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ITAD RULING NO.

014-01

Art. 5 & 7, RP-Singapore


BIR Rulings Nos. 279-88, 219-85 &
DA-062-2-5-99

Puyat Jacinto & Santos


12/F Manilabank Building
672 Ayala Avenue
Makati 1226

Attention: Regina P. Jacinto


Job M. Ambrosio
Rafael C. Garcia

Gentlemen :

This refers to your application on behalf of your client, Edsamail Asia Private
Ltd. (EAPL), requesting confirmation of your opinion that the income derived by
EAPL is income from sources outside the Philippines and therefore not subject to
income tax, withholding tax and value-added tax in accordance with the Tax Code of
1997 and pursuant to the RP-Singapore Tax Treaty.

It is represented that EAPL is a nonresident foreign corporation organized and


existing under the laws of Singapore with office address at No. 50 Kallang Avenue,
Noel Corporate Building, Singapore 339505; that EAPL does not have a branch,
representative office or subsidiary in the Philippines; that EAPL intends to
disseminate advertisements of its potential clients through the Internet using its
facilities in Singapore; that the said advertisements, which are in the form of
"banner-ads," will be prepared entirely in Singapore and the editing, programming,
designing and dissemination of such advertisements will also be done using the EAPL
facilities in Singapore; that EAPL also intends to enter into non-exclusive contracts
with Philippine agents such as advertising agencies (local agents, i.e. Indio
Communication Design and RS Concepts, Inc.); that these agents will act as
independent contractors and will be responsible for soliciting potential advertising
customers in the Philippines for EAPL; that these local agents do not have authority
to enter into contracts for and on behalf of EAPL; that all advertising contracts will
be accepted and executed by EAPL in Singapore; that the role of the local agents will
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be limited to soliciting advertisements from advertisers and collecting the advertising
fees and remitting the same to EAPL net of their commission; and that all cost for
solicitation and collection will be for the account of the local agents.

In reply, please be informed that Article 7 of the RP-Singapore Tax Treaty


states:

"Article 7

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be taxable


only in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If the
enterprise carries on or has carried on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only so much of them as is
attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a


Contracting State carries on business in the other Contracting State through a
permanent establishment situated therein, there shall be attributed to that
permanent establishment profits which it might be expected to make if it were a
distinct and separate enterprise engaged in the same or similar activities under
the same or similar conditions and dealing wholly independently with the
enterprise of which it is a permanent establishment. aTEScI

However, insofar as it has been customary in a Contracting State to


determine the profits to be attributed to a permanent establishment on the basis
of an apportionment of the total profits of the enterprise to its various parts,
nothing in this paragraph shall preclude that Contracting State from determining
the profits to be taxed by such an apportionment as may be customary; the
method of apportionment adopted shall, however, be such that the result shall
be in accordance with the principles embodied in this Article."

The above-quoted provision of the RP-Singapore Tax Treaty must be read in


relation with its Article 5, to wit:

"Article 5

PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term "permanent


establishment" means a fixed place of business in which the business of the

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enterprise is wholly or partly carried on.

2. The term "permanent establishment" includes specially 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; ISCTcH

f) A workshop;

g) A warehouse, in relation to a person providing storage facilities for


others;

h) A mine, quarry, or other place of extraction of natural resources;

i) A building site or construction or assembly project or installation


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

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


resident of one of the Contracting States through employees or other personnel,
provided activities of that nature continue (for the same or a connected project)
within the other Contracting State for a period or periods aggregating more than
183 days.

3. ...

4. A person acting in one of the Contracting States on behalf of an


enterprise of the other Contracting State, other than an agent of an independent
status to whom paragraph 5 applies, shall be deemed to be a permanent
establishment in the first-mentioned Contracting State if

a) he has, and habitually exercises in the first-mentioned


Contracting State, an authority to conclude contracts in the name of that
enterprise unless the exercise of such authority is limited to the purchase
of goods or merchandise for that enterprise; or

b) he has no such authority, but habitually maintains in the


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first-mentioned State a stock of goods or merchandise from which he
regularly delivers goods or merchandise on behalf of the enterprise.

5. An enterprise of one of the Contracting States shall not be deemed


to have a permanent establishment in the other Contracting State merely
because that enterprise carries on business in that other Contracting State
through a broker, general commission agent, or any other agent of an
independent status, where such broker or agent is acting in the ordinary course
of his business. However, when the activities of such an agent are devoted
wholly or almost wholly on behalf of that enterprise, he shall not be considered
an agent of independent status within the meaning of this paragraph if the
transactions between the agent and the enterprise were not made under arm's
length conditions."

Based on the foregoing provisions of the treaty, the Philippines is allowed to


tax the business profits of an enterprise which is a resident of Singapore if it has a
permanent establishment situated in the Philippines and only so much of such profit
that is attributable to that permanent establishment.

Considering that EAPL does not have permanent establishment located in the
Philippines and its local agents did not qualify as to constitute permanent
establishment situated in the Philippines, your opinion that the income of EAPL from
advertising fees paid by local agents is not subject to Philippine income tax and
consequently to the withholding tax pursuant to the RP-Singapore Tax Treaty is
hereby confirmed. (BIR Rulings 279-88 & 219-85)

Moreover, as the editing, programming, designing and dissemination of such


advertisements will be done using the facilities in Singapore, the situs of income
arising from such labor or personal services is Singapore. On this score, whatever fees
derived therefrom are considered income outside the Philippines and therefore not
taxable since a nonresident foreign corporation is taxable only on its income from
sources within the Philippines. (BIR Rulings supra.)

However, the commissions received and to be received by Indio


Communication Design and RS Concepts, Inc. from EAPL pursuant to their
agreement are subject to the corporate income tax imposed under Section 27(A) of the
Tax Code of 1997 and to the 10% VAT under Section 108(A) of the same Code. (BIR
Ruling DA-062-2-5-99)

This ruling is issued on the basis of the foregoing facts as represented.


However, if upon investigation it will be disclosed that the facts are different, then

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this ruling shall be null and void.

Very truly yours,

(SGD.) RENE G. BAEZ


Commissioner
Bureau of Internal Revenue

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