December 15, 2009

BIR RULING [DA-(ECB-026) 778-09]

RR 2-98; RR 3-98; RR 8-2000; DA-374-08;
DA-013-08; DA-233-07; DA-023-06; DA-350-04
SyCip Gorres Velayo & Co.
6760 Ayala Avenue
Makati City
Attention: Atty. Jules E. Riego
Principal, Tax Services
Gentlemen :
This refers to your letter dated October 20, 2009 requesting for confirmation of your
opinion: EcDTIH
1)
That the taxi/transportation allowance of P100.00/day given by SGS Gulf to
any employee who worked overtime beyond 10 p.m. or whose work shift starts at
10 p.m. onwards are not subject to the fringe benefits tax; and
2)
That since the said benefits are pre-computed on a daily basis and are paid to
the employees, while they are on assignment or duty, they are not subject to the
requirements of substantiation and therefore not subject to income tax and to
withholding tax.
The facts as you represented are as follows:
SGS Gulf is a foreign corporation duly registered with and licensed to do business by
the Philippine Securities and Exchange Commission (SEC). Its principal office is
located at 20th Floor Citibank Tower, 8741 Paseo de Roxas, Makati City.
SGS Gulf provides business process insourcing services to the SGS network
worldwide and is processing trade documents using the centralized web based
single IT Platform twenty four (24) hours a day. SGS Gulf is servicing 90% of the
volume for the global Governments and Institutions Services ("GIS") business line
alone: 410 offices in Europe, 133 Offices in Asia and the Pacific, 128 offices in
Africa/Middle East and some offices in the Americas.
Expanded services catering to other global SGS business line include: data
management on global contract prices, framework agreement, vessel inspection
reports, analysis of the voice of the customers and data cleaning for the Oil & Gas
Chemicals, Agriculture-Cotton and Continuous Improvement.

SGS Gulf also provides global information technology services. It provides expertise
in the fields of application support, web content publishing, software development,
network and infrastructure support and software testing. Request for services come
from the information technology group in the head office in Geneva, and some from
the different global business sectors.
Hence, the necessity and demands of the job of its employees often require them to
render overtime work. Due to the nature of its business, there are also employees
whose work shift schedules are between the hours of 10:00 p.m. and 7:00 a.m. of
the following day.
In this regard, in order to promote the welfare and safety of its employees, SGS Gulf
instituted a taxi/transportation allowance of P100.00/day for employees rendering
overtime work beyond 10:00 p.m. and those whose work shift schedules are from
10:00 p.m. to 7:00 a.m. The purpose of the taxi/transportation allowance is to allow
the said employees to take a safer means of transportation considering their late
time-out from work and the difficulty of travelling at night for those whose night
shift starts at 10:00 p.m. onwards. ESTDcC
In reply thereto, please be informed as follows:
Section 2.78.1 (A) (3) of Revenue Regulations No. 2-98 provides
"(3) Facilities and privileges of relatively small value Ordinarily, facilities and
privileges (such as entertainment, medical services, or so called "courtesy"
discounts on purchases), otherwise known as "de minimis benefit," furnished or
offered by an employer to his employees, are not considered as compensation
subject to income tax and consequently to withholding tax, if such facilities are
offered or furnished by the employer merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees."
Corollarily, in Section 2.33 (C) of Revenue Regulations No. 3-98 provides that
"(C) Fringe Benefits Not Subject to Fringe Benefits Tax In general, the fringe
benefits tax shall not be imposed on the following fringe benefits:
xxx

xxx

xxx

(5)
If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer; or
(6)

If the grant of the fringe benefit is for the convenience of the employer."

Finally, in Section 2.78.1 (A) (6) (b) of Revenue Regulations No. 8-2000 provides that

"(6)

Fixed or variable transportation, representation and other allowances. . . .

xxx

xxx

xxx

(b)
Any amount paid specifically, either as advances or reimbursements for
travelling, representation and other bona fide ordinary and necessary expenses
incurred or reasonably expected to be incurred by the employee in the performance
of his duties are not compensation subject to withholding, if the following conditions
are satisfied:
(i)
It is for ordinary and necessary traveling and representation or entertainment
expenses paid or incurred by the employee in the pursuit of the trade, business or
profession; and aESICD
(ii)
The employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category of
expenses pursuant to Section 34 of the Code. The excess of actual expenses over
advances made shall constitute taxable income if such amount is not required to
the employer. Reasonable amounts of reimbursements/advances for traveling and
entertainment expenses which are pre-computed on a daily basis and are paid to an
employee while he is on assignment or duty need not be subject to the
requirements of substantiation and to withholding."
Thus, in BIR Ruling No. DA-350-04 dated June 25, 2004, this Office ruled that
"In view of the foregoing, this Office confirms your opinion that the transportation
allowance being given by your subsidiaries, Parlance Systems, Inc. and Vocative
Systems, Inc. to its customer service representatives are not compensation subject
to income tax and consequently, to withholding tax on wages in accordance with
Revenue Regulations No. 2-98, as amended. Moreover, since the transportation
allowance is pre-computed on a daily basis and are paid to the employee while on
an assignment or duty, the said transportation allowance is not subject to the
requirements of substantiation and to withholding pursuant to Revenue Regulations
No. 2-98, as amended."
In the said ruling, Parlance and Vocative gave a fixed pre-computed transportation
allowance to all customer service representatives in the amount of Two Thousand
Pesos (P2,000.00) per month or around Ninety One Pesos (P91.00) per day and
Three Thousand Pesos (P3,000.00) per month or around One Hundred Thirty Six
Pesos (P136.00) per day for the coaches. The transportation allowance was given
not only to promote the efficiency and well being, as well as the safety of its
employees, but also to enable these employees to come to work on time without
any untoward incident. CSDcTH
This ruling was reiterated in BIR Ruling No. DA-023-06 dated January 27, 2006,
wherein this Office ruled that the transportation subsidy ranging from P100/day to
P220/day given by Sykes to its Customer Service Representatives whose work shift
start or end at anytime between 10:00 p.m. to 6:00 a.m. and the transportation

allowance provided to any employee who renders overtime work for at least four (4)
hours per day are exempt from income tax and consequently from withholding tax
and from fringe benefits tax.
More recently, in BIR Ruling No. DA-013-08 dated January 16, 2008, this Office cited
the aforementioned rulings in holding that the Overtime/Transportation Allowance
and Duty Allowance on Night/Graveyard Shift ranging from P100/day to P200/day
given by Metrobank Card Corporation (MCC) to its employees who are made to work
overtime or made to work at designated hours at night are not subject to fringe
benefits tax as these are for the convenience of MCC and are required by the nature
of, or necessary to the trade or business of MCC. It was further ruled that since the
benefits are pre-computed on a daily basis and are paid to the employees, while
they are on assignment or duty, they are not subject to the requirements of
substantiation and therefore not subject to income tax and to withholding tax.
Similar pronouncements were also made in BIR Ruling No. DA-233-07, dated April
17, 2007 and in BIR Ruling No. DA-374-08, dated June 19, 2008, wherein it was
confirmed that transportation allowance ranging from P1,500.00 to P3,000.00 per
month is not considered compensation, hence, not subject to withholding tax and is
not subject to the fringe benefits tax since it is required by the nature of the
business of CSC and under the convenience of employer.
In view of the foregoing, this Office hereby confirms your opinion that the
taxi/transportation allowance of P100.00/day given by SGS Gulf to any employee
who worked overtime beyond 10 p.m. or whose work shift starts at 10 p.m. onwards
are not only considered "de minimis" benefit, but are also granted for the
convenience of SGS and are required by the nature of, or necessary to the trade or
business of SGS, hence, not subject to the fringe benefits tax pursuant to Section
2.33 (C) of Revenue Regulations No. 3-98, as amended. Moreover, since the said
benefits are pre-computed on a daily basis and are paid to the employees, while
they are on assignment or duty, they are not subject to the requirements of
substantiation and therefore not subject to income tax and to withholding tax.
EcDATH
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation, it will be ascertained that the facts are different,
then this ruling shall be considered as null and void.
Very truly yours,
Commissioner of Internal Revenue
By:
(SGD.) JAMES H. ROLDAN
Assistant Commissioner

Legal Service
Bureau of Internal Revenue

October 8, 2009
BIR RULING [DA-(I-033) 584-09]
24 (D) (1); 427-88; DA-096-97;
DA-092-01; DA-511-07
Mr. Joseph Sabater Paredes
Unit 1203, Goldhill Tower
No. 5 Annapolis St., Greenhills
San Juan City
Sir :
This refers to your letter dated October 2, 2009 requesting for an opinion on the tax
consequence of the court approved settlement of the properties you conjugally
owned with your wife, Lorna Pascual-Paredes, by virtue of the Order issued by the
Regional Trial Court of Makati City, Branch 136, National Capital Judicial Region, on
March 14, 2008 in Civil Case No. 07-050. ECcTaS
It is represented that on August 14, 1988, you were married to Lorna PascualParedes; that you have been separated in fact for more than one year and that
reconciliation is highly improbable; that you and your wife, assisted with your
respective counsels, through the process of the Supreme Court's system of Judicial
Dispute Resolution ("JDR"), mutually agreed to put a definitive and absolute end, by
way of settlement, to the legal actions relative to the separation of your property
relations, while the Petition for Declaration of Nullity of Marriage in Civil Case No.
7479-TG, entitled "Joseph S. Paredes vs. Lorna Pascual Paredes", pending before the
Regional Trial Court, Pasig City (Taguig Station), Branch 163, is still ongoing; that to
give effect of your mutual desire to settle your properties, you have mutually
agreed to dissolve your property relations and agreed to distribute the same in the
manner as stated in the Compromise Agreement to which the Court has acquiesced;
that in accordance with the above Court approved Compromise Agreement, the

following real properties, together with any improvements found thereon, shall be
delivered and exclusively pertain to you, viz.:
1)
Condominium Certificate of Title No. 34835 of the registry of Deeds for Pasig
City (Robinsons PCI Bank Tower);
2)
Condominium Certificate of Title No. 68693 of the Registry of Deeds for
Makati City (Le Domaine);
3)
Condominium Certificate of Title No. C-11584-R of the Registry of Deeds for
San Juan, Metro Manila (LPL Greenhills);
4)
Condominium Certificate of Title No. C-11585-R of the Registry of Deeds for
San Juan, Metro Manila (Parking Space Slot, LPL Greenhills); IDESTH
5)
Transfer Certificate of Title No. N-267933 of the Registry of Deeds for Quezon
City (Matandang Balara);
6)
Transfer Certificate of Title No. T-28944 of the Registry of Deeds for Tagaytay
City (Tagaytay Grand View III), including improvements covered by Tax Declaration
No. AA-00029-02771;
7)
Transfer Certificate of Title No. T-1073345 of the Registry of Deeds for
Province of Dasmarias, Cavite (Orchard); and
8)
Lot identified as Block 13, Lot Punta Fuego and covered by a Contract to Sell
No. 0707 dated July 16, 2002 with an area of 537 square meters.
In reply, please be informed that Articles 134 and 135 (6) of the Family Code, as
amended, the applicable provisions in the instant case, provide as follows: TcEaDS
"ART. 134. In the absence of an express declaration in the marriage settlements,
the separation of property between spouses during the marriage shall not take
place except by judicial order. Such judicial separation of property may either be
voluntary or for sufficient cause."
"ART. 135. Any of the following shall be considered sufficient cause for judicial
separation of property:
xxx

xxx

xxx

(6)
That at the time of the petition, the spouses have been separated in fact for
at least one year and reconciliation is highly improbable."
Since you were married with Lorna Pascual-Paredes on August 14, 1988, after the
effectivity of the Family Code, it is presumed that the property regime governing
your property relationship is the system of absolute community. Thus, for the reason
that you and your spouse have been separated for more than one year and

reconciliation is highly improbable, the properties belonging to the absolute

community are now voluntarily dissolved or separated and are distributed in
accordance with the court approved settlement thereof. Such being the case, and
considering that the transfer, adjudication or distribution of the above-mentioned
properties in your favor is not pursuant to a sale, hence, without any monetary
consideration, the said transfer, adjudication or distribution therefore is not subject
to the capital gains tax imposed under Sections 24 (D) (1) and 27 (D) (5) of the Tax
Code of 1997, as amended. Neither is the said adjudication, transfer, or distribution
subject to the donor's tax imposed under Section 98 of the same Tax Code, there
being no donative intent on the part of your spouse because the transfer is made
only in compliance with your property settlement which was approved by the court.
Moreover, the said transfer of real properties is not subject to the documentary
stamp tax imposed under Section 196 of the Tax Code, for said transfer is made
without any monetary consideration. (BIR Ruling No. 427-88 dated August 31, 1988;
BIR Ruling Nos. DA-096-97 dated March 14, 1997, DA-092-01 dated May 6, 2001, &
DA-511-07 dated September 26, 2007) TcEaAS
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.
Very truly yours,
Commissioner of Internal Revenue
By:
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service
Bureau of Internal Revenue

October 17, 2008

BIR RULING [DA-(C-101) 311-08]
DA115-06
Philippine Seven Corporation
7th Floor, The Columbia Tower
Ortigas Avenue
Mandaluyong City
Attention: Mr. Lawrence N. De Leon
Comptroller
Gentlemen :
This refers to your letter dated August 28, 2008 stating that the Philippine Seven
Corporation (PHIL 7) is a corporation duly registered with the Securities and
Exchange Commission (SEC); that on the other hand, 2MM Express Services
Corporation is likewise a domestic corporation with principal office address at G/F
Comfoods Building, Sen. Gil Puyat Avenue, Makati City; that PHIL 7 is the holder of
the Philippine Area License to operate and individually franchise 7-Eleven Stores in
the Philippine Territory using the 7-Eleven Trademark, Trade Services, and 7-Eleven
System, proprietary lines in accordance with 7-Eleven Image pursuant to the Area
Service and License Agreement (ASLA) between 7-Eleven, Inc. (formerly The
Southland Corporation) (7-Eleven) and PHIL 7 dated October 26, 1982, as amended
and renewal ASLA dated December 12, 1992; that on April 27, 2006, a Store
Franchise Agreement was entered into by PHIL-7 and 2MM Express Services
Corporation, as the Franchisee, whereby the latter recognizes the advantages of the
7-Eleven System and desires to obtain a franchise for a 7-Eleven Store; that in
connection therewith, Franchisee wants to lease the Store and Equipment and
operate the Store in a manner which will enhance the 7-Eleven Image and pursuant
to the 7-Eleven System, as determined from time to time by PHIL-7 and/or 7-Eleven.
PHIL-7, in reliance on the representations made by FRANCHISEE, is willing to provide
certain training and continuing services and grant a License and Lease, but only on
the terms of this Agreement, which terms are acceptable to FRANCHISEE and are
acknowledged by the parties to be material and reasonable; that the salient
features of the said Agreement are as follows: TaISDA

1.
The Franchisee shall pay Phil-7 a Franchise fee and will make a down
payment for the required investments. Franchisee shall be obligated to pay Phil-7
the amount of the unpaid balance in the Open Account. Further, Franchisee will bear
the cost to construct a standard 7-Eleven Store building in accordance with the
plans and specifications set and approved by Phil-7.
2.
Phil-7 shall provide its then current training program for operating a
franchised 7-Eleven Store to Franchisee.
3.
The Store site may be provided either by the Franchisee or Phil-7. If the site is
owned by the Franchisee, the site shall be leased to Phil-7. If the site is leased by
the Franchisee, the lease shall be transferred or assigned to Phil-7. The site may
also be currently owned or leased by Phil-7. In all cases, the lease of the store to
Phil-7 shall be covered by a separate lease contract. The store site identified by
Franchisee is acceptable by Phil-7 based on general location and neighborhood,
traffic patterns, parking facilities, accessibility and other factors as Phil-7 may
consider necessary from time to time. aASDTE
Based on the foregoing representations, you now request confirmation of your
opinion that
1.
The royalty payments made to Phil-7 shall be considered as active income
subject to the 35% corporate income tax and not passive income subject to the 20%
final tax; and
2.
The payments are not subject to creditable withholding tax of 2% unless the
payor belongs to the top 10,000 corporations designated by the BIR.
In reply thereto, please be informed that your opinion is hereby confirmed as
follows:
1.
In BIR Ruling No. 057-00 dated November 7, 2000, later reiterated in BIR
Ruling No. DA518-03 dated December 17, 2003, this Office citing Section 27 (D) (1)
of the Tax Code of 1997, thus ruled that ECDAcS
"(D)

Rates of tax on certain passive incomes.

(1)
Interest from deposits and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements, and royalties. A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, that interest income derived by a domestic or a resident foreign
corporation from a depository bank under the expanded foreign currency deposit
system shall be subject to a final tax at the rate of seven and one-half percent (7
1/2%) of such interest income. . . ."

As expressly denoted in the caption, to be subject to the 20% final withholding tax,
the royalties must be in the nature of passive income. HScAEC
On the other hand, since the income derived by MKI-Phils. from the distribution of
the Licensed Computer Systems to Philippine banks and the performance of support
services is income generated in the active pursuit and performance of its primary
purpose, this Office confirms your opinion that the same is clearly NOT passive
income subject to the 20% final tax. Such being the case, the payments received by
MKI-Phils. from the active conduct of trade or business is considered ordinary
business income subject to the 33% for 1999 regular corporate income tax."
In applying the above-cited rulings, it is undisputed that the royalties and other fees
received by Phil-7 are in the nature of ordinary business income because the
aforesaid income was derived or generated from activities that are in accordance
with the primary purpose of Phil-7 which is operate and individually franchise 7Eleven stores in the Philippine territory as provided in its Articles of Incorporation.
SUCH BEING THE CASE, the royalty income derived by Phil-7 in the conduct of its
business shall form part of its ordinary income subject to the 35% regular corporate
income tax. THIcCA
2.
Generally, if the royalty income is considered as an active income, there is no
duty to withhold on such payments as required under Section 57 of the Tax Code of
1997, as the royalty payments are not subject to creditable withholding tax since
said income is not among those enumerated under the withholding tax regulations
as subject to withholding tax. However, if Phil-7's client/payor is one of the top ten
thousand (10,000) corporations designated by the BIR, the royalty shall be subject
to the withholding tax of 2% which shall be creditable against the tax due on the
taxable income of Phil-7.
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. EDHCSI
Very truly yours,
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service
Bureau of Internal Revenue

June 13, 2008

BIR RULING [DA-364-08]
DA 115-06
Punongbayan & Araullo
20th Floor, Tower 1
The Enterprise Center
6766 Ayala Avenue
Makati City
Attention: Ms. Maria Victoria C. Espao
Tax Partner
Gentlemen :
This refers to your letter dated April 14, 2008 stating that your client, VIVA
Communications, Inc. (formerly VIVA Productions, Inc. or "VCI"), is a domestic
corporation with office address at VIVA Entertainment Center, No. 61 Scout
Mandrinan Street, South Triangle, Diliman, Quezon City, engaged generally in the
movie industry business; that it derives income primarily from license fees arising
from various license agreements with television companies and cable television
operators for the distribution of entertainment content such as motion pictures and
television programs; that in 2007, VCI entered into a Content Licensing Agreement
(the Agreement) with MediaScape wherein the former granted the latter the
exclusive right to make available for subscription the twenty four (24) hour linear
television program service currently known as "Pinoy Box Office" consisting of
Philippine made movies and all promotions thereof (referred to as the Content); that
under the Agreement, MediaScape will make available the Content to subscribers
through an audiovisual service owned or operated by the latter, comprising of linear
channels transmitted encrypted via wireless networks to mobile devices of
subscribers in the territory (Service); that MediaScape will also make use of the
telecommunication facilities and broadcast licenses of its associated companies for

the distribution and transmission of the Content in the Service; that in consideration
of the right to use of the Content, MediaScape will pay VCI a fixed amount of
License Fee per subscriber per month or, where a fraction of a month is subscribed
to by a subscriber, the equivalent number of subscribers to the Service including
the Content for the relevant month where all subscriptions within the relevant
month will be aggregated so that each full month's worth of subscription (28 to 31
days as appropriate) will be calculated and reported as one (1) subscriber; that in
addition, MediaScape is obliged to pay VCI an Annual Minimum Guarantee Fee of
P12 Million for the 1st year of the term of the Agreement, P24 Million for the 2nd
year of the term of the Agreement and P36 Million for the 3rd, 4th and 5th terms of
the Agreement; and that payments of the License and Minimum Guarantee Fees will
be made by MediaScape to VCI on a quarterly basis. SEcTHA
Based on the foregoing representations, you now request confirmation of your
opinion that
1)
the License and Minimum Guarantee Fees payments made to VCI be
considered as active income subject to the regular corporate income tax rate of
35% pursuant to Section 27 (A) of the Tax Code of 1997 and not to the 20% royalty
tax on certain passive income pursuant to Section 27 (D) (1) of the said Code; and
2)
the payments are not subject to creditable withholding tax of 2% unless
MediaScape belongs to the top 10,000 corporations designated by the BIR.
In reply thereto, please be informed that this Office had already occasioned to rule
on the matter when it said in BIR Ruling No. DA-115-06 dated March 16, 2006, as
follows: IDSaTE
". . ., since the income derived by MKI-Phils from the distribution of the Licensed
Company Systems to Philippine banks and the performance of support services is
income generated in the active pursuit and performance of its primary purpose, this
Office confirms your opinion that the same is clearly NOT passive income subject to
the 20% final tax. Such being the case, the payments received by MKI-Phils from the
active conduct of trade or business is considered ordinary business income subject
to the 33% for 1999 regular corporate income tax."
In applying the above-cited rulings, it is clear that the royalties and other fees
received by WARNER are in the nature of ordinary business income because the
aforesaid income was derived or generated from activities that are in accordance
with the primary purpose of WARNER which is licensing and sub-licensing of musical
compositions and performance of support services as provided in its Articles of
Incorporation.
SUCH BEING THE CASE, the royalty income derived by WARNER in the conduct of its
business shall form part of its ordinary income subject to the 32% regular corporate
income tax.

Generally, if the royalty income is considered as an active income, there is no duty

to withhold on such payments as required under Section 57 of the Tax Code of 1997,
as the royalty payments are not subject to creditable withholding tax since said
income is not among those enumerated under the withholding tax regulations as
subject to withholding tax. However, if WARNER's client/payor is one of the top ten
thousand (10,000) corporations designated by the BIR, the royalty shall be subject
to the withholding tax of 2% which shall be creditable against the tax due on the
taxable income of WARNER". DacASC
Considering that the above-cited ruling is in all fours similar to the instant case, this
Office holds that
1.
The License and Minimum Guarantee Fees payments made to VCI be
considered as active income subject to the 35% regular corporate income tax
pursuant to Section 27 (A) of the Tax Code of 1997 and not to the 20% final tax.
2.
The MediaScape is not obliged to withhold the 2% creditable withholding tax
unless the payor belongs to the top 10,000 corporations designated by the BIR.
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. cSIADH
Very truly yours,
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service
Bureau of Internal Revenue

December 27, 2007

BIR RULING [DA-684-07]
DA 115-06
GMA Records
Unit 1402, Future Point Plaza I
112 Panay Avenue, Barangay South Triangle
Quezon City
Attention: Mr. Jose S. Toledo, Jr.
Officer-In-Charge for Subsidiary Operations & Monitoring Division
Gentlemen :
This refers to your letter dated August 15, 2007 stating that RGMA Marketing and
Productions, Inc. (GMA Records) is a domestic corporation organized and existing
under and by virtue of the laws of the Philippines with registered office at GMA
Network Building, EDSA corner Timog Avenue, Diliman, Quezon City; that GMA
Records is engaged in producing, recording, publishing, reproducing, selling, buying,
distributing, exporting, importing and otherwise dealing in musical tapes, records,
discs, musical compositions, arrangements, sounds and songs of any and all kinds
of services necessary for the business; and that as a recording company, the royalty
income that it received from its clients is one of income sources of its Company,
which it considers as an ordinary income subject to 35% income tax. DCcTHa
In connection therewith, you now request confirmation of your opinion that
1.
The royalty payments that GMA Records received from its clients are subject
to 35% regular corporate income tax and not the 20% final tax; and
2.
The Company is not obliged to withhold the 2% creditable withholding tax
unless the payor belongs to the top 10,000 corporations designated by the BIR.
In reply thereto, please be informed that this Office had already occasioned to rule
on the matter when it said in BIR Ruling No. DA115-06 dated March 16, 2006, as
follows:
". . ., since the income derived by MKI-Phils from the distribution of the Licensed
Company Systems to Philippine banks and the performance of support services is
income generated in the active pursuit and performance of its primary purpose, this
Office confirms your opinion that the same is clearly NOT passive income subject to

the 20% final tax. Such being the case, the payments received by MKI-Phils from the
active conduct of trade or business is considered ordinary business income subject
to the 33% for 1999 regular corporate income tax." HIaSDc
In applying the above-cited rulings, it is clear that the royalties and other fees
received by WARNER are in the nature of ordinary business income because the
aforesaid income was derived or generated from activities that are in accordance
with the primary purpose of WARNER which is licensing and sub-licensing of musical
compositions and performance of support services as provided in its Articles of
Incorporation.
SUCH BEING THE CASE, the royalty income derived by WARNER in the conduct of its
business shall form part of its ordinary income subject to the 32% regular corporate
income tax.
Generally, if the royalty income is considered as an active income, there is no duty
to withhold on such payments as required under Section 57 of the Tax Code of 1997,
as the royalty payments are not subject to creditable withholding tax since said
income is not among those enumerated under the withholding tax regulations as
subject to withholding tax. However, if WARNER's client/payor is one of the top ten
thousand (10,000) corporations designated by the BIR, the royalty shall be subject
to the withholding tax of 2% which shall be creditable against the tax due on the
taxable income of WARNER."
Considering that the above-cited ruling is in all fours similar to the instant case, this
Office holds that
1.
The royalty payments that GMA Records received from its clients are subject
to the 35% regular corporate income tax and not to the 20% final tax.
2.
The Company is not obliged to withhold the 2% creditable withholding tax
unless the payor belongs to the top 10,000 corporations designated by the BIR.
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. CTcSAE
Very truly yours,
(SGD.) JAMES H. ROLDAN
Assistant Commissioner
Legal Service
Bureau of Internal Revenue

April 29, 2008

DA ITAD BIR RULING NO. 030-08
Article 7 in relation to Article 5 of the Philippines-Japan tax treaty; BIR Ruling No. DAITAD 19-07
Regalado Bautista & Menzon Law Offices
Suite 710 City & Land Mega Plaza
ADB Ave. corner Garnet Street
Ortigas, Pasig City
Attention: Atty. Edith Abana-Bautista
Atty. Rhodora Corcuera-Menzon
Gentlemen :
This refers to your letter dated February 23, 2007 requesting a ruling on the tax
implication on the purchase of software by Canon Information Technologies
Philippines, Inc. (Canon-Philippines) from Canon Inc. (Canon-Japan) and applying for
a tax treaty relief pursuant to the Philippines-Japan tax treaty. ITcCSA
It is represented that Canon-Japan is a foreign corporation organized and existing
under the laws of Japan with principal address at 30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan; that Canon-Japan 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 domestic
corporation with office address at 2nd Floor Techno Plaza One, 18 Orchard Road,
Eastwood, Quezon City and is registered with the Board of Investments under
Certificate of Registration No. 93-170; 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 following software
products from Canon-Japan in the amount of Y38,892,000.00 pursuant to a Software
License Base Agreement (Agreement) which is effective on January 1, 2005 and
which shall continue in full force and effect for a period of one (1) year as
implemented by Supplement No. 1; HDIaET
I.

Synopsis

1)

DFT Compiler

2)

Primetime

3)

DC Expert

4)

Design Analyzer

5)

HDL Compiler Verilog

6)

Power Compiler

7)

VHDL Compiler

8)

Design Ware Library

9)

DC Ultra Add-on

10)

Global WAN Option

II.

Mentor

1)

Modelism SE/Mix

2)

Modelism PSL opt.

3)

Modelism SystemC opt.

4)

Seamless CVE

5)

PSP MIPS 25kf

6)

PSP Any ARM

7)

HDL Designer

8)

Global WAN Option

III.

Verisity

HaIATC

1)

Specman EE

2)

Global WAN Option

IV.

Denali

1)

Memory Modeler

2)

Global WAN Option

HEASaC

That on January 1, 2006, Canon-Philippines and Canon-Japan renewed the

application of the above-enumerated software products by virtue of the Supplement
No. 2; that Supplement No. 2 is subject to the terms and conditions provided under
the terms and conditions of the Agreement, whereby Canon-Japan grants to CanonPhilippines a non-exclusive, non-transferable license, without the right to grant a
sublicense to others:
(a)
to copy and use the Licensed Software in the computer, which is located at
the facilities of Canon-Philippines and connected via a global area network the
number of its employees using the Licensed Software simultaneously shall not
exceed the number of licenses set forth in the applicable Supplement (License
Number); and CSHcDT
(b)
to access from the Canon-Philippines Designated Computer via a global area
network, and use the Licensed Software retained in the License Server or the
computer, which is located at the facilities of Canon-Japan and connected via a
global area network to the License Server, for the Purpose; provided that the
number of its employees using the Licensed Software simultaneously shall not
exceed the License Number. ADEacC
That Canon-Philippines shall not disassemble, decompile, reverse engineer or
otherwise reduce to a human perceivable form the Licensed Software; that CanonPhilippines is not authorized or permitted to use, copy and have copied, duplicate
and have duplicated, rent, lease, sell, distribute, sublicense, assign or otherwise
transfer the Licensed Software and the Manual, except as expressly provided; that
Canon-Philippines shall not, nor shall it allow any third party to, change or remove
any copyright notice which the Licensors place on their respective Licensed
Software and/or the Manual; that except as expressly provided, no license or right,
express or implied, is conveyed or granted for any invention, patent application,
patent, copyright or other intellectual property rights of Canon-Japan and the
Licensors; that the said Agreement and each supplement do not transfer to CanonPhilippines any title to or ownership of the Licensed Software and/or the Manual;
that Canon-Philippines shall have no right to create derivative works of the Licensed
Software and the Manual; that Canon-Philippines shall not modify the Licensed
Software or the Manual in any way; that Canon-Japan shall provide CanonPhilippines (a) any updates and bug-fixes of the License Software and the Manual,

which is provided by Canon-Japan or (b) access key which Canon-Philippines uses in

order to download such updates and bug-fixes of the License Software and the
Manual from the website of Canon-Japan; that this Agreement shall become
effective as of the effective date and continue in full force and effect for a period of
one (1) year unless earlier terminated; 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 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 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: IAEcCa
"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 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. 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: TAESDH
"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. (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;
DSCIEa
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. DSITEH
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. (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.
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. EcDTIH
"xxx

xxx

xxx"

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.
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.
AEDHST
Thus, payments made by Canon-Philippines to Canon-Japan, being business income
(business profits), are subject to Philippine income tax only if such payments are
attributable to a permanent establishment which Canon-Japan has in the
Philippines, under paragraph 1, Article 7 in relation to Article 5 of the PhilippinesJapan tax treaty, to wit:
"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 on so much of them as is attributable
to that permanent establishment.
xxx

xxx

xxx"

"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. cdasia
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."

Based on the foregoing, in order for Canon-Japan to be considered to have a

permanent establishment to which said business profit may be attributed, it must
satisfy the following conditions: 3

the existence of a "place of business", i.e., a facility such as premises or, in

certain instances, machinery or equipment; cSITDa

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 it appears, based on the SEC Certificate that Canon-Japan is not registered
either as a corporation or as a partnership in the Philippines, that Canon-Japan 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, Canon-Japan is deemed as not having permanent
establishment to which said business profit may be attributed to.
Thus, for as long as Canon-Japan 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
19-07 dated February 14, 2007) ISCTcH
However, the importation of software is subject to value-added tax (VAT) at the rate
of 12% 4 pursuant to Section 107 of the National Internal Revenue Code of 1997
(Tax Code of 1997), as amended by Republic Act No. 9337. Accordingly, CanonPhilippines being the direct importer of the downloadable software, is subject to
12% VAT from its payments before telegraphically transferring it to the account of
Canon-Japan.

Accordingly, Canon-Philippines, being the resident withholding agent and payor in

control of the payments, shall be responsible for the withholding of the final VAT
before making any payment to Canon-Japan. In remitting the VAT withheld, CanonPhilippines shall use 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 documentary substantiation for the claim of input
tax by Canon-Philippines upon filing its own VAT Return, if it is a VAT-registered
taxpayer. In case Canon-Philippines is a non-VAT registered taxpayer, the passed-on
VAT withheld shall form part of the cost of the service purchased which may be
treated as "expense" or "asset", whichever is applicable. In addition, CanonPhilippines is required to issue the respective Certificate of Final Tax Withheld at
Source (BIR Form 2306) in quadruplicate upon request of Canon-Japan, the first
three copies thereof to be given to Canon-Japan and the fourth copy to be retained
by Canon-Philippines as its file copy. [Section 4 & 6, Revenue Regulation (RR) No. 42002; Section 3 RR No. 8-2002; Section 7 of RR No. 14-2002] THIAaD
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,
Commissioner of Internal Revenue
By:
(SGD.) GREGORIO V. CABANTAC
Deputy Commissioner
Bureau of Internal Revenue

February 9, 2007
DA ITAD BIR RULING NO. 017-07
Article 12 (Royalties) Philippines-Singapore tax treaty
Quisumbing Torres
12th Floor, Net One Center
26th Street corner 3rd Avenue
Crescent Park West
Bonifacio Global City
Taguig, Metro Manila
Attention: Atty. Dennis G. Dimagiba
Atty. Jose Jaime V. Cruz
Gentlemen :
This refers to your letters dated January 5 and November 18, 2005 requesting for a
reconsideration of BIR Ruling No. DA-ITAD 153-04 dated December 20, 2004 issued
to Autodesk Asia Pte., Ltd. (Autodesk Asia) where we ruled that software payments
made to Autodesk Asia by CIM Technologies, Inc. (CIM Technologies) are royalties
and subject to twenty-five percent (25%) income tax based on the gross amount
thereof pursuant to Article 12 (Royalties) 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 (PhilippinesSingapore tax treaty). cADEIa
Background:
It is represented that Autodesk Asia is a corporation organized and existing under
the laws of Singapore, with registered office at 391B Orchard Road, No. 12-06 Ngee
Ann City Tower B, Singapore 238874, as confirmed by its Certificate of Residence
dated May 3, 2004 issued by the Inland Revenue Authority of Singapore, its
Memorandum and Articles of Association, and its profile downloaded from the
website called BizNet on May 31, 2004; that Autodesk Asia is licensed by the
Securities and Exchange Commission (Commission) to establish a representative
office in the Philippines and that as of March 30, 2004, Autodesk Asia has not yet
filed a petition for cancellation or withdrawal of such license with the Commission,
as confirmed by the Certificate of Corporate Filing/Information dated March 30, 2004
issued by the Commission; that the objects for which Autodesk Asia is established
are, among others, (1) to carry on the business of consultants and advisors in

connection with computers, computer equipment and machinery, both hardware

and software, computer related products and peripheral equipment in connection
thereto, and (2) to provide information and services including maintenance, repair,
programming, installation, designs, systems, data centres, software development
and research analysis to its parent company, 1 to firms and corporations engaged in
business with the parent company, and to computer users generally; that, on the
other hand, CIM Technologies is a corporation organized and existing under the laws
of the Philippines, with principal office at LG 103, Peninsula Court Building, 8735
Paseo de Roxas corner Makati Avenue, Makati City, Philippines.
It is further represented that on February 1, 2004, Autodesk Asia and CIM
Technologies entered into an Autodesk Authorized Distributor Agreement
(Agreement) which has an initial term of effectivity of one (1) year from February 1,
2004 to January 31, 2005 unless terminated earlier; that under the Agreement,
Autodesk Asia appointed CIM Technologies as a non-exclusive Autodesk Authorized
Distributor for the Products 2 within the Territory, 3 and CIM Technologies accepted
such appointment; that CIM Technologies shall, unless otherwise directed by
Autodesk Asia, purchase the Products from Autodesk Asia for distribution to the
Autodesk Distribution Channel 4 within the Territory only and not to End-Users; 5
that CIM Technologies shall not be entitled to distribute the Products to any parties
other than those permitted by Autodesk Asia, and that CIM Technologies undertakes
(1) to fulfill all orders for the Products which it receives, and (2) not to reject any
orders for the Products from, or cease to supply the Products to, any Retail Reseller
6 or any party in the Autodesk Distribution Channel unless a prior written consent of
Autodesk Asia has been obtained; that all prices of the Products are on Incoterms
2000 "Ex-Works" (fulfillment facility as notified by Autodesk Asia) basis, and that the
price to CIM Technologies for each of the Products (the "Per Copy Fee") shall be as
set forth in Autodesk Asia's then prevailing price list as notified to CIM Technologies;
that CIM Technologies' profit or income from distributing the Products shall be the
difference between CIM Technologies' price of the Products charged to its customers
and CIM Technologies' Per Copy Fee charged by Autodesk Asia; that CIM
Technologies' minimum purchase commitments for the Products for the four (4)
quarters of the initial year shall be as follows:
Products

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Total

(February-

(May-July)

(August-

(November-

April)

October)

January)

MSD

$22,000

$24,000

$30,000

$24,000

$100,000

MAP

$55,000

$60,000

$75,000

$60,000

$250,000

LCS

$19,800

$21,600

$27,000

$21,600

$90,000


TOTAL$96,800
=====

$105,600

$132,000

$105,600

$440,000

=====

=====

=====

=====

that Autodesk Asia may modify the above figures from time to time by making a
written notice to CIM Technologies; that upon shipment of the Products to CIM
Technologies, Autodesk Asia shall submit an invoice to CIM Technologies, which
indicates therein CIM Technologies' Per Copy Fee of the Products shipped plus any
freight, taxes, insurance or other applicable costs initially paid by Autodesk Asia but
to be paid afterwards by CIM Technologies; and that CIM Technologies shall pay
Autodesk Asia the full invoiced amount in United States dollars and within thirty (30)
days from the invoice date. HIaSDc
It is also represented that on February 1, 2005, Autodesk Asia made a written notice
to CIM Technologies informing the latter that Autodesk Asia has renewed the
Agreement for another term of one (1) year from February 1, 2005 to January 31,
2006 unless terminated earlier, upon the same terms and conditions in the original
Agreement, with few modifications relating to taxes, stock rotation, upgrades and
crossgrades, sales records, survival of certain terms, and intellectual property
rights.
Request for Reconsideration:
In view of the foregoing, you seek reconsideration and argue that instead of
royalties, payments to be made by CIM Technologies to Autodesk Asia under the
Autodesk Authorized Distributor Agreement should be characterized as business
profits and taxed accordingly under the articles on permanent establishment and
business profits of the Philippines-Singapore tax treaty.
Further, in your letter dated November 18, 2005, you requested that we issue
another ruling for Autodesk Asia in the light of the renewed Agreement and of the
pertinent Philippine tax laws, regulations and administrative issuances in effect
during the term of the renewed Agreement.
BIR Position on the Request for Reconsideration:
1.

On BIR Ruling No. DA-ITAD 153-04 dated December 20, 2004

In reply, please be informed that we maintain our position in BIR Ruling No. DA-ITAD
153-04 since Revenue Memorandum Circular (RMC) No. 77-2003 (Classification of
Payments for Software for Income Tax Purposes) was in place at the time of the
drafting and issuance of the said ruling and this RMC mandated the observance of
its provisions regarding the taxation of software payments made on November 18,
2003 up to September 7, 2005. RMC 77-2003 is applicable to payments made to
domestic and foreign licensors and in case of the latter, whether or not such

payments can be subject to relief under a particular tax treaty. Under this RMC,
software payments are generally characterized as royalties for taxation purposes,
and this includes and treats as royalties payments from the mere purchase of a
copyrighted article embedding a software and payments from reselling and
distributing a copyrighted article embedding a software, among others, to wit:
"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. ISCDEA
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."
Applying the provisions of RMC 77-2003 in ITAD Ruling 153-04, payments to be
made by CIM Technologies to Autodesk Asia under the Autodesk Authorized
Distributor Agreement are royalties and subject to 25% income tax based on the
gross amount thereof, under the article on royalties of the Philippines-Singapore tax
treaty.
2.

On the Renewed Agreement

Payments made by CIM Technologies to Autodesk Asia under the renewed

Agreement from February 1 to September 7, 2005 are covered by the provisions of
RMC 77-2003 while payments made or to be made by CIM Technologies to Autodesk
Asia from September 8, 2005 and thereafter are covered by the provisions of RMC
44-2005 (Taxation of Payments for Software), which took effect on September 8,
2005. Under RMC 44-2005, which substantially amended RMC 77-2003, 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:
"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. cATDIH
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"

Other than as royalties, this RMC treats software payments as business income,
rental income, or capital gains, depending on the nature of the transaction out of
which such payments are made.

A significant difference between the two RMCs lies in the characterization of

payments made for the purchase of a copyrighted article incorporating a software
where an end-user is merely granted access and use of the software for its own
internal data processing requirements and not any of the copyright rights in the
software as described above. While RMC 77-2003 would treat payments made by an
end-user as royalties, RMC 44-2005, on the other hand, would treat such payments
as business income (or business profits for tax treaty purposes). Furthermore,
software payments will constitute as royalties under RMC 44-2005 if the licensor
grants access and use of any of the copyright rights in the software exclusively or
with limitations to the particular person.
On the question of whether RMC 44-2005 continues to characterize payments to be
made by CIM Technologies to Autodesk Asia under the Autodesk Authorized
Distributor Agreement as royalties, please be informed that when only copyright
rights are transferred in a transaction involving software, payments made in
consideration therefor are royalties. 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 following rights:
1.
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;
2.
The right to prepare derivative computer programs based upon the
copyrighted software;
3.

The right to make a public performance of the software;

4.

The right to publicly display the computer program; or

5.
Any other rights of the copyright owner, the exercise of which by another
without his authority shall constitute infringement of said copyright. AScTaD
Based on the facts as represented, it is understood that under the Autodesk
Authorized Distributor Agreement, Autodesk Asia will ship the Products to CIM
Technologies who will in turn distribute the Products to the parties in the Autodesk
Distribution Channel and to Retail Resellers. CIM Technologies has a minimum
purchase commitment for the Products for each quarter of the term of the
Agreement. Upon shipment of the Products, Autodesk Asia shall submit an invoice
to CIM Technologies, which will indicate therein CIM Technologies' Per Copy Fee of
the Products shipped plus any freight, taxes, insurance or other applicable costs
initially paid by Autodesk Asia but which shall be paid afterwards by CIM
Technologies. The Per Copy Fee for the Products paid by CIM Technologies is the
basis for computing Autodesk Asia's income from the transaction.
An analysis of this business arrangement cannot be considered as a grant by
Autodesk Asia to CIM Technologies of a copyright right as described in Items 1, 2, 3

and 4 above. In relation to Item 1, CIM Technologies is granted by Autodesk Asia the
right to distribute the Products in public but not to reproduce them. CIM
Technologies will acquire the Products by ordering them from Autodesk Asia and not
from reproducing them in its own premises or assigning another person to
reproduce the Products for its (CIM Technologies) own benefit before distributing the
Products. In relation to Items 2, 3 and 4, CIM Technologies is also not granted the
right to prepare derivative computer programs based upon the software embedded
in the Products, to make a public performance of the software, nor to publicly
display the software.
However, in relation to Item 5, the grant by Autodesk Asia to CIM Technologies of
the right to distribute the Products in public but not to reproduce them shall be
classified as a transfer of a copyright right if the acquisition and exercise of such
right without the authority of Autodesk Asia constitutes an infringement of such
copyright. In order to determine if such right can be the subject of infringement,
Section 177 of the Intellectual Property Code of 1998 (Republic Act No. 8293)
enumerates those rights of an author or owner of a literary, artistic or scientific
work like software which can be the subject of infringement. It provides:
"Section 177.
Copyright or Economic Rights. Subject to the provisions of
Chapter VIII, copyright or economic rights shall consist of the exclusive right to carry
out, authorise or prevent the following acts:
177.1.Reproduction of the work or substantial portion of the work;
177.2.Dramatization, translation, adaptation, abridgment, arrangement or other
transformation of the work;
177.3.The first public distribution of the original and each copy of the work by sale
or other forms of transfer of ownership;
177.4.Rental of the original or a copy of an audiovisual or cinematographic work, a
work embodied in a sound recording, a computer program, a compilation of data
and other materials or a musical work in graphic form, irrespective of the ownership
of the original or the copy which is the subject of the rental;
177.5.Public display of the original or a copy of the work; and
177.6.Other communication to the public of the work." (emphasis supplied)
CSHcDT
It is noteworthy that Section 177.3 includes as one of the copyright or economic
rights of the author or owner of a work the right to make a first public distribution of
the original and each copy of the work by sale or other forms of transfer of
ownership. A simple interpretation of Section 177.3 would mean that the grant by
the author or owner of a work to another person of` the right to distribute the work
in public even without the right to reproduce the work constitutes a transfer of a

copyright right because the other person acquires a right the exercise of which by
him without the authority of the author or owner constitutes infringement, as
emphasized by the phrase the "exclusive right to carry out, authorise or prevent the
act (of distributing the work)". Applying this to the case at hand, the grant by
Autodesk Asia to CIM Technologies of the right to distribute the Products in public to
the parties in the Autodesk Distribution Channel and to Retail Resellers constitutes a
transfer of a copyright right whereby CIM Technologies acquires a right the exercise
of which by CIM Technologies, without Autodesk Asia's authority, constitutes
infringement of such right of Autodesk Asia.
In fact, this right granted to CIM Technologies is even subject to further limitations
by reason, for example, that CIM Technologies can distribute the Products to the
parties in the Autodesk Distribution Channel and to Retail Resellers only but not to
End-Users, and that CIM Technologies should fulfill all orders for the Products which
it receives, and cannot reject any orders for the Products from, or cease to supply
the Products to, any Retail Reseller or any party in the Autodesk Distribution
Channel unless the prior written consent of Autodesk Asia has been obtained. Taking
a step further, if Autodesk Asia also imposes these limitations to the parties in the
Autodesk Distribution Channel and to Retail Resellers who in turn distribute the
Products to End-Users, such an arrangement also constitutes a transfer of a
copyright right whereby the parties in the Autodesk Distribution Channel and the
Retail Resellers acquire a right the exercise of which by them without Autodesk
Asia's authority constitutes infringement of such right of Autodesk Asia. This
transfer of a copyright right provided under Section 177.3 of the Intellectual
Property Code applies only to the distribution and reselling of a copyrighted work
like software but not to the distribution and reselling of a non-copyrighted work. By
applying a 'substance-over-form' approach, a transfer of copyright right exists
regardless of the business arrangement between the author or owner of the
copyrighted work and the distributor or reseller, that is, whether the arrangement is
a consignment arrangement where title and ownership of the copyrighted work
remains with the author or owner until the copyrighted work is sold by the
distributor or reseller to a third party, or a reselling arrangement where title and
ownership of the copyrighted work is with the distributor or reseller of the
copyrighted work and not with the author or owner of the work until the distributor
or reseller sold the work to a third party.
This is buttressed by the fact that a distributor or reseller of a copyrighted work like
software, as distinct from an end-user, cannot distribute or resell such work unless
he is permitted to do so by the author or owner of the work. Lacking such
permission, the act of distribution or reselling of the copyrighted work constitutes an
infringement of the right or rights subsisting in that work, punishable under Section
217.3 of the Intellectual Property Code, to wit:
"Section 217.

Criminal Penalties. . . .

217.3.Any person who at the time when copyright subsists in a work has in his
possession an article which he knows, or ought to know, to be an infringing copy of
the work for the purpose of:
(a)
Selling, letting for hire, or by way of trade offering or exposing for sale, or
hire, the article;
(b)
Distributing the article for purpose of trade, or for any other purpose to an
extent that will prejudice the rights of the copyright owner in the work; or
(c)
Trade exhibit of the article in public, shall be guilty of an offense and shall be
liable on conviction to imprisonment and fine as above mentioned. (Sec. 29, P.P. No.
49a)
xxx

xxx

xxx"

On the other hand, Sections 185 and 189 of the Intellectual Property Code, quoted
below, do not consider it an infringement when an end-user merely makes a "fair
use" of a software, nor when he copies (reproduces) the software onto a computer
or copies (reproduces) it but for archival or backup purposes only.
"Section 185. Fair Use of a Copyrighted Work. 185.1 The fair use of a copyrighted
work for criticism, comment, news reporting, teaching including multiple copies for
classroom use, scholarship, research, and similar purposes is not an infringement of
copyright. Decompilation, which is understood here to be the reproduction of the
code and translation of the forms of the computer program to achieve the interoperatibility of an independently created computer program with other programs
may also constitute fair use. In determining whether the use made of a work in any
particular case is fair use, the factors to be considered shall include:
(a)
The purpose and character of the use, including whether such use is of a
commercial nature or is for non-profit educational purposes;
(b)

The nature of the copyrighted work;

(c)
The amount and substantiality of the portion used in relation to the
copyrighted work as a whole; and
(d)
The effect of the use upon the potential market for or value of the
copyrighted work."
"Section 189. Reproduction of Computer Program. 189.1. Notwithstanding the
provisions of Section 177, the reproduction in one (1) backup copy or adaptation of
a computer program shall be permitted, without the authorization of the author of,
or other owner of copyright in, a computer program, by the lawful owner of that
computer program; Provided, That the copy or adaptation is necessary for:

(a)
The use of the computer program in conjunction with a computer for the
purpose, and to the extent, for which the computer program has been obtained; and
(b)
Archival purposes, and, for the replacement of the lawfully owned copy of the
computer program in the event that the lawfully obtained copy of the computer
program is lost, destroyed or rendered unusable. DHaECI
189.2. No copy or adaptation mentioned in this Section shall be used for any
purpose other than the ones determined in this Section, and any such copy or
adaptation shall be destroyed in the event that continued possession of the copy of
the computer program ceases to be lawful.
189.3. This provision shall be without prejudice to the application of Section 18.5
whenever appropriate."
In relation to the use of software by an end-user, it should be emphasized that the
software payments made by an end-user are now treated as business income (or
business profits for tax treaty purposes) under the new RMC 44-2005 and no longer
as royalties under the old RMC 77-2003. Under RMC 44-2005, the rights generally
acquired by the end-user to reproduce the software onto a computer or to
reproduce the software for archival or backup purposes only is merely a de minimis
right compared to other rights mentioned in Section 177 of the Intellectual Property
Code. However, the grant of a right to distribute the software cannot be considered
as de minimis as in the case of the end-user. The grant of this right to a distributor
or reseller by the author or owner of the software pertains to rights which may be
subject to infringement and as such gives rise to royalties. This is true even if
payments to be made by the distributor or reseller to the author or owner are not
literally termed as royalties but merely payments or fees in general and even if the
contract between the parties are not literally termed license contracts but merely
contracts of sale, contracts to sell, consignment contracts, etc., as those generally
used when the goods or merchandise involved are noncopyrighted works. What is
essential is that copyright rights are granted under such contract and without
which, the reseller or distributor may be regarded as infringing the copyright
owner's rights, based on the provisions of the Intellectual Property Code.
In view of the foregoing, this Office is of the opinion and so holds that payments to
be made by CIM Technologies to Autodesk Asia under the renewed Autodesk
Authorized Distributor Agreement continues to be in the nature of royalties and are
not business profits under RMC 44-2005. These payments (in this case, termed Per
Copy fees) shall be subject to 25% income tax based on the gross amount thereof
pursuant to Article 12 (Royalties) of the Philippines-Singapore tax treaty in relation
to RMC 44-2005.
Finally, the sale of the Products by Autodesk Asia to CIM Technologies is subject to
value-added tax (VAT) under Section 106(A) of the Tax Code, to wit:

"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
transferror.
xxx

xxx

xxx" 7

The gross amount of the Per Copy Fees payable to Autodesk Asia constitutes the
gross selling price or gross value in money of the Products on which the appropriate
VAT rate (now 12%) is imposed. TCAHES
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 and Section 4.114.2 of Revenue
Regulations No. 16-2005, provide that CIM Technologies shall be responsible for the
withholding of the appropriate VAT rate (now 12%) on the Per Copy Fees before
remitting them to Autodesk Asia. In remitting to the Bureau of Internal Revenue the
VAT withheld on such fees, CIM Technologies shall use BIR Form No. 1600 (Monthly
Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered
taxpayer, CIM Technologies 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, CIM Technologies may include as part of the cost
of the Products sold to it by Autodesk Asia the VAT consequently shifted or passed
on to it and may treat such VAT either as expense or asset, whichever is applicable.
In addition, CIM Technologies 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 Autodesk Asia upon its request, and the fourth copy to be retained by CIM
Technologies as its file copy. aDSHCc
This ruling is issued on the basis of the facts as represented. However, if upon
investigation it shall be disclosed that the facts are different, then this ruling shall
be without force and effect insofar as the herein parties are concerned.
Very truly yours,
(SGD.) JOSE MARIO C. BUAG
Commissioner
Bureau of Internal Revenue

June 13, 2000

BIR RULING NO. 026-00
32 (B) (7) (d), RR 2-98 000-00 026-2000
Atty. Samuel D. Estimo
No. 10 Magreville Avenue
Magreville Subdivision
Capitol Hills, Quezon City
S i r:
This refers to your letter dated April 27, 2000 requesting, in behalf of your client,
International Chess Grandmaster Rogelio (Joey) M. Antonio Jr., for a ruling exempting
the latter's cash prize amounting to One Million Pesos (P1,000,000.00) from income
tax.
It is represented that GM Antonio won the recently concluded 1st Pambansa
Millennium Chess Grand Prix sanctioned by the Philippine Chess Federation (PFC), a
sports association recognized by the Philippine Sports Commission (PSC); that
during the awarding ceremonies, PCF withheld twenty percent (20%) of GM
Antonio's P1Million champion prize in accordance with Revenue Regulations No. 298; and that GM Antonio refused to accept the reduced prize not only because the
PCF announced during the start of the sports competition that the champion's purse
would be tax-free, but also because of the existence of R.A. 7549, which exempts all
prizes and awards granted to athletes in local and international sports competitions
and tournaments from the payment of income tax.
In reply, please be informed that Section 32(B)(7)(d) of the Tax Code of 1997
provides that "All prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their respective national sports association" shall be included in gross
income and shall be exempt from income tax. This section, however, should be read

in relation to the provisions of R. A. 7549, dated May 22, 1992, which was integrated
in the aforecited section of the Tax Code, Section 2 of the said Act provides that the
national sports association shall refer only to those sports associations duly
accredited by the Philippine Olympic Committee (POC). The documents submitted
by you, however, disclosed that the sports association that organized and
sanctioned the aforementioned chess event is not duly accredited by the Philippine
Olympic Committee. Thus, the exemption granted under the aforequoted section of
the Tax Code of 1997 does not apply to your client. cdtai
Moreover, tax exemptions are not presumed (Floro Cement Corp. v. Gorospe, 200
SCRA 480) because it is a cardinal rule in taxation that tax exemption should be
construed "in strictissimi juris" against the taxpayer and liberally in favor of the
taxing authority. Tested by this precept, we cannot indulge in expansive
construction and write into the law an exemption not therein set forth. Rather, we
go by the reasonable assumption that where the State has granted in express terms
certain exemptions, those are the exemptions to be considered and no more. (Esso
vs. Acting Commissioner of Customs, 18 SCRA 489).
Further, the exemption contained in the tax statutes must be strictly construed
against the one claiming the exemption, because the law does not look with favor
on tax exemptions and that he who would seek to be thus privileged must justify it
by words too plain to be mistaken and too categorical to be misinterpreted.
(Commissioner of Internal Revenue v. P.J. Kiener Company, Ltd., 65 SCRA 143)
In view thereof, the prize money won by your client, GM Rogelio (Joey) M. Antonio,
Jr., is subject to 20% final withholding tax under Section 24(B)(1) of the Tax Code of
1997, as implemented by Revenue Regulations 2-98.
Very truly yours,
(SGD.) DAKILA B. FONACIER
Commissioner
Bureau of Internal Revenue