April 30, 2008

BIR RULING [DA-273-08]

23 (F); 42 (C) (3); 108; 109 (K); DA

108-07; DA-ITAD 042-06

Samsung Electronics Philippines

Manufacturing Corporation
Block 6, Calamba Premiere International Park,
Barangay Batino, Calamba City,
Laguna

Attention: Mr. Sang Ho Park

Chief Financial Officer

Gentlemen :

This refers to your letter dated April 21, 2008 requesting confirmation
that: 1) the license fees to be made by Samsung Electronics Philippines
Manufacturing Corporation (SEPHIL) to Samsung Electronic Co. Ltd. (SECL)
pursuant to the JungUm Global License Agreement (Agreement) are not
subject to value added tax (VAT); 2) the license fees to be paid by SEPHIL
under the Agreement effective September 8, 2005 are ordinary business
profits and not royalties; and 3) the license fees effective September 8, 2005
are income of SECL derived from sources outside the Philippines and,
therefore, exempt from Philippine income tax.
It is represented that SEPHIL [formerly Philippines Samsung Electronics
Corporation (PSEC)] is a corporation duly organized and existing under
Philippine laws with office address at the Calamba Premiere International
Park-Special Economic Zone. It is registered with the Philippine Economic
Zone Authority (PEZA) as an Ecozone Export Enterprise under Registration
Certificate No. 01-011 dated February 9, 2001 and is entitled to a 5% special
tax on gross income in lieu of payment of all national and local taxes and
Income Tax Holiday on other registered activities with Supplemental
Agreements dated December 22, 2004 and January 9, 2008 under
Resolutions No. 04-0436 and 08-030.
It is also 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. It 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. SECL has not engaged in any
business activity in the Philippines. CaTcSA

CD Technologies Asia, Inc. © 2022 cdasiaonline.com

 It is finally represented that SEPHIL is one of the ten entities
comprising the Samsung Electronics Southeast Asia (SEAHQ). On June 22,
2005, SEAHQ entered into an agreement with SECL for use of the JungUm
Global License for a period of three years, from June 22, 2005 to June 21,
2008. Under the Agreement, SEAHQ's entities are granted the non-exclusive
right to use the JungUm Global License, in exchange for which SECL bills the
SEAHQ entities individually for use of the software. Pursuant thereto, SEPHIL
shall pay SECL annual license fees in US dollars equivalent to 177,000 won.
Based on the foregoing, you now request confirmation of your opinion
that 1) the license fees to be paid by SEPHIL are not subject to value added-
tax; 2) the license fees to be paid by SEPHIL under the Agreement effective
September 8, 2005 are ordinary business profits and not royalties; 3) the
license fees effective September 8, 2005 are income of SECL derived from
sources outside the Philippines and, therefore, exempt from Philippine
income tax.
In reply, please be informed that as a general rule, the sale of services
to be rendered in the Philippines is subject to twelve percent (12%) VAT.
Section 108 (A) of 1997 Tax Code, as amended by R.A. 9337, provides as
follows:
"Section 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%) [now
12%] 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 a fee,
remuneration or consideration . . . (emphasis added)
aSTECI

However, Section 109 (q) of the same Tax Code exempts from VAT
transactions which are exempt under international agreements or under
special laws, to wit:
"SEC. 109. Exempt Transactions . — The following 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;

"xxx xxx xxx"

Concerning special laws relevant to SEPHIL 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
CD Technologies Asia, Inc. © 2022 cdasiaonline.com
 Authority (PEZA), and for Other Purposes) is worth mentioning, thus:
"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. . ."

As a PEZA-registered enterprise enjoying a 5% preferential tax rate,

SEPHIL is subject to a different tax regime and excluded from the VAT
system. This is because the ecozone within which it is registered is managed
and operated as a separate customs territory — or a foreign territory created
by legal fiction. Considering that SEPHIL is transacting with a non-resident
foreign corporation which is likewise not covered by the VAT system, there
may be no instance where VAT may be imposed on SEPHIL's transactions. As
such, it may not be passed on with nor claim input VAT on the license fees,
nor can it be obliged to shoulder the payment of VAT on the fees.
Accordingly, the payment of license fees by SEPHIL to SECL is exempt from
VAT. This position finds support in VAT Ruling No. 100-99 dated September
16, 1999, as reiterated in BIR Ruling Nos. DA-ITAD 62-05 dated June 27,
2005 and DA-ITAD 112-05 dated September 30, 2005, where the BIR held
that the payment of royalties by a PEZA-registered export enterprise to a
non-resident owner is exempt from VAT. TcAECH

With respect to the income tax implications of the subject payment to

SECL, please be informed that there are two Revenue Memorandum
Circulars (RMCs) governing the taxation of software payments as explained
in BIR Ruling DA-ITAD-042-06. 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.
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 was also stated in the ruling that license fees paid for the right to
access and use a licensed software but without the right to market or exploit
the same would render the payment of such fees as business income. DcSEHT

Based on the foregoing, the license fees paid by SEPHIL for its use of
the JungUm Licensed Software from the effective date of the Agreement on
June 22, 2005 up to September 7, 2005, are treated as royalties under RMC
77-2003, and are therefore subject to the reduced tax rate under Article 12
CD Technologies Asia, Inc. © 2022 cdasiaonline.com
 of the RP-Korea Tax Treaty which provides thus:
"Article 12
Royalty
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 charged
shall not exceed 15 per cent of the gross amount of the royalties.
3. Notwithstanding the provisions of paragraph 2 hereof, the
amount of tax imposed by 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
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.
xxx xxx xxx"

On the other hand, the license fees paid by SEPHIL for the its 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 of SECL in the Philippines, in accordance with
Article 5, in relation to Article 7 of the Philippines-Korea tax treaty, quoted as
follows: DaIAcC

"Article 5
PERMANENT ESTABLISHMENT

(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 place of management;

b) a branch;
c) an office;

d) a factory;
CD Technologies Asia, Inc. © 2022 cdasiaonline.com
 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.
xxx xxx xxx

(4) Notwithstanding the preceding provisions of this Article, the

term "permanent establishment" shall be deemed not to include:
xxx xxx xxx

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; and
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 a preparatory or auxiliary
character.

"xxx xxx xxx"

"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. HaTISE

xxx xxx xxx"

Considering the foregoing, and inasmuch as SECL's representative

office acts exclusively for information collection and dissemination on its
behalf and for other activities which are preparatory and auxiliary in
character, it is clear that said representative office is not a permanent
establishment of SECL in the Philippines. Accordingly, SECL is not deemed to
have permanent establishment in the Philippines to which the royalty
payment may be attributed. Hence, the license fees paid effective
September 8, 2005 are considered income derived from sources outside the
Philippines.
In this regard, Section 23 (F), in relation to 42 (C) (3) of the Tax Code,
provides:
CD Technologies Asia, Inc. © 2022 cdasiaonline.com
 "Sec. 23. General Principles of Income Taxation in the Philippines.
—
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."

"Sec. 42. Gross Income from Sources Without the Philippines. —

xxx xxx xxx

(3) Compensation for labor or personal services performed

without the Philippines."

Since the license fees are considered income derived from sources
outside the Philippines, the payments made by SEPHIL to SECL pursuant to
the JungUm Agreement effective September 8, 2005 are not subject to
Philippine income tax and consequently to withholding tax.
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, then this ruling shall be considered null and void. cHaICD

Very truly yours,

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

CD Technologies Asia, Inc. © 2022 cdasiaonline.com