Very truly yours,

Legal Service
March 1, 2006

Article 34, Vienna Convention on
Diplomatic Relations;
Embassy of Mexico
2157 Paraiso St.,
Dasmariñas Village,
Makati City
Gentlemen :
This has reference to your Note No. FIL-0074 dated January 16, 2006, referred to this Office by the
from payment of value-added tax (VAT) on the purchase of one (1) locally-assembled motor vehicle, for
the official use of the Embassy of Mexico, specifically described as follows:
Make: Nissan X-Trail 200X (FL) 2.0 L 4WD

Model Year: 2006
Color: Black X
Engine Number: QR20-603688A
Chassis Number: TDANLJAT30-A32584
reads:
"ARTICLE 34
services;
xxx xxx xxx"
prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. cEaACD
Embassy of Mexico and/or its personnel on their purchases of locally-assembled motor vehicles it
Government allows similar exemption to Philippine Embassy and/or its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2006 Nissan X-Trail 200X (FL) 2.0 L 4WD for the
official use of the Embassy of Mexico is exempt from VAT. (ITAD Ruling No. 01-05 dated January 6,
2005)
Very truly yours,

March 1, 2006
Article 12 of the Philippines-Japan tax treaty; BIR Ruling No.

007-86
SGV & Co.

6760 Ayala Avenue
1226 Makati City
Philippines
Attention: M.F.A. Balili

Tax Division
Gentlemen :
This refers to your application for relief from double taxation dated June 23, 2005, on behalf of
your client, Yokohama Tire Philippines, Inc. (YTPI), requesting confirmation of your opinion that the
royalty payments by YTPI to Yokohama Rubber Co., Ltd (YRC) are subject to the preferential
withholding tax rate of 25% pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty.
It is represented that YRC is a corporation duly organized and existing under the laws of Japan with
principal office address at 36-11, Shimbashi 5-chome, Minato-ku, Tokyo, Japan; that it is not registered
either as a corporation or as a partnership in the Philippines per certification issued by the Securities and
Exchange Commission dated February 18, 2005; that YTPI is a company registered with the Clark Special
Economic Zone (CSEZ) under Certificate of Registration No. 2002-89 dated. October 3, 2002 with
principal office address at IE5, Clark Special Economic Zone, Pampanga; that on January 1, 1997, YTPI
and YRC entered into a Technical Assistance Agreement (Agreement), whereby YRC granted to YTPI a
non-exclusive license to manufacture, use and sell all ground vehicle pneumatic tires of radial ply
construction in commercial production (the "Products") by YPC in the Philippines with the licensed
trademark using the Patents and Technical Information of YRC; that under the said Agreement, YTPI may
manufacture and sell the Products with the licensed trademarks either in accordance with the specification,
direction, and processes: (a) furnished to YTPI by YRC during the duration of the Agreement or (b)
Furnished to YRC by YTPI from time to time and duly approved by the latter; that YRC shall supply YTPI
with the technical information necessary for YTPI (a) to manufacture the products at YTPI's plant, and (b)
to prepare or construct a plant; that per Memorandum dated December 28, 1998, YTPI shall pay to YRC
the running royalty of 2.0% of net sales amount of products manufactured and sold by YTPI other than
those products sold to YRC from January 1, 1999; that the Agreement shall take effect on January 1, 1997
and shall continue to be in full force for ten (10) years from the effective date and thereafter shall
automatically be renewed for a period or periods of five (5) years unless terminated by the mutual
agreement between YTPI and YRC not later than six (6) months prior to the expiration of the original or
any renewed term of the Agreement; and that the said royalty payments are payable semi-annually or not
later than sixty (60) days from the last day of June and December of each year. SEIaHT
"Article 12
radio or television broadcasting;
Philippines our the royalties paid by a company, being a resident of the Philippines, registered with
incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the
royalties, shall not exceed 10 per cent of the gross amount of the royalties.
industrial, commercial or scientific experience. TcEAIH
xxx xxx xxx"
Based on the aforequoted provisions, royalties paid by a resident of the Philippines to a resident of
Japan may be taxed at a rate not exceeding 10% of the gross amount of the royalties if the payor is a Board
of Investments (BOI)-registered enterprise engaged in preferred pioneer areas of investments (BIR Ruling
No. 120-84), 15% if it is paid in respect of the use of or the right to use cinematograph films and films or
tapes for radio or television broadcasting, and 25% in all other cases. Such being the case, this Office is of
the opinion and so holds that since YTPI is not a BOI-registered enterprise engaged in preferred pioneer
areas of investment, and that the subject royalty payments are not paid in respect of the use of the right to
use cinematograph films and films or tapes for radio or television broadcasting, royalty payments by YTPI
to YRC under the above Agreement shall be subject to Philippine income tax at a rate of 25% of the gross
amount of the royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No.
007-86)
Very truly yours,
By:

Legal Service
March 1, 2006
Article 11 of the Philippines-Singapore tax treaty;

SB Flex Philippines, Inc.

Lot 6B, Phase 1-A, First Philippine Industrial Park (FPIP)
Barangay Sta. Anastacia, Sto. Tomas, Batangas
Attention: Atty. Luisa L. Delfin

Corporate Secretary
Gentlemen :
This refers to your application for relief from double taxation dated July 30, 2005, requesting
confirmation of your opinion that the interest to be paid by SB Flex Philippines, Inc. (SPFI) to Sumitomo
Bakelite Singapore Pte. Ltd. (SBS) is subject to the preferential final withholding tax rate of fifteen
percent (15%), pursuant to Article 11 of the Philippines-Singapore tax treaty.
It is represented that SBS is a non-resident corporation with principal address at 1 Senoko South
Road, Singapore 758069 and is regarded as a resident in Singapore for income tax purposes for purposes
of the Year of Assessment 2006 as certified by The Inland Revenue Authority of Singapore; that it is not
registered either as a corporation or as a partnership in the Philippines per certification issued by the
Securities and Exchange Commission dated September 2, 2005; that SPFI is a corporation organized and
existing under the laws of the Philippines with principal address at Lot 6-B, Phase 1-A, FPIP, Barangay
Sta. Anastacia, Sto. Tomas, Batangas; that on June 15, 2005, SPFI entered into a Loan Agreement
(Agreement) wherein SBS granted to SPFI a loan in the amount of Seven Hundred Thousand US Dollars
($700,000.00) for a period of one year from June 17, 2005 for working capital requirements; and that
under the Agreement, it is stated that, viz:
"The unpaid balance of the loan shall bear interest at a rate equal to the 03-month United States
Dollars fixed deposit interest rate offered by the Bank of Tokyo-Mitsubishi, Singapore Branch (the
'Basic Rate') plus a margin of 0.125% per annum ('Rate'). The Basic rate shall be such the one
available of the first date of the applicable Interest Period, which is defined hereinafter. (Emphasis
supplied) HaTISE
The Interest Period shall be a period of three (03) calendar months; from the date of
drawdown for the first Period and from the immediate following date of the previous Interest Period
for the second Period onward.
Interest chargeable herein shall be calculated on the basis of a three hundred sixty (360) day
year comprised of twelve (12) thirty (30) day months. Borrower shall pay the interest chargeable of
each Interest Period at the ending date of such Interest Period.
Borrower shall repay the principal of the loan in one single payment on the maturity date of
the loan. Notwithstanding the above provisions, the loan shall be automatically extended for another
year unless either parties hereto gives a written notice to terminate this Agreement.
xxx xxx xxx
In the event Borrower fails to pay principal or interest within seven (7) days after such
payment becomes due, principal amounts remaining unpaid, together with any accrued interest
unpaid at the date payment was due, shall bear interest at 2% per annum over the Rate. Borrower
shall pay the costs and expenses of Lender, including reasonable attorneys' fees and expenses, in
connection with any breach of this Loan Agreement or collection of any amounts due hereunder.
(Emphasis supplied)
xxx xxx xxx"
In reply, please be informed that Article 11 of the Philippines-Singapore tax treaty provides as
follows:
"Article 11
INTEREST
according to the law of that State, but if the recipient is the beneficial owner of the interest the tax
so charged shall not exceed 15 per cent of the gross amount of the interest. The competent
authorities of the Contracting States shall by mutual agreement settle the mode of application of this
limitation. IEHSDA
whether or not secured by mortgage, and whether or not carrying a right to participate in the debtor's
profits, and in particular, income from government securities and income from bonds and
debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well
as income assimilated to income from money lent by the taxation law of the State in which the
income arises, including interest on deferred payment sales. Penalty charges for late payment shall
not be regarded as interest for purposes of this Article."
xxx xxx xxx"
Based on the aforesaid provision, interest income which arises in the Philippines and paid to a
resident of Singapore is taxable in the Philippines at a preferential tax rate not exceeding 15% of the gross
amount of the interest if the recipient of such interest is also the beneficial owner thereof.
In view thereof, this Office confirms your opinion and so holds that the interest payments on the
unpaid balance of the loan by SPFI to SBS, the beneficial owner of the interest under the said Agreement,
are subject to the preferential tax rate of 15% based on the gross amount of interest, pursuant to Article 11
of the Philippines-Singapore tax treaty. (BIR Ruling No. 142-95 dated September 13, 1995)
On the other hand, the interest which is at the rate of 2% per annum, which is due upon the failure
of SPFI to pay the principal or interest within the period specified in the Agreement, shall be dealt with in
a separate ruling.
Moreover, the Loan Agreement entered into by and between SPFI and SBS dated June 17, 2005 is
subject to documentary stamp tax imposed under Section 179 of the National Internal Revenue Code of
1997, as amended by Republic Act No. 9243 1, at a rate of (P1.00) on each Two Hundred Pesos (P200) or
fractional part thereof, of the issue price of any such loan contract.
Very truly yours,
By:

Legal Service
Footnotes
February 28, 2006
Art. 12, Philippines-Switzerland tax treaty;

Bernaldo Mirador & Directo Law Offices

Unit 1807 Cityland Condominium 10-Tower 1
6815 Ayala Avenue cor. H.V. dela Costa St.
Makati City
Attention: Atty. Perfecto E. Mirador, Jr.

Tax Partner
Gentlemen :
This refers to your tax treaty relief application dated July 11, 2005 and received by this Office on
August 2, 2005 requesting confirmation that royalty payments made by Apo Cement Corporation (APO)
and Solid Cement Corporation (SOLID) in favor of Cemex Trademarks Worldwide Ltd. (CEMEX) are
subject to a preferential rate of fifteen percent (15%) under Article 12 of the Philippines-Switzerland tax
treaty.
It is represented that CEMEX is a nonresident foreign corporation duly organized and existing
under the laws of Switzerland with office address located at Romerstrasse 13, 2555 Brugg, Switzerland;
that it is not registered either as a corporation or as a partnership in the Philippines as shown in the
Certification of Non-Registration issued by the Securities and Exchange Commission on July 28, 2005;
that APO is a corporation duly organized and existing under the laws of the Philippines with business
address at 25th Floor, Petron Mega Plaza, 358 Sen. Gil J. Puyat Avenue, Makati City; that SOLID is a
corporation duly organized and existing under the laws of the Philippines with business address at 25th
Floor, Petron Mega Plaza, 358 Sen. Gil J. Puyat Avenue, Makati City; that the following Agreements were
separately, entered and executed between CEMEX and SOLID and between CEMEX and APO:
1. On June 1, 2004, CEMEX and SOLID entered into a Trademark License Agreement,
effective for a period of five (5) years, to retroact from January 1, 2004, whereby the former
will grant to the latter a non-exclusive license to use, exploit and enjoy its Trademarks under
the terms established therein. In consideration for the non-exclusive use, exploitation and
enjoyment of the said Trademark, SOLID will pay CEMEX annual royalties based on 2.86%
of the amount of SOLID's annual third party net sales of cement and ready-mix products.
Such royalties will be determined in liquid amounts and the percentage may be amended
upwards or downwards, as per transfer price study to be prepared at the end of SOLID's
fiscal year, in such a way that the royalties correspond to the consideration to be paid in arms
length transactions in similar operations. The said First Agreement is covered by the
Certificate of Compliance No. 5-2004-00075 issued by the Intellectual Property Office on
December 6, 2004. IEHaSc
2. On July 1, 2004, CEMEX and SOLID entered into and executed an Assets License
Agreement for a period of five (5) years (to be automatically renewed for further periods of
5 years each unless terminated by either party) to retroact on January 1, 2004 whereby the
former will grant to the latter non-exclusive license to use, exploit and enjoy the Assets
subject to the terms and conditions embodied in the agreement. The Assets are the
intangibles set forth in the Annex incorporated in the Agreement. In consideration thereof,
SOLID will pay CEMEX annual royalties equivalent to 1.25% of the amount of SOLID's
historical annual net sales of goods and services. Such royalties will be determined in liquid
amounts and the percentage may be amended upwards or downwards, as per transfer price
study to be prepared at the end of SOLID's fiscal year, in such a way that the royalties
correspond to the consideration to be paid in arms length transactions in similar operations.
The Second Agreement is covered by Certificate of Compliance No. 5-2004-00076 issued by
the Intellectual Property Office on December 6, 2004.
3. On July 1, 2004, CEMEX and APO entered into and executed a Trademark License
Agreement for a period of five (5) years, to retroact on January 1, 2004, whereby the former
will grant APO non-exclusive license to use, exploit and enjoy its Trademarks under the
terms established therein. In consideration for the non-exclusive use, exploitation and
enjoyment of the said Trademark, APO will pay CEMEX annual royalties equivalent to
2.85% of the amount of APO's annual third party net sales of cement and ready-mix
products. Such royalties will be determined in liquid amounts and the percentage may be
amended upwards or downwards, as per transfer price study to be prepared at the end of
APO's fiscal year, in such a way that the royalties correspond to the consideration to be paid
in arms length transactions in similar operations. The said First Agreement is covered by the
Certificate of Compliance No. 5-2004-00129 issued by the Intellectual Property Office on
December 6, 2004.
4. On July 1, 2004, CEMEX and APO entered into and executed an Assets License Agreement
for a period of five (5) years (to be automatically renewed for further period of 5 years each
unless terminated by either party) to retroact on January 1, 2004 whereby the former will
grant to the latter non-exclusive license to use, exploit and enjoy the Assets subject to the
terms and conditions embodied in the agreement. The Assets are the intangibles set forth in
the Annex, incorporated and made part of the Agreement. In consideration thereof, APO
will, pay CEMEX annual royalties equivalent to 1.25% of the amount of APO's historical
annual net sales of goods and services. Such royalties will be determined in liquid amounts
and the percentage may be amended upwards or downwards, as per transfer price study to be
prepared at the end of APO's fiscal year, in such a way that the royalties correspond to the
consideration to be paid in arms length transactions in similar operations. The Second
Agreement is covered by Certificate of Compliance No. 5-2004-00130 issued by the
Intellectual Property Office on December 6, 2004.
In reply, please be informed that Article 12 of the Philippines-Switzerland tax treaty provides: AEcIaH
"Article 12
Royalties
2. However, the royalties may also be taxed in the Contracting State in which they arise
and according to the laws of the State, but the tax so charged shall not exceed 15 per cent of the
gross amount of the royalties.
including cinematographic films and films and tapes for television or radio broadcasting, any patent,
trademark, design or model, plan, secret formula or process, or for information concerning
industrial, commercial or scientific experience.
xxx xxx xxx"
Based on the aforequoted provisions, the tax imposed on royalties derived by a resident of
Switzerland from sources within the Philippines may be taxed in the Philippines at a rate not exceeding
15% of the gross amount of the royalties.
In view thereof, this Office is of the opinion that the royalty payments arising from the four (4)
separate agreements entered into by and between CEMEX and SOLID and by and between CEMEX and
APO are subject to a 15% final withholding tax, based on the gross amount of the royalties, pursuant to
Article 12(2) of the Philippines-Switzerland tax treaty. (BIR Ruling No. DA-ITAD 40-04 dated May 3,
2004)
Moreover, the respective royalty payments that shall be made by SOLID and APO to CEMEX are
subject to the 10% value-added tax (VAT) pursuant to Section 106 of the Tax Code of 1997. Accordingly,
SOLID and APO, being the resident withholding agents and payors in control of the payments, shall be
responsible for the withholding of 10% final VAT before remitting any payments to CEMEX. In remitting
the VAT withheld, SOLID and APO shall use BIR Form No. 1600 (Monthly Remittance Return of
Value-Added Tax and 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 by SOLID and APO
upon filing their respective VAT, if they are VAT-registered taxpayers. In case SOLID and APO are
non-VAT registered taxpayers, the passed on VAT withheld shall form part of the cost of the service
purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition,
SOLID and APO are respectively required to issue the Certificate of Final Tax Withheld at Source (BIR
Form No. 2306) in quadruplicate, the first three copies thereof to be given to CEMEX upon its request and
the fourth copy to be respectively retained by SOLID and APO as their own file copy. [Section 4 & 6,
Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] DCATHS
Therefore, with respect to the subject royalty payments, both SOLID and APO shall be responsible
for the withholding of the 10% VAT and income tax at the rate of 15% of the gross amount of royalties.
Very truly yours,
By:

Legal Service
February 24, 2006

Philippines-United States of America tax treaty
Ortigas, Pasig City

Gentlemen :
This refers to your letter dated December 20, 2005 requesting confirmation that payments received
by Quality Logic, Inc. (Quality Logic) arising from the sale of its Software Test Product (Software) to
Canon Info Tech-Philippines, Inc. (Canon-Philippines) constitute business income and consequently are
subject to Philippine tax if it is attributable to a permanent establishment within the purview of the
Agreement between the Republic of the Philippines and the United States of America for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-US
tax treaty).
It is represented that Quality Logic is a nonresident foreign corporation, organized and existing
under the laws of the. United States of America, with principal office at 5401 Tech Circle-Moorpark, CA
93021; that Quality Logic is not registered either as a corporation or as a partnership in the Philippines, as
confirmed by the Certification of Non-Registration of Corporation/Partnership dated November 23, 2005
issued by the Securities and Exchange Commission; that Canon-Philippines is a corporation duly
organized and existing under the laws of the Philippines with office address at 2nd Floor Plaza One, 18
Orchard Road, Eastwood, Quezon City; that it is engaged in the business of hardware design and software
development involving imaging, communications and related technologies; that Canon-Philippines
purchased a Software Test Product (software) from Quality Logic; that under the Quality Logic-Software
License Agreement (Agreement), Quality Logic grants to Canon-Philippines a non-exclusive right to use
and display the software up to five (5) computers (i.e. with up to five (5) CPU's) in a single department, at
a single company site; that if the computers on which Canon-Philippines uses the software are multi-user
systems, the license covers up to five (5) users on a single multi-user system; that Quality Logic reserves
all rights not expressly granted to Canon-Philippines; that Canon-Philippines shall own the magnetic or
other physical media on which the software is originally or subsequently recorded or fixed, but Quality
Logic shall retain title and ownership of the software recorded on the original disk copy(ies) of the
software, regardless of the form or media in or on which the original and other copies may exist; that the
license is not sale of the original software or any copy; that Canon-Philippines may not distribute, copies
of the software or accompanying written materials to other employees, departments, divisions,
subsidiaries, joint venture companies, suppliers or any other company except as expressly provided in the
Agreement; that Canon-Philippines may not modify, adapt, translate, reverse engineer, decompile,
disassemble, or create derivative works based on the Utility Programs; that the software is licensed only,
to Canon-Philippines; that Canon-Philippines may transfer the software provided the original software
and all copies are purged from the original Licensee prior to the transfer; that any authorized transferee of
the software shall be bound by the terms and conditions of the Agreement; that in no event may
Canon-Philippines transfer, assign, rent, leases, sell or otherwise dispose of the software on a temporary
or permanent basis except as expressly provided under the Agreement; that the software and the
accompanying written materials are copyrighted; that Quality Logic will provide Canon-Philippines
support for the software for a period of ninety (90) days and make available to Canon-Philippines
extended support contracts that can be purchased on an annual basis; and that Canon-Philippines will pay
Quality Logic $5,700 US Dollars inclusive of freight and other miscellaneous charges payable within 60
days from date of invoice.
77-20031) covers software payments made as of November 18, 2003 and until the effectivity of the second
Circular and generally treats software payments as royalties, thus: HDAaIc
of software.

royalties."
On the other hand, the second Circular (RMC 44-2005 2 ) covers payments made as of September 8,
2005 and onwards and substantially amends the first Circular by treating software payments either as

a. Transfer of copyright rights. A transfer of software is classified as a transfer of a

described below:



above (or only acquires a de minimis grant of such rights), and the transaction does not involve the
provision of services or of know-how, the transfer of the copy of the software is classified solely as
a transfer of a copyrighted article and payments for which constitute business income. CIETDc
xxx xxx xxx"
The fact that what is being transferred to Canon-Philippines is the magnetic or other physical media
on which the software is originally or subsequently recorded or fixed and the Quality Logic retains title
and ownership, including pertinent rights protected under relevant intellectual property laws, of the
software recorded on the original disk copy(ies) of the software, Revenue Memorandum Circular (RMC)
44-2005, Section 5b thereof, will apply in this case which states that "If a person acquires a copy of a
software but does not acquire any of the rights described above (or only acquires a de minimis grant of
such rights), and the transaction does not involve the provision of services or of know-how, the transfer of
the copy of the software is classified solely as a transfer of a copyrighted article and payments for which
constitute business income."
Thus, payments (license fee) made by Canon-Philippines to Quality Logic on November 30, 2005,
being business income (or business profits), is subject to income tax in the Philippines only if it is
attributable to a permanent establishment which Quality Logic has in the Philippines, under paragraph 1,
Article 8 in relation to Article 5 of the Philippines-US tax treaty, to wit:
"Article 8
BUSINESS PROFITS
other Contracting State on the business profits of the resident but only so much of them as are
attributable to the permanent establishment."
"Article 5
or business.
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse;
i) A building site or construction or assembly project or supervisory


other Contracting State for a period or periods aggregating more than 183 days. HcTDSA
xxx xxx xxx"
Based on the foregoing, in order for Quality Logic to be considered to have a permanent
establishment to which said business profit may be attributed, it must satisfy the following conditions 3 :
Since Quality Logic based on the documents submitted and or requested does not have a place of
business at its disposal which is fixed or established at a distinct place with a certain degree of
permanence in the Philippines through which it may use for carrying on its business, Quality Logic does
not have a permanent establishment to which said business profit may be attributed to.
This is further bolstered of the fact that it is not registered as a corporation nor as a partnership in
the Philippines.
Accordingly, Quality Logic not having a permanent establishment to which it may attribute any
profits it earned from the sale of the software to Canon-Philippines, said profits are not subject to
Philippine income tax at 32% of the gross amount thereof under Section 28(B)(1) of the National Internal
Revenue Code (NIRC) of 1997. 4
Finally, the sale of the Licensed Software by Quality Logic to Canon-Philippines is subject to ten
percent (10%) value-added tax (VAT) under Section 106(A) of the Tax Code, to wit:
such tax to be paid by the seller or transferor.
xxx xxx xxx"
The gross amount of the license fee paid or payable to Quality Logic constitutes the gross selling
price of gross value in money of the Licensed Software on which the 10% VAT is imposed.
10 percent VAT on the license fee before remitting it to Quality Logic. In remitting to the Bureau of
Internal Revenue the VAT withheld on such, fee, Canon-Philippines shall use BIR Form No. 1600
(Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered
taxpayer, Canon-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,
Canon-Philippines may include as part of the cost of the services provided to it by Quality Logic the VAT
applicable. In addition, upon Quality Logic's request, Canon-Philippines is required to issue in
three copies for Quality Logic and the fourth copy for Canon-Philippines as its file copy.
herein parties are concerned. TICDSc
Very truly yours,
Commissioner
Footnotes
1. Classification of Payments for Software for Income Tax Purposes
2. Taxation of Payments for Software
85-91.
4. Republic Act No. 9337 — new rate
February 20, 2006
VAT Ruling 009-99; 100-99;

ITAD Ruling No. 056-03;
Sec. 109 (q) Tax Code of 1997
Joaquin Cunanan & Co.

8767 Paseo de Roxas Avenue
1226 Makati City
Attention: George T.J. Lavadia

Tax Services Department
Gentlemen :
This refers to your letter dated December 15, 2004, requesting to amend DA-ITAD Ruling No.
139-04 dated November 30, 2004 so that the royalty payments to Fuji Electric Co. Ltd. (FECL) by Fuji
Electric-Philippines, Inc. (FEP) be declared exempt from value-added tax, in view of the additional
representation that FEP is registered with the then Export Processing Economic Zone Authority (EPZA),
now Philippine Economic Zone Authority (PEZA), as an Export Enterprise under Certificate of
Registration No. 95-54 dated May 15, 1995.
It is represented that FECL is a nonresident foreign corporation organized under the laws of Japan
with principal address at New Yurakucho Building, 12-1 Yurakucho 1-Chome, Chiyoda-ku, Tokyo, Japan;
that as shown in the Certificate of Corporate Filing/Information dated March 23, 2001 issued by the
Securities and Exchange Commission (SEC), FECL was licensed to transact business as a representative
office in the Philippines on January 14, 1980 per License No. F-899; that per Certificate of Cancellation of
License of a Foreign Corporation with SEC Reg. No. FM-889 dated October 10, 2000, the License issued
to FECL to transact business in the Philippines was cancelled; that another Certificate of Withdrawal of
License of a Foreign Corporation was issued to replace the previous Certificate of Withdrawal dated
October 10, 2000 to reflect the correction of SEC Reg. No. FM-889, to F-889; that per Certification dated
June 22, 2004 issued by SEC, the correct registration number of the company was duly indicated; that FEP
is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office
address at Carmelray Industrial Park Canlubang, Calamba, Laguna; that on April 1, 1997, FECL and FEP
entered into a Technology License Agreement which states among others, that "Licensor grants to
Licensee a non-exclusive, non-transferable License to use the technical information, to reproduce and
prepare derivative works of the works protected by the copyrights, to practice any and all inventions
claimed in the Patents and to exercise all Other Intellectual Property Rights in order to manufacture the
Subject Products only in the Territory 1, and to use, sell and otherwise dispose of the Subject Products
worldwide. Such license shall not include the right to sublicense or have made. Subject to the terms and
conditions of this Agreement, Licensor hereby grants to Licensee, for the term of this Agreement, a
non-exclusive, non-transferable license to use the Trademarks in connection with the Subject Products
manufactured by Licensee provided that such Subject Products are manufactured in accordance with
specifications and standards established from time to time by Licensor or otherwise approved by
Licensor"; that in consideration of said license grant, FECL is entitled to receive a royalty equivalent to
five percent (5%) of FEP's net sales of any and all subject products (SP) that are manufactured and sold by
FEP during the term of the Agreement; that a Memorandum for Technology License Agreement dated
April 20, 1997 was entered into which states that with respect to the "Half Term" from April 1, 1997 to
September 30, 1997, the expected total sum of (a) trade, quantity or cash discounts and broker's or agent's
commission, (b) return credits and allowances, (c) tax, excise or other government charges, and (d) freight,
insurance and packing costs, with respect to the SP which shall be deducted from the total invoice value of
the SP in order to calculate the "Net Sales", shall be deemed to be equal to 2.75% of the total invoice value
of the SP, in consideration of the result of the preceding half term, thus, the rate of royalty to be paid by
FEP for such period shall be equal to 4.86% (97.25% x 5%) of the total invoice value of any and all SP
that are sold by FEP during the period; that this deduction rate for calculating net sales (2.75%) shall
continue for successive term, unless it is largely fluctuated; and it is represented further that FEP is
registered with the then Export Processing Economic Zone Authority (EPZA) now PEZA per Certificate
of Registration No. 95-54 dated May 15, 1995 and was certified that it is entitled to the 5% Special Tax on
Gross Income under Section 24 of R.A. 7916 dated August 19, 2004. AaEcHC
In reply, please be informed that under Section 108 of the National Internal Revenue Code of 1997,
the lease or use of property or property rights is embraced within the definition of "sale or exchange of
services" which is subject to VAT.
However, in the recent case of Commissioner of Internal Revenue v. Seagate Technology

(Philippines), G.R. No. 153866, promulgated on February 11, 2005, the Supreme Court held that:
"Special laws expressly grant preferential tax treatment to business establishments registered
and operating within an ecozone, which by law is considered as a separate customs territory. As
such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto . . . .
Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides
that those falling under Presidential Decree (PD) No. 66 are not. P.D. No. 66 is the precursor of
R.A. No. 7916 — the special law under which respondent was registered. The purchase transactions
it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required
to register. Since the purchases of respondent are not exempt from the VAT, the rate to be applied is
zero. Its exemption under both P.D. No. 66 and R.A. 7916 effectively subjects such transactions to a
zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory. This means that in such zone is created the legal fiction of foreign
territory.
xxx xxx xxx
Further, RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone. Since this law does not exclude the VAT from the
the law. That no VAT shall. be imposed directly upon business establishments operating within the
xxx xxx xxx
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not
be subject to . . . internal revenue laws and regulations" under PD 66 — the original charter of
PEZA (then EPZA) that was later amended by RA 7916. No provisions in the latter law modify such
exemption. (Emphasis supplied) EIASDT
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise —
except those prohibited by law — 'shall not be subject to . . . internal revenue laws and regulations .
. ." if brought to the ecozone's restricted area for manufacturing by registered export enterprises, of
which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to
the effectivity of such rules'. (Emphasis supplied)
provision for exempt transactions under Section 109(q) of the Tax Code of 1997 which provides VAT
exemption for transactions that are exempt under special laws, e.g., Republic Act No. 7916 or PEZA Law,
is particularly applicable to the instant case.
Such being the case, the royalty payment of FEP, being an EPZA-registered (now a
PEZA-registered) export enterprise, to FECL should be, as it is hereby confirmed to be, exempt from
VAT. This ruling is deemed incorporated in and modifies DA-ITAD Ruling No. 139-04 dated November
30, 2004 to the extent of the above pronouncement that FEP is exempt from VAT.
Very truly yours,

Commissioner
February 16, 2006

The People's Bureau of the

Great Socialist People's
Libyan Arab Jamahiriya
6819 Ayala Avenue,
Makati City
Gentlemen :
This has reference to your Note No. 079/05 dated December 15, 2005, referred to this Office by the
Department of Finance (DOF) and the Department of Foreign Affairs (DFA), requesting for exemption
from the payment of value-added tax (VAT) on the purchase of one (1) locally-assembled motor vehicle,
for the official use of The People's Bureau of the Great Socialist. People's Libyan Arab Jamahiriya,
Make: Toyota Innova 2.0 G A/T

Model Year: 2006
Color: Night Mist
reads:
"ARTICLE 34
services;
xxx xxx xxx"
prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. DAHCaI
However, applying the principle of reciprocity, this Office may grant VAT exemption to the The
People's Bureau of the Great Socialist People's Libyan Arab Jamahiriya and/or its personnel on their
purchases of locally-assembled motor vehicles it appearing from the list submitted by the Department of
Foreign Affairs as of October 18, 2005, that your Government allows similar exemption to Philippine
Embassy and/or its personnel on their purchase of locally-assembled motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2006 Toyota Innova 2.0 G A/T for the official use of
The People's Bureau of the Great Socialist People's Libyan Arab Jamahiriya is exempt from VAT. (ITAD
Ruling No. 111-04 dated October 26, 2004)
Very truly yours,

Legal Service
February 13, 2006
Article 11, Philippines-United States tax treaty;

Visteon Philippines, Inc.
No. 3 American Road
Greenfield Automotive Park
Don Jose, Sta. Rosa
Laguna, Philippines
Attention: Ms. Rina J. Luna

Finance Manager
Gentlemen :
This refers to your application for tax treaty relief dated April 14, 2005, requesting confirmation
that the cash dividends to be remitted by Visteon Philippines, Inc. (VPI) to Visteon International Holdings
Inc. (VIHI) are subject to the 20% withholding tax pursuant to Article 11(2)(b) of the Philippines-United
States of America (Philippines-US) tax treaty.
It is represented that VIHI is a nonresident foreign corporation organized and existing under the
laws of United States of America (U.S.A.) with office address at One Village Center Drive, Van Buren
Township, Michigan 48111, U.S.A.; that it is not registered either as a corporation or as a partnership in
the Philippines per Certification dated March 10, 2005 issued by the Securities and Exchange
Commission; that VPI is a corporation organized and existing under laws of the Philippines, with an
authorized capital stock of One hundred Twenty-Eight Million Pesos (Php128,000,000.00) divided into
Sixteen Thousand (16,000) Class "A" Common shares with a par value of One Thousand Pesos
(Php1,000.00) per share and One Hundred Twelve Thousand (112,000) Class "B" Common shares with a
par value of One Thousand Pesos (Php1,000.00) per share; that it has a total outstanding stock of
Sixty-Eight Million Twenty Thousand Pesos (Php68,020,000.00) divided into Eight Thousand (8,000)
Class "A" Common shares and Sixty Thousand Twenty (60,020) Class "B" Common shares; that from
March 31, 2003 to February 3, 2005 the shareholdings of VIHI in VPI, including the five nominee shares,
represent 100% of the outstanding capital stock of the VPI; that in the meeting of the Board of Directors of
VPI held on April 8, 2005, it was resolved that VPI declare cash dividends in the total amount of
Seventy-Five Million Pesos (Php75,000,000.00), to be distributed among stockholders of record as of
December 31, 2004 pro-rata to their respective shareholdings, based on the number of shares held by them
as of December 31, 2004; and that the cash dividends shall be paid not later than August 1, 2005. aIHCSA
In reply, please be informed that Article 11 of the Philippines-US tax treaty provides as follows:
"Article 11
"DIVIDENDS
"1. Dividends derived from sources within one of the Contracting States by a resident of
the other Contracting State may be taxed by both Contracting States.
"2. The rate of tax imposed by one of the Contracting States on dividends derived from
sources within that Contracting State by a resident of the other Contracting State shall not exceed:
a) 25 percent of the gross amount of the dividend; or
b) When the recipient is a corporation, 20 percent of the gross amount of
the dividend if during the part of the paying corporation's taxable year which
precedes the date of payment of the dividend and during the whole of its prior
taxable year (if any), at least 10 percent of the outstanding shares of the voting stock
of the paying corporation was owned by the recipient corporation.
"xxx xxx xxx"
"5. The term 'dividends' as used in this Convention means income from shares, mining
shares, founders' 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 law of the
State of which the corporation making the distribution is a resident.
"xxx xxx xxx"
In view of the foregoing, since VIHI, being the recipient of the dividends, owns more than 10% of
the outstanding shares of the voting stock of VPI, the paying corporation, during the part of the latter's
taxable year which precedes the date of payment and during the whole of its prior taxable year, this Office
is of the opinion and so holds that the cash dividends to be remitted by VPI to VIHI are subject to the
preferential rate of 20% withholding tax pursuant to Article 11(2)(b) of the Philippines-US tax treaty. (BIR
Ruling No. 123-84 dated July 25, 1984)
herein parties are concerned. AScHCD
Very truly yours,
By:

Legal Service
January 30, 2006
1997;
British Embassy
15th-17th Floors
L.V. Locsin Building
6752 Ayala Avenue cor. Makati Avenue
Makati City
Gentlemen :
This has reference to your Note No. 155-05 dated December 5, 2005, referred to this Office by the
Department of Finance (DOT) and the Office of Protocol, Department of Foreign Affairs (DFA),
requesting for a tax-free purchase on a local motor vehicle for the official use of the British Embassy,
Make: Nissan Patrol 4x2 wagon

Model Year: 2002
Color: Polar White
Engine Number: TB45-056866
Frame Number: TGNSLHAY61-Y11298
"ARTICLE 34
goods or services;
"xxx xxx xxx"
The tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the
value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that
Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108, and
ad valorem taxes under Section 149, all of the National Internal Revenue Code of 1997. ASHaTc
However, applying the principle of reciprocity, this Office may grant exemptions to the British
Embassy or its personnel on their local purchases of goods and/or services it appearing from the list
country.
Hence, the herein local purchase of one (1) Nissan Patrol 4x2 wagon for the official use of the
British Embassy is exempt from VAT and ad valorem tax. (BIR Ruling No. DA-ITAD-150-04 dated
December 20, 2004)
Very truly yours,

Legal Service
February 8, 2006
Art. 12, Philippines-Germany Tax Treaty;

Section 28(B)(4) Tax Code of 1997;

6760 Ayala Avenue
1226 Makati City

Tax Services
Gentlemen :
This refers to your letter dated August 30, 2005 on behalf of your client, Tann Philippines, Inc.
(TPI) requesting for confirmation of your opinion that the lease payments made by TPI to Tann Germany
GmbH (TANK GER) are subject to the seven and one-half percent (7 1/2%) rate of Philippine income tax
under Section 28(B)(4) of the Tax Code of 1997.
It is represented that TANN GER is a nonresident foreign corporation with office address at
Siemensstr. 2, 21465 Reinbek, registered as an entrepreneur liable to pay taxes in Germany under tax
number 30 292 05392 since January 1, 1977 per Proof of Registration dated June 27, 2005, issued by The
Local Tax Office Stormarn of Germany; that TANN GER is not registered either as a corporation or as a
partnership in the Philippines per Certification of Non-Registration dated August 22, 2005 issued by the
Securities and Exchange Commission; that TPI is a corporation duly organized and existing under the laws
of the Philippines with office address located at 1st Street cor. R. S. Diaz Ave., First Philippine Industrial
Park, Brgy. Sta Anastacia, Sto Tomas, Batangas; that TPI is a Philippine Economic Zone Authority
(PEZA)-registered Ecozone Export Enterprise with Registration Certificate No. 02-016 dated April 16,
2002 and is engaged in the business of manufacturing, printing and conversion of packaging and other
materials such as but not limited to tipping papers and soft packaging materials for cigarette industry,
including the selling, importing, and exporting and general trading of said products; that on October 13,
2004, TANN GER and TPI entered into a Lease Contract whereby TANN GER agreed to lease a used
secondary slitting machine with 50 winding units and additional parts (Equipment) in favor of TPI under
the terms and condition stated in the said Lease Contract and for and in consideration of an annual rental
price of US$17,640.00, inclusive of final withholding taxes and exclusive of VAT; that on January 1, 2005
and June 1, 2005, TANN GER and TPI executed an addendum to the existing Lease Contract wherein an
additional secondary slitting machine with 78 winding units and an additional rewinding machine with 9
winding units were leased to TPI; and that the said contract has an indefinite period unless terminated by
either party. AHcaDC
In reply, please be informed that Article 12 of the Philippines-Germany tax treaty provides, viz:
"Article 12
ROYALTIES
and according to the law of that State, but the tax so charged shall not exceed:
a) 15 per cent of the gross amount of royalties arising from the use of, or
the right to use, any copyright of literary, artistic or scientific work including
cinematograph films or tapes for television or broadcasting, or
b) 10 per cent of the gross amount of royalties arising from the use of, or
the right to use, any patent, trade mark, design or model, plan, secret formula or
process, or from the use of, or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific
experience.
For as long as the transfer of technology, under Philippine law, is subject to

approval, the limitation of the tax rate mentioned under (b) shall, in the case of
royalties arising in the Republic of the Philippines, only apply if the contract giving
rise to such royalties has been approved by the Philippine competent authorities.
including cinematograph films or tapes for television or broadcasting, any patent, trade mark, design
or model, plan, secret formula or process, or for the use of, or the right to use, industrial,
commercial, or scientific equipment, or for information concerning industrial, commercial or
scientific experience. HAECID
xxx xxx xxx."
Based on the aforequoted provisions, the abovementioned rental payments are covered by the term
"royalties" and as such are subject to the preferential tax rate not exceeding 10 percent of the gross amount
of royalties. However, Section 28(B) of the Tax Code of 1997 provides, viz:
"Section 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
xxx xxx xxx
(4) Nonresident Owner or Lessor of Aircraft; Machineries and Other Equipment. —

Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other
equipment shall be subject to a tax of seven and one half percent (7 1/2%) of gross rentals or fees.
xxx xxx xxx"
In view thereof, this Office is of the opinion and so holds that the rental income derived by TANN
GER from its lease transaction with TPI is subject to tax at the rate of seven and one-half percent (7 1/2%)
based on gross rentals, the same not having exceeded the 10 per cent (10%) rate imposed on the gross
amount of royalties under the Philippines-Germany tax treaty. (BIR Ruling No. DA-ITAD 039-04 dated
April 28, 2004)
In addition, Section 108 of the Tax Code of 1997 states that the lease or the use of, or the right to
use of any industrial, commercial or scientific equipment is embraced within the definition of "sale or
exchange of services" and is subject to value-added tax (VAT). However, the dispositive portion of VAT
Ruling No. 100-99 dated September 16, 1999 provides: "In the case of payment for royalties to a
non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor:
However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then
payment of royalties to a non-resident lessor . . . should be as it is hereby confirmed to be, exempt from
VAT." Accordingly, payment of royalties by TPI, a PEZA-registered enterprise, to TANN GER, a
nonresident owner, is hereby confirmed to be exempt from VAT. (BIR Ruling No. DA-ITAD 113-05 dated
September 30, 2005) aESICD
Very truly yours,
By:

Legal Service
January 30, 2006
1997;
Embassy of Romania
1216 Acacia Road
Dasmariñas Village
Makati City
Gentlemen :
This has reference to your Note No. 20 dated January 9, 2006, referred to this Office by the
requesting for a tax-free purchase on a local motor vehicle for the official use of the Embassy of Romania,
Make: Honda CR-V 2.0 4x2 AT (5 seater)

Model Year: 2006
Color: Satin Silver Metallic
"ARTICLE 34
goods or services;
"xxx xxx xxx"

The tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the
value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that
Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108 of
the National Internal Revenue Code of 1997.
Romania or its personnel on their local purchases of goods and/or services it appearing from the list
country. CAETcH
Hence, the herein local purchase of one (1) Honda CR-V 2.0 4X2 AT for the official use of the
Embassy of Romania is exempt from VAT. (VAT Ruling No. 006-97 dated January 17, 1997)
Very truly yours,

Legal Service
January 26, 2006
Philippines-Netherlands tax treaty;


8741 Paseo de Roxas, City of Makati
Philippines
Gentlemen :
This refers to your application for tax treaty relief dated October 27, 2005, on behalf of your client,
Maddison Square Holding B.V. (Maddison), requesting confirmation of your opinion that the dividends
payable by Reckitt Benckiser (Philippines), Inc. (RBPI) to Maddison are subject to the preferential tax rate
of 10% pursuant to Article 10(2)(a) of the Philippines-Netherlands tax treaty.
It is represented that Maddison, a nonresident foreign corporation with address at De Fruittuinen

2-12, 2132NZ Hoofddorp and with Tax Identification Number 8079.05.781, is a resident of the
Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty as certified by The
Inspector of the Tax Administration, Amsterdam, Netherlands on September 13, 2005; that it is not
registered either as a corporation or as a partnership in the Philippines per certification dated May 20,
2005 issued by the Securities and Exchange Commission; that RBPI is a corporation organized and
existing under the laws of the Philippines, with office address at Unit 2601, 26/F, The Orient Square
Building, Emerald Avenue, Ortigas Center, Pasig City, Philippines; that Maddison holds Eight Thousand
One Hundred Seventy Six (8,176) shares or a total of Twenty Million Four Hundred Forty Thousand
Pesos (Php20,440,000.00) which constitutes 99.9% of the total stockholdings of RBPI as evidenced by the
Corporate Secretary's Certification dated October 26, 2005; and that at a special meeting held on April 22,
2005, it was resolved by the Board of Directors of RBPI that the company which has an accumulated
unrestricted earnings amounting to Forty One Million Eight Hundred Ninety Thousand Six Hundred
Ninety Eight Pesos (Php41,890,698.00), which is around 204.82% of its capital stock of Twenty Million
Four Hundred Fifty Two Thousand Five Hundred Pesos (Php20,452,500.00) needs to declare and pay
dividends to its stockholders to avoid penalties due to improperly accumulated earnings and upon the
recommendation of the Comptroller: and that in the same meeting, said Board of Directors approved the
declaration and payment of dividends in the amount of Forty One Million Eight Hundred Eighty Six
Thousand Seven Hundred Twenty Pesos (Php41,886,720.00) to the stockholder of record as of March 31,
2005 namely, Maddison at Five Thousand One Hundred Twenty Pesos (Php5,120.00) per share. IEaCDH
follows, viz:
"Article 10
DIVIDENDS
1. Dividends paid by a company which is a resident of one of the States to a resident of

the other State may be taxed in that other State.
2. However, such dividends may also be taxed in the State of which the company paying
the dividends is a resident and according to the laws of that State, but if the recipient is the
a) 10 per cent of the gross amount of the dividends if the recipient is a

company the capital of which is wholly or partly divided into shares and which holds
directly at least 10 per cent of the capital of the company paying the dividends;
b) 15 percent 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, 'jouissance'
shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as
well as income from debt-claims participating in profits and income from other corporate rights
which is subjected to the same taxation treatment as income from shares by the taxation law of the
State of which the company making that distribution is a resident.
xxx xxx xxx"
whenever the beneficial owner/recipient of the dividend owns at least 10 percent of the capital of the
paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and
considering that Maddison directly holds and owns 99.9% percent of the capital of RBPI, this Office is of
the opinion and so holds that the dividend payments by RBPI to Maddison shall be subject to the
preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10(2)(a) of
the Philippines-Netherlands tax treaty. (BIR Ruling No. DA ITAD 126-04 dated November 9, 2004; BIR
Ruling No. DA-ITAD 028-99 dated October 7, 1999) CSAaDE
Very truly yours,
By:

Legal Service
January 24, 2006

Embassy of Canada
6819 Ayala Avenue,
Makati City
Gentlemen :
This has reference to your Note Nos. 1756/05 and 1765/05 dated October 11, 2005 and November
3, 2005, respectively, referred to this Office, by the Department of Finance (DOF) and the Department of
Foreign Affairs (DFA), requesting for the exemption from payment of value-added tax (VAT) tax on the
purchase of one (1) locally-assembled motor vehicle, for the official use of the Embassy of Canada,
Make: Toyota Hi-Ace GL Grandia 2.5 Diesel M/T

Model Year: 2005
Color: Silver Metallic
Chassis Number: JTFRS13P1-00001259
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from (VAT) on its purchases of locally-assembled motor vehicles. In other words, purchases by that
Embassy and/or its diplomatic agents of locally-assembled motor vehicles shall be subject to the
value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997. ITAaCc
Embassy of Canada and/or its personnel on their purchases of locally assembled motor vehicles it
Government allows similar exemption to Philippine Embassy and/or its personnel on their purchase of
Hence, the local purchase of one (1) unit of 2005 Toyota Hi-Ace GL Grandia 2.5 Diesel M/T for
the official use of the Embassy of Canada is exempt from VAT. (ITAD Ruling No. 038-01 dated April 5,
2001)
Very truly yours,

Legal Service
January 24, 2006
Articles 5 and 7 of the Philippines-Singapore Tax Treaty;

Avisado Agan Nidea Montenegro Linaac & Associates

3rd Floor, P & L Building, Legazpi Street, Legaspi Village
Makati City 1229
Attention: Atty. J. Carlito M. Montenegro
Gentlemen :
This refers to your letter dated August 28, 2005, on behalf of your client, Isuzu Philippines Inc.
(IPC), requesting confirmation of your opinion that the service fees paid by IPC to Isuzu Motors Asia
Limited (IMA), formerly Isuzu Motors Asia Pte. Limited, under their Service Agreement are not subject to
Philippine income tax and consequently not subject to Philippine withholding tax pursuant to Article 7(1)
of the Philippines-Singapore tax treaty.
It is represented that IMA is a nonresident foreign corporation duly organized and existing under
the laws of Singapore with registered office address at 9 Temasek Boulevard #22-03, Suntec City Tower
Two, Singapore with Company No. 199601332E, as certified by the Senior Assistant Registrar of
Companies and Businesses of Singapore; that IMA was incorporated under the Companies Act as a private
company limited by shares; that however, on February 6, 1998, it was converted to a public company
under the name of Isuzu Motors Asia Limited; that it is not registered either as a corporation or as a
partnership in the Philippines as confirmed by the Certification of Non-Registration dated September 22,
2005 issued by the Securities and Exchange Commission; that IPC is a corporation duly organized and
existing under the laws of the Philippines with registered office at 114 Technology Avenue, Phase II,
Laguna Technopark, Biñan, Laguna; that IPC is an enterprise registered with the Board of Investments
(BOI) as evidenced by Certificate of Registration No. 96-003(CVDP) issued by the BOI; that on August
15, 2004, a Service Agreement (Agreement) was executed by and between IPC and IMA which shall take
effect on September 1, 2004; that under the Agreement, IPC contracted the services of IMA for the
purpose of undertaking research, development, design and engineering of the new to be released (TBR)
vehicle model classified as Model (165); that the services shall not exceed an aggregate number of one
hundred (100) days at any given year in the Philippines or shall be performed entirely in Singapore; and
that for and in consideration of the services rendered and performed by IMA in favor of IPC, IPC shall pay
IMA the amount of Six Hundred Three Thousand US Dollars (US$603,000.00).
In reply, please be informed of paragraph 1 of Article 7 (Business Profits) of the

Philippines-Singapore tax treaty, stated as follows:
"Article 7
BUSINESS PROFITS
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 an enterprise of a Contracting State shall be taxable only in
that Contracting State unless the enterprise carries on business in the other Contracting State through a
the 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 IMA for the services rendered
in the Philippines shall be taxable in the Philippines only if it has a permanent establishment in the
Philippines in connection with the activities giving rise to such income.
"Article 5
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. TCaAHI
2. The term "permanent establishment" includes specially but is not limited to:
xxx xxx xxx

one of the Contracting states through employees or other personnel, provided
days.
xxx xxx xxx"
It is clear from the aforequoted provisions that a corporation which is a resident of Singapore may
be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of
services by such corporation, through its employees or other personnel, in the same or connected project,
continues within the Philippines for a period or periods aggregating more than 183 days. It shall be noted
that the 183-day period shall be counted based on the total number of days the service is rendered in the
Philippines for the entire duration of the same or a connected project. Moreover, it shall be reckoned from
the start of the project and until its completion that may span to two or more taxable years including all
periods resulting from its automatic renewal or extension thereof. Thus, the counting of the days of service
rendered in the Philippines is not interrupted by the end of a taxable year but continues until the
completion of the same or a connected project.
Applying the same to the instant case, IMA is deemed not to have a permanent establishment for as
long as its employees do not stay in the Philippines for a period or periods aggregating more than 183 days
in the same or connected project (and not in a given taxable year) in the course of rendition of their service
to IPC. It may be gleaned from the contract that IPC would require the services of IMA from year to year
starting from the time the project TBR model (165) shall have started and until its completion. Where the
total number of days stayed in the Philippines by personnel rendering subject services do not exceed 183
days counted as such, the income derived by IMA from services rendered to IPC shall not be subject to
Philippine income tax and, consequently, to withholding tax. (BIR Ruling No. DA-ITAD 231-02 dated
December 27, 2002)
10% VAT, the fees paid for that portion of the services of IMA which are rendered in the Philippines are,
however, subject to 10% VAT pursuant to Section 108 of the Tax Code of 1997. Accordingly, IPC, 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 IMA. In remitting the VAT withheld, IPC
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
from IPC if it is a VAT-registered taxpayer. In case IPC 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, IPC is required to issue the Certificate of Creditable Tax
Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies thereof to be given to
IMA and the fourth copy to be retained by IPC. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002;
Very truly yours,
By:
Legal Service
January 20, 2006
Arts. 5 & 8, RP-US Tax Treaty;

Caltex (Philippines), Inc.

6F 6750 Ayala Avenue
1226 Makati City
Attention: Mr. Armando Diaz

General Manager — Finance
Atty. Raissa R. Bautista
Tax Manager
Gentlemen :
This refers to your letter dated September 5, 2005, received by this Office on October 26, 2005,
requesting confirmation of your opinion on the following:
(1) That the service fees that Chevron U.S.A., Inc. ("CUSA") will receive from Caltex
Philippines, Inc. ("CPI") pursuant to a Service Agreement are not subject to Philippine
income tax following Section 28(B)(1) of the Tax Code of 1997 (Tax Code), and Articles 5
and 8 of the Philippines-United States of America (RP-US) tax treaty, and thus exempt from
withholding tax;
(2) That the said payments are not subject to value-added tax (VAT) pursuant to Section 108 of
the Tax Code; and
(3) That the said payments are considered ordinary and necessary business expenses and
deductible from CPI's gross income under Section 34 of the Tax Code.
It is represented that CUSA is a U.S. corporation and a resident of the United States of America for
purposes of U.S. taxation with TIN No. 25-0527925, certified by the Department of Treasury, Internal
Revenue Service, Philadelphia PA 19255, U.S.A.; that its principal office address is at 6001 Ballinger
Canyon Road, San Ramon, California 94583; that CUSA is not registered either as a corporation or as a
partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities
and Exchange Commission on September 1, 2005; that it is engaged in all branches of the petroleum
industry as well as mineral, geothermal and other energy activities and it has the skilled personnel and
facilities to provide on a centralized basis, advice, assistance and coordination in the areas of
administration, corporate finance, business planning and coordination, training and personnel
management, procurement of raw materials and components, economic and investment research and
analysis, marketing management, analysis, control and sales promotion planning, refinery management
and production planning, and environmental, health and safety matters as such services are related to the
marketing, supply, trading or refining of petroleum products or to the selling of lubricants, aviation fuels
or fuel and marine products and other petroleum products and related services; that CPI is a corporation
duly organized and existing under the laws of the Philippines with principal address located at 6th Floor,
6750 Building, 6750 Ayala Avenue, Makati City; that CPI is engaged in the manufacture, distribution,
trading and marketing of petroleum products; that on January 1, 2004, CPI and CUSA entered into a
Service Agreement whereby CPI engaged CUSA to provide or arrange for such services as CPI may
require from time to time in connection with the carrying out of its activities; that said services, shall
consist in advice, assistance and coordination by providing support and administrative services for the
global downstream business units, which shall include but shall not be limited to the following areas:
1. Marketing Business Unit,
2. Lubricant Business Unit,
3. Refining and Supply Group,
4. Procurement,
5. Health, Environment and Safety (HES) Matters,
6. Fiscal Services/Business Support and Reporting,
7. Information Technology (IT) Services,
8. Legal,
9. Training and Human Resource Services,
10. Aviation Business Unit,
11. Fuel and Marine Marketing Business Unit, and
12. Other services.
that CUSA, may, in the performance of any Service under the Agreement use such independent contractors
or agents as it deems fit, provided the services are performed at competitive costs; that said services shall
be performed by CUSA in the United States of America (USA), except for occasional visits or
consultation with CPI of short duration, which in no case shall exceed an aggregate of 183 days during the
period of the Service Agreement as shown in the duly notarized Certification dated October 19, 2005
issued by Mr. Randall H. Johnson, Country Chairman, Caltex (Philippines), Inc.; that in consideration of
the said services, the estimated service fee, together with any reimbursements, shall be payable by CPI in
monthly or other periodic installments upon receipt of an invoice from CUSA; and that the said agreement
shall be deemed to come into force on the effective date and shall continue until terminated by either party
by previous notice in writing, of not less than thirty (30) days. AaHTIE
In reply, please be informed of Article 8 of the RP-US tax treaty quoted as follows.
"Article 8
BUSINESS PROFITS
them as are attributable to the permanent, establishment.
xxx xxx xxx"
that permanent establishment. Applying this to the instant case, the service fees received by CUSA for
services rendered in the Philippines under the Service Agreement shall be taxable in the Philippines only if
it has a permanent establishment in the Philippines in connection with the activities giving rise to such
income.
"Article 5
business.
b) A branch;
c) An office;
e) A factory;
f) A workshop;
g) A warehouse;

connection therewith, provided such site, project or activity continues for a
period of more than 183 days; and

days.
xxx xxx xxx."
Inasmuch as it is represented that the Service 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 service is
rendered in the Philippines upon effectivity of the subject Service Agreement, including all periods
resulting from its automatic renewal. Accordingly, for as long as the employees or agents of CUSA 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 CPI for the "same or connected project", then CUSA 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, exemption of CUSA as confirmed herein shall not extend to independent contractors
contracted by it to perform services it (CUSA) is obligated to perform under the Service Agreement.
Finally, while the compensation for services rendered outside the Philippines is not subject to the
10% VAT, the fees paid for that portion of the services rendered by CUSA in the Philippines are,
however, subject to 10% VAT pursuant to Section 108 of the Tax Code of 1997. Accordingly, CPI, 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 CUSA. In remitting the VAT withheld,
CPI 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 CPI if it is a VAT-registered taxpayer. In case CPI is a non-VAT registered taxpayer, the
as an "asset", whichever is applicable. In addition, CPI is required to issue the Certificate of Creditable
Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies thereof be given to
CUSA and the fourth copy to be retained by CPI. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002;
As regards the deductibility of payments as ordinary and necessary expenses from CPI's gross
income, this Office declines to rule on the matter considering the factual nature of the issue. However, this
does not preclude the taxpayer from treating it as a deductible item, the allowability of which is subject to
the findings of an investigation pursuant to the substantiation requirements under Section 34(A)(1)(b) of
the Tax Code. (BIR Ruling No. DA-ITAD 129-03 dated August 18, 2003)
herein parties are concerned. aATESD
Very truly yours,
By:

Legal Service
January 12, 2006
Arts. 5 & 7, Philippines-Japan tax treaty;

SGV & Co.

6760 Ayala Avenue
1266 Makati City
Attention: Atty. Emmanuel C. Alcantara

Gentlemen :
This refers to your letters dated August 12, 2005 and January 2, 2006 on behalf of your client,
Mitsui Kinzoku Engineering Kabushiki Kaisha Incorporated ("MESCO"), requesting confirmation that the
income to be derived by MESCO from the two (2) contracts it entered into with the Philippine Associated
Smelting and Refining Corporation ("PASAR") is not subject to Philippine income tax and consequently,
to withholding tax, as well as to value-added tax (VAT).
It is represented that MESCO is a nonresident foreign corporation duly organized and existing
under the laws of Japan with office address at 3-2-1 Ryogoku, Sumida-ku, Tokyo Japan; that it is not
registered either as a corporation or as a partnership in the Philippines per Certification of
Non-Registration issued by the Securities and Exchange Commission (SEC) dated August 8, 2005; that, on
the other hand, PASAR is a corporation duly organized and existing under the laws of the Philippines with
office address at 37th Floor, Philamlife Tower, 8767 Paseo de Roxas Avenue Makati City; that PASAR is
registered with the Philippine Economic Zone Authority (PEZA); that on July 20, 2005, MESCO and
PASAR entered into two (2) contracts relative to the latter's additional 4,000 Nm3/Hr Oxygen Plant in
Isabel, Leyte, Philippines; that under the first contract ("Contract A"), MESCO shall provide the design,
engineering, fabrication and supply and delivery of materials, tools, equipment, consumables, licensing,
submission of all technical documents, and all other services and supply necessary or incidental to
completely undertake the design, engineering and fabrication of the additional 4,000Nm3/Hr Oxygen
Plant; that said services shall include, among others, site verification and data gathering; 1 that by the
nature of the works and services to be provided by MESCO under the contract, MESCO shall execute and
accomplish such works and services in Japan, and in cases allowed by the contract, it may subcontract any
part or parts of the said services to Japanese subcontractors which shall also perform the same in Japan,
upon prior written approval therefor secured from PASAR; that in consideration for these services,
PASAR shall pay to MESCO the amount of Japan Yen Two Hundred Ninety Four Million Seven Hundred
Seventy Thousand (YEN294,770,000) in Japanese Yen; that for the supply of materials, tools and
equipment, there will be instances when MESCO may source these goods from contractors located in the
Philippines for direct delivery to PASAR; that MESCO intends to pay these local contractors in acceptable
foreign currency; that under the second contract ("Contract B"), MESCO shall perform the following
services: mobilization and demobilization, site verification and data gathering 2, installation works,
electrical and instrumentation works, surface preparation and painting works, testing and commissioning,
training of operating and maintenance personnel, site clean-up, among others; that in consideration for
these services, PASAR shall pay to MESCO the amount of Philippine Pesos Seventy Nine Million Forty
Nine Thousand (PHP79,049,000.00) to be paid in US Dollars calculated using the published Philippine
Peso-US Dollar reference rate of the Bangko Sentral ng Pilipinas (BSP) on the business day immediately
preceding the date of actual payment; and that, since MESCO does not maintain any place of business in
the Philippines, it will subcontract the performance and execution of the entire Contract B to Taisei
Philippine Construction Inc. ("TAISEI"); that TAISEI is a corporation duly organized and existing under
the laws of the Philippines with office address at 23rd Floor, Equitable Tower B, 8751 Paseo de Roxas,
Makati City; that the Subcontract entered into by and between MESCO and TAISEI pursuant to Contract
B supra is executed on July 14, 2005 and shall be completed on October 15, 2005; and that there is no
relationship or control, direct or indirect, among the parties to the two contracts, namely MESCO, PASAR
and TAISEI.
In reply, this Office is of the opinion and so holds that:
1. Income payments to be derived by MESCO from Contracts A and B are not subject to Philippine
income tax
Article 7(1) in relation to Article 5 of the Philippines-Japan tax treaty provides, viz:
"Article 7
1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting
State unless the enterprise carries on business in the other Contracting State through a permanent
enterprise may be taxed in that other Contracting State but only so much of them as is attributable to
that permanent establishment. HCEcaT
xxx xxx xxx"
"Article 5
1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of
business through which the business of an enterprise is wholly or partly carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse;

resources.
3. A building site or construction or installation project constitutes a permanent establishment

only if it lasts more than six months.
xxx xxx xxx
6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the

other Contracting State if it furnishes in that other Contracting State consultancy services, or
supervisory services in connection with a contract for a building, construction or installation project
through employees or other personnel — other than an agent of an independent status to whom
paragraph 7 applies — provided that such activities continue (for the same project or two or more
year. However, if the furnishing of such services is effected under an agreement between the
Governments of the two Contracting States regarding economic or technical cooperation, that
enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent
establishment in that other Contracting State.
xxx xxx xxx"
Based on the aforequoted provisions, the profits of a corporation which is a resident of Japan is
taxable only in Japan unless the Japanese corporation carries on business in the Philippines through a
permanent establishment situated therein. For this purpose, a Japanese corporation may be deemed to have
a permanent establishment in the Philippines if, among others, the furnishing of services by such
corporation through its employees or other personnel, in the same or any project connected thereto,
continue within the Philippines for a period or periods aggregating more than six (6) months within any
taxable year.
With respect to paragraph 3 supra; the commentaries of the ORGANISATION FOR ECONOMIC
CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax
Convention on Income and Capital Condensed Version [par. 19, Commentary on Article 5 (Permanent
Establishment), © 2005, p. 93) provides, viz:
"19. . . . If an enterprise (general contractor) which has undertaken the performance of a

comprehensive project subcontracts parts of such a project to other enterprises (subcontractors), the
period spent by a contractor working on the building site must be considered as being time spent by
the general contractor on the building project. The subcontractor himself has a permanent
establishment at the site if his activities there last more than twelve months."
The relevant OECD commentary provides that a Japanese contractor of a building site, construction
or installation project which subcontracts part of the project to a Philippine corporation may be deemed to
have a permanent establishment in the Philippines depending on the period spent by the subcontractor on
the building site or project. The period spent by the domestic subcontractor on the building site or project
shall be considered as time spent by the Japanese contractor itself. Accordingly, if the period spent by the
Philippine subcontractor on the building site, construction or installation project exceeds 6 months, then
the Japanese contractor shall be deemed to have a permanent establishment in Philippines. Conversely, if
the period spent by the Philippine subcontractor on the building site, construction or installation project is
less than 6 months, then the Japanese contractor is deemed not to have a permanent establishment in
Philippines to which its business profits may be attributed to.
Insofar as the rendition of services under Contract A, MESCO represents that it shall execute and
accomplish such services in Japan, and that in cases allowed by the contract regarding subcontracting, it
shall subcontract the same to Japanese subcontractors which shall also perform the same in Japan. Such
being the case, and for as long as its employees do not render services in the Philippines for a period or
periods aggregating more than 6 months within any taxable year, MESCO is not deemed to have a
permanent establishment in the Philippines. (BIR Ruling No. DA-ITAD-128-05 dated November 10, 2005)
With respect to Contract B, inasmuch as the execution of the subcontract will be performed by
TAISEI in its ordinary course of business, and that the duration of the entire subcontract does not exceed
six months, more particularly from July 14, 2005 to October 15, 2005, MESCO is not deemed to have a
permanent establishment in the Philippines to which its business profits may be attributed to. However,
TAISEI shall remain liable for the Philippine income tax on payments it will receive from MESCO under
the subcontract. Further, the total payments arising from the transactions shall be allocated if it is
discovered later on that the parties are owned and controlled, directly or indirectly, by the same interest.
CIAcSa
Accordingly, the payments by PASAR to MESCO for the latter's services under Contracts A and B
are not subject to Philippine income tax pursuant to Article 7 in relation to Article 5 of the
2. Payments to be derived by MESCO from the sale of materials, tools and equipment and the sale of
services to PASAR under Contracts A and B are not subject to VAT
Section 106 of the Tax Code of 1997 (Tax Code) subjects the sale, barter or exchange of goods or
properties to the 10% VAT. However, in the recent case of Commissioner of Internal Revenue v. Seagate
Technology (Philippines), G.R. No. 153866, promulgated on February 11, 2005, the Supreme Court held
that:
"Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides
that those falling under Presidential Decree (PD) No. 66 are not. P.D. No. 66 is the precursor of
Republic Act (RA) No. 7916 — the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT;
respondent is required to register. Since the purchases of respondent are not exempt from the VAT,
the rate to be applied is zero. Its exemption under both P.D. No. 66 and R.A. No. 7916 effectively
subjects such transactions to a zero rate, because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs territory. This means that in such zone is
created the legal fiction of foreign territory.
xxx xxx xxx
However, R.A. No. 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone. Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio 'firmat regulam in casibus non exceptis. An exception
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity — a patent circumvention of the
law. That no VAT shall be imposed directly upon business establishments operating within the
ecozone under R.A. No. 7916 also means that no VAT may be passed on and imposed indirectly.
Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited
directly, it is also prohibited indirectly.
xxx xxx xxx
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be
subject to . . . internal revenue laws and regulations" under P.D. No. 66 — the original charter of
PEZA (then EPZA) that was later amended by R.A. No. 7916. No provisions in the latter law
modify such exemption. (Emphasis supplied)
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise — except
those prohibited by law — "shall not be subject to . . . internal revenue laws and regulations . . ." if
brought to the ecozone's restricted area for manufacturing by registered export enterprises, of which
respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the
effectivity of such rules. (Emphasis supplied)
Based on the foregoing, transactions exempt from VAT by reason of P.D. No. 66 and R.A. No.
7916 are effectively zero-rated. However, instead of zero-rating which is not available to nonresident
suppliers, the provision for exempt transactions under Section 109(q) of the Tax Code which provides
VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or
PEZA Law, is particularly applicable to the instant case.
Accordingly, the sale of materials, tools and equipment by MESCO to PASAR is exempt from
VAT as PASAR, being a PEZA-registered enterprise, cannot legally be passed on with nor claim input
VAT while MESCO being a nonresident foreign corporation cannot avail of the benefits of zero-rating.
With respect to the services by MESCO for PASAR performed outside the Philippines, the same
shall be exempt from VAT. In defining the phrase "sale or exchange of services" subject to 10% VAT,
Section 108 of the Tax Code provides:
"The phrase "sale or exchange of services" means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, . . . " (emphasis supplied)
Clearly, the VAT imposed under Section 108 of the Tax Code applies only to services performed in
the Philippines and not to services rendered outside the Philippines. Accordingly, the subject service fees
to be paid by PASAR to MESCO in consideration for the services to be performed by MESCO in Japan
are not subject to VAT. (BIR Ruling No. DA-ITAD 39-03 dated March 4, 2003)
3. The sale by local suppliers to MESCO for delivery to PASAR and the payment of MESCO to TAISEI,
the local subcontractor under Contract B, shall be subject to VAT at zero percent
The sale of materials, tools and equipment by local suppliers to MESCO for delivery to PASAR, if
any, are subject to VAT at zero percent rate when paid for in acceptable foreign currency and accounted
for in accordance with the Bangko Sentral ng Pilipinas (BSP) under Section 106(A)(2)(b) of the Tax Code.
Section 106(A)(2)(b) of the Tax Code provides that foreign currency denominated sales by
VAT-registered persons shall be subject to VAT at zero percent. The phrase "currency denominated sales"
means sale to a nonresident of goods for delivery to a resident in the Philippines, paid in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP. Accordingly,
the sales by the local suppliers to MESCO pursuant to Contract A is subject to VAT at zero percent,
provided that the consideration for such sale is in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP. (BIR Ruling DA-161-05 dated April 14, 2005)
As regards TAISEI, Section 108(B)(2) of the Tax Code provides that the sale of services to persons
doing business outside the Philippines, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP are subject to VAT at
zero percent. Accordingly, the services to be rendered by TAISEI, the local contractor to whom MESCO
will subcontract Contract B, is subject to VAT at zero percent rate provided that the consideration for such
sale is in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP. (VAT Ruling No. 004-04 dated February 27, 2004)
herein parties are concerned. cDCaTH
Very truly yours,

Commissioner
Legal Service
Footnotes
1. Site verification and data gathering: MESCO to independently check the accuracy or veracity or
completeness of any data or information furnished by PASAR, for which MESCO fully assumes any and
all risks. Drawings furnished are meant to be verified at Plant Site. Site Verification shall not, in any way,
exceed an aggregate of six (6) months.
2. MESCO to independently check the accuracy or veracity or completeness of any data or information
furnished by PASAR, for which MESCO fully assumes any and all risks. Drawings furnished are meant to
be verified at the Plant Site.
January 9, 2006

Embassy Of The Islamic Republic of Iran

2224 Paraiso St. cor. Pasay Road,
Dasmariñas Village,
Makati City
Gentlemen :
This has reference to your Note No. 6060 dated October 3, 2005 referred to this Office by the
from payment of tax on the purchase of one (1) locally-assembled motor vehicle, for the official use of the
Embassy of the Islamic Republic of Iran, specifically described as follows:
Make: Toyota Innova J 2.0 Gas M/T

Model Year: 2005
Color: Quick Silver
Engine Number: ITR-6122403
reads:
"ARTICLE 34
services;
xxx xxx xxx"
from value-added tax (VAT) on its purchases of locally assembled motor vehicles. In other words,
purchases by that Embassy and/or its diplomatic agents of locally-assembled motor vehicles shall be
subject to the value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue
Code of 1997.
Embassy of the Islamic Republic of Iran and/or its personnel on their purchases of locally-assembled
motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18,
2005, that your Government allows similar exemption to Philippine Embassy and/or its personnel on their
purchase of locally assembled motor vehicles in your country.
Hence, the local purchase of one (1) unit of 2005 Toyota Innova J 2.0 Gas M/T for the official use
of the Embassy of the Islamic Republic of Iran is exempt from VAT. (ITAD Ruling No. 048-01 dated May
15, 2001)
Very truly yours,

Legal Service
January 9, 2006

Embassy of The United States of America

Roxas Boulevard
Manila
Gentlemen :
This has reference to your Note No. 1510 dated November 18, 2005, referred to this Office by the
from payment of value-added tax (VAT) on the purchase of two (2) locally-assembled motor vehicles, for
the official use of the Embassy of the United States of America, specifically described as follows:
Make: Toyota Hi-Lux G 3.0 A/T

Model Year: 2005
Color: Graying Brown
Chassis Number: MROFZ29G8-01514296
Make: Mitsubishi Adventure GLS Sport Gas A/T

Model Year: 2005
Color: Aspen White
Engine Number: 4G63A-C3750
Chassis Number: PAEVB2RX15B000589
reads:
"ARTICLE 34
services;
xxx xxx xxx"
Embassy and/or its diplomatic agents of locally-assembled motor vehicles shall be subject to the
value-added tax prescribed under Sections 106 and 108 of the National Internal Revenue Code of 1997.
Embassy of the United States of America and/or its personnel on their purchases of locally-assembled
motor vehicles it appearing from the list submitted by the Department of Foreign Affairs as of October 18,
2005, that your Government allows similar exemption to Philippine Embassy and/or its personnel on their
Hence, the local purchases of one (1) unit of 2005 Toyota Hi-Lux G 3.0 A/T and one (1) unit of
2005 Mitsubishi Adventure GLS Sport Gas A/T for the official use of the Embassy of the United States of
America are exempt from VAT. (ITAD Ruling No. 165-03 dated November 7, 2003)
Very truly yours,

Legal Service
Endnotes
1 (Popup - Popup)
1. Republic Act No. 9243 — An Act Rationalizing The Provisions on the Documentary Stamp Tax of the
National Internal Revenue Code of 1997, as amended and for Other purposes. (Effective date is March 20,
2 (Popup - Popup)
3 (Popup - Popup)
4 (Popup - Popup)
5 (Popup - Popup)
9337]
6 (Popup - Popup)
1. Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive
Finance to increase the Value-Added Tax Rate from Ten Percent to Twelve Percent)
7 (Popup - Popup)
8 (Popup - Popup)
9 (Popup - Popup)
85-91.
10 (Popup - Popup)
1. Contractor refers to Korea Electric Power Corporation (KEILCO).
11 (Popup - Popup)
2. Kepco Ilijan Corporation (KEPCO).
12 (Popup - Popup)
3. Managerial and Technical Services Agreement between KEPCO and KEILCO.
13 (Popup - Popup)
4. "Project".
14 (Popup - Popup)
5. "Power Station" means the 1200 MV natural gas fired combined cycle power plant with diesel fuel fire
capability to be located in Ilijan, Batangas on a build, operate and transfer basis, and all other facilities
constructed or to be constructed in respect thereof by the Owner to enable the Owner to fulfill its
obligations under the ECA, and including the Switchyard Facilities, Access Road, Diesel Fuel Pipeline and
Jetty.
15 (Popup - Popup)
6. "Construction Contractors" means Raytheon Ebasco Overseas Ltd, and United Engineers International, Inc.
and Mitsubishi Corporation.
16 (Popup - Popup)
107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The
for others for a fee, remuneration or consideration. . ."
Memorandum Circular No. 7-2006 (Publishing the full Text of the Memorandum from Executive Secretary
17 (Popup - Popup)
percent (1 1/2%).
xxx xxx xxx"
18 (Popup - Popup)
19 (Popup - Popup)
20 (Popup - Popup)
9337].
21 (Popup - Popup)
1. The "Language" shall be Tagalog and English. A Picture shall be deemed to be in the Language if its
original soundtrack is in the language, or if its is sub-titled or dubbed in the Language if and as approved by
Fox in Advance in writing. The soundtrack on any sub-titled version shall be in the English language.
22 (Popup - Popup)
2. The "Territory" shall be in the Philippines and its respective territories and possessions, as their political
borders exist on the Commencement Date.
23 (Popup - Popup)
November 1, 2005, as amended Section 108(A) to read as:
xxx xxx xxx"
24 (Popup - Popup)
25 (Popup - Popup)
26 (Popup - Popup)
85-91.
27 (Popup - Popup)
28 (Popup - Popup)
29 (Popup - Popup)
3. Referring to the old Section 109(q) of the Tax Code of 1997 [now Section 109(K), as amended by RA No.
9337].
30 (Popup - Popup)
31 (Popup - Popup)
1. RMC 7-2006 Publishing the Full text of the Memorandum of Executive Secretary Eduardo R. Ermita dated
January 31, 2006, Approving the Recommendations of the Secretary of Finance to Value Added Tax Rate
from Ten Percent to Twelve Percent.
32 (Popup - Popup)
1. Effective February 1, 2006, the rate shall be twelve percent (12%).
33 (Popup - Popup)
9337]
34 (Popup - Popup)
3. SEC. 109. Exempt Transactions. — The following transactions shall be exempt from the value-added tax:
xxx xxx xxx
signatory or under special laws, except those under Presidential Decree Nos. 66, 529, and 1590;
35 (Popup - Popup)
1. "Commitment" shall mean the obligation of Lender to make Loans to the Borrower in an aggregate amount
equal to US$400,000,000.00 outstanding at any time, subject to the provisions of Section 3.02 hereof.
36 (Popup - Popup)
37 (Popup - Popup)
38 (Popup - Popup)
39 (Popup - Popup)
percent (1 1/2%).
Philippines for others for a fee, remuneration or consideration . . . The phrase 'sale or exchange of services'
shall likewise include:
xxx xxx xxx
(3) The supply of scientific, technical, industrial or commercial knowledge or information;"
40 (Popup - Popup)
2. Republic Act No. 9337 renumbered and amended Section 109(q) thus:
"SEC. 109. Exempt Transactions. — (1) Subject to the provisions of Subsection (2) hereof the following
transaction shall be exempt from the value-added tax:
xxx xxx xxx
41 (Popup - Popup)
1. SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. — Upon documents,
instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the
obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of
the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the
following Sections of this title, by the person making, signing, issuing, accepting, or transferring the same
wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises
from Philippine sources or the property is situated in the Philippines, and at the same time such act is done
or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the
tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax.
42 (Popup - Popup)
1. The Territory shall be Asia and Oceania, excluding Korea, Japan, China, Hongkong, Taiwan, Turkey, Israel
and former Soviet Bloc countries.
43 (Popup - Popup)
44 (Popup - Popup)
9337].
45 (Popup - Popup)
46 (Popup - Popup)
47 (Popup - Popup)
1. Amended by Republic Act No. 9337, effective November 1, 2005, to read as follows:
xxx xxx xxx
"(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or
price or gross value in money of goods or properties sold, bartered or exchange, such tax to be paid by the
seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance,
xxx xxx xxx
"(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable
of pecuniary estimation and shall include:
xxx xxx xxx
"(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
xxx xxx xxx
48 (Popup - Popup)
9337].
49 (Popup - Popup)
1. VAT Ruling No. 146-90 dated May 24, 1990.
50 (Popup - Popup)
1. Section 108 was amended by Republic Act No. 9337, which was signed into law on May 24, 2005 and
became effective on November 1, 2005, to read as:
A. Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipt derived from the sale or exchange of services, including the
use or lease of properties selling price of gross value in money of the goods or properties sold, bartered or
percent (1 1/2%)
xxx xxx xxx
51 (Popup - Popup)
85-91.
52 (Popup - Popup)
1. Please not that this cited provision has been retained by Republic Act (RA) No. 9337, although with the
53 (Popup - Popup)
2. Referring to the old Section 109 (q) of the Tax Code of the 1997 [now Section 109(K), as amended by RA
No. 9337].
54 (Popup - Popup)
equivalent to ten percent (10%) of gross receipts deprived from the sale or exchange of services, including
tax to twelve percent (12%), after any of the following conditions has been satisfied.
exceeds one and one half percent (1 1/2%); or
(ii) National agreement 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' means the performance of all kinds of services in the
Philippine for others for a fee, remuneration or consideration . . ."
55 (Popup - Popup)
2. Section 109(q) was amended and renumbered by Republic Act 9337 to read as:
"SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following
shall be exempt from the value-added tax.
xxx xxx xxx
56 (Popup - Popup)
3. Now Section 4.109-1 of Revenue Regulations 16-2005, the accompanying regulations of Republic Act
9337.
57 (Popup - Popup)
58 (Popup - Popup)
59 (Popup - Popup)
1. Republic Act No. 9243 — An Act Rationalizing the Provisions on The Documentary Stamp Tax of the
National Internal Revenue Code of 1997, as amended and for Other Purposes. (Effective date is March 20,
2004 per Revenue Regulations No. 13-2004).
60 (Popup - Popup)
61 (Popup - Popup)
62 (Popup - Popup)
85-91.
63 (Popup - Popup)
4. 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, 236, 237 and 288 of the National Internal Revenue Code of 1997, As
Amended, And For Other Purposes.
64 (Popup - Popup)
65 (Popup - Popup)
66 (Popup - Popup)
85-91.
67 (Popup - Popup)
68 (Popup - Popup)
69 (Popup - Popup)
70 (Popup - Popup)
85-91.
71 (Popup - Popup)
4. Republic Act No. 9337 — new rate.
72 (Popup - Popup)
73 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy. Footnote No. 3 should read as
Footnote No. 5.

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December 20, 2006

DA ITAD BIR RULING NO. 171-06

Article 10, Philippines-Japan tax treaty;

Ideal World Corporation

Attention: Mr. Mario M. Guy

(1) Dividends paid by a company which is a resident of a Contracting State to a resident of

xxx xxx xxx

xxx xxx xxx"

Very truly yours,

Commissioner of Internal Revenue

(SGD.) JAMES H. ROLDAN

DA ITAD BIR RULING NO. 170-06

Article 13, Philippines-Netherlands Tax Treaty;

Castillo Laman Tan Pantaleon & San Jose

Attention: Atty. Maria Victoria D. Sarmiento

a. decrease the Authorized Capital Stock (ACS) of ELP by P500,000,000.00;

Since the shareholder is a resident of the Netherlands, Article 13 of the Philippines-Netherlands

1. Gains from the alienation of immovable property, as defined in paragraph 2 of Article

3. Notwithstanding the provisions of paragraph 2, gains derived by an enterprise of one of

December 22, 2006

DA ITAD BIR RULING NO. 169-06

Article 11 of the Philippines-Singapore tax treaty;

Asahi Glass Philippines, Inc.

Attention: Ms. Sarah C. Soriano

It is represented that AG Investment is a nonresident foreign corporation duly organized and

xxx xxx xxx"

Very truly yours,

Commissioner of Internal Revenue

(SGD.) JAMES H. ROLDAN

December 21, 2006

DA ITAD BIR RULING NO. 168-06

Make: Toyota Camry 2.4V A/T

xxx xxx xxx"

Very truly yours,

(SGD.) JAMES H. ROLDAN

December 18, 2006

Article 20, Philippines-Germany tax treaty; BIR Ruling No.

European International School

Attention: Mr. Ludwig Etzel

TEACHERS AND RESEARCHERS

1. Remuneration which a professor or teacher, who is or immediately before was a

Very truly yours,

Commissioner of Internal Revenue

(SGD.) JAMES H. ROLDAN

December 15, 2006

DA ITAD BIR RULING NO. 166-06

Article 11, Philippines-Japan tax treaty; BIR Ruling No.

Isla Lipana & Co.

Attention: George J. Lavadia

xxx xxx xxx

xxx xxx xxx"

Very truly yours,

Commissioner of Internal Revenue

(SGD.) JAMES H. ROLDAN

December 18, 2006

DA ITAD BIR RULING NO. 165-06

Philippines-Australia Land Administration and

Organization: Philippines-Australia Land Administration and

"Section 106. Value-added Tax on Sale of Goods or Properties. —