II.

ITAD RULING

July 19, 2002 ITAD RULING NO. 124-02 RP-US, Art. 5 & 7 BIR Ruling No. ITAD-65-00 Norgate Apparel Manufacturing, Inc. Molave St., Ceris I Subdivision Canlubang, Laguna Attention: Minoru Sakata VP-Treasurer Gentlemen : This refers to your letter dated February 4, 2002 requesting for a ruling on whether the commission income paid by your company to Tomen America, Inc. (Tomen) falls within the purview of ordinary business profits and therefore is exempt from Philippine income tax pursuant to Article 8(1) of the RP-US tax treaty. DcCITS It is represented that Tomen is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office address at 111 West 40th Street, New York, NY10018, USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 20, 2002; that Norgate Apparel Manufacturing, Inc. (Norgate) is a corporation duly organized and existing under Philippine laws and engaged in the business of manufacture and export of wearing apparels; that on January 22, 2002, Tomen and Norgate entered into a Service Contract whereby the former agreed to look and procure for possible buyers of Norgate apparels in the USA; that in the conduct of the aforesaid services provided by Tomen, all transactions and communications are being done through electronic mail and couriers; that no representative of Tomen has arrived or stayed in the Philippines and it is the Sales Officers of Norgate who goes to the USA for the negotiation with the prospective buyers; and that Norgate shall pay to Tomen service commissions as consideration of the above services. In reply, please be informed that Article 7 paragraph 1 of the RP-US tax treaty provides as follows: ECDHIc "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" Moreover, Article 5 paragraphs 1 and 2 of the same treaty provide, viz: "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; 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. (emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, it is clear that if a corporation which is a resident of the USA 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 them as is attributable to that permanent establishment. For this purpose, a corporation which is a resident of the USA 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, continue within the Philippines for a period or periods aggregating more than 183 days. cHSIDa Considering that the furnishing of services is performed by Tomen in its office in the USA and none of its personnel will arrive or stay in the Philippines, Tomen is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, the commission income derived by Tomen from services rendered to Norgate is not subject to Philippine tax pursuant to Article 8(1) in relation to Article 5(1) and (2) of the RP-US tax treaty. (BIR Ruling No. ITAD-65-00 dated April 6, 2000) 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. THcaDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service C o p y r i g h t 2 0 0 3 C D T e c h n o l o g i e s A s i a, I n c. 07-17-2002 ITAD Ruling No. 123-02

GENERALLY, Foreign corporations are taxed only on their Philippine source income. Corporate income is taxed when earned by the corporation and again when profits are received by shareholders. Inter-corporate dividends between domestic corporations or received from a domestic corporation by a resident foreign corporation are not subject to tax. Depending on the business activity involved, the starting point for Philippine taxation is whether a foreign business has Philippine source income. The Philippines also has several double taxation treaties with different countries like in the case at bar, which relinquish taxing rights over business profits to the state of residence if no permanent establishment (PE) exists or should reduce the applicable rates of tax imposed on Philippine source income. Generally, active business income earned by individuals is subject to graduated rates of tax between 5-32% in the Philippines. The active business income of Corporations, on the other hand is subject to a flat 30% tax rate. Passive income such as interest, royalties, and dividends are subject to final withholding taxes which are withheld at source. The applicable rates of final withholding tax vary depending on the type of income involved and the taxpayer in the Philippines. A foreign owned company considered doing business in the Philippines must be licensed by the Securities and Exchange Commission (SEC) or will be considered a non resident foreign corporation and subject to tax a final tax of 32% of its gross (rather than net) income

Foreign and local businesses in the Philippines that qualify and are registered for tax incentives can avail of income tax holidays and this may be followed by a special tax rate of 5% in lieu of any and all taxes if the business is located in a Philippine Special Economic Zone (PEZA) . The tax rates mentioned above, however, will differ if a different tax rate is provided for in a Tax Treaty entered into by the Philippines with the country where the foreign corporation is registered or a resident of like in the case at bar, the RP-US treaty.