August 2, 2005

BIR RULING NO. 009-05

Sec. 23 (F) 000-00

The Law Firm of Raymundo A. Armovit

Suite 803, The Centerpoint
Julia Vargas Corner Garnett Streets
Ortigas Center, Pasig City

Attention: Atty. Miguel R. Armovit

Gentlemen :

This refers to your letter dated October 18, 2001 stating that:

1. Dot Phone, Inc. (DPI) is a corporation registered under the laws of the
British Virgin Islands as a domain name service company for Philippine
(PH) domain names;

2. DPI is engaged in the business of performing PH domain name services

outside of the Philippines for PH domain name holders located inside
of, as well as outside of the Philippines, through PH domain name
servers/web servers also located outside of the Philippines;

3. Domain Merchandising Services, Inc. (DMSI) is a corporation duly

organized and

existing under and by virtue of the laws of the Republic of the Philippines; SIcEHD

4. DMSI is engaged in the business of collecting PH domain name service

fees in the Philippines as agent for and in behalf of DPI from resellers
located outside of the Philippines who in turn collect PH domain name
service fees from PH domain name holders located inside of, as well as
outside of the Philippines, for domain name services performed outside
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 1
 of the Philippines by DPI;

5. DPI has contracted outside of the Philippines with various resellers

located inside of, as well as outside of the Philippines for the latter to
offer for sale PH domain name services to be performed by DPI outside
of the Philippines for potential PH domain name holders located inside
of, as well as outside of the Philippines;

6. PH domain name service fees for PH domain name services performed

by DPI outside of the Philippines for PH domain name holders located
inside of, as well as outside of the Philippines, are collected in this
manner:

a. PH domain name holders located inside of, as well as outside of

the Philippines pay PH domain name service fees directly to the
various resellers located inside of, as well as outside of the
Philippines who, in turn, either directly or indirectly remit the
same PH domain name service fees to DPI through DMSI in the
Philippines by telegraphic transfers, online credit card payments
or check issuances; and TDCAHE

b. In instances where PH domain name service fees are coursed

through DMSI in the Philippines, the latter issues its own duly
registered official receipts of payments in the name of the
resellers concerned, specifically indicating therein that such
official receipts are merely issued for the account of DPI, the
ultimate recipient of the PH domain name service fees.

7. Every computer on the Internet has a unique address called an IP

(Internet Protocol) address. An IP address is a set of four three-digit
numbers separated by dots (e.g., 123.456.789.012). One can actually
input the IP address in a web browser such as Netscape or Internet
Explorer and be transported to a website. However, given that IP
addresses are difficult to remember, the designers of the Internet
decided to come up with a short-cut in the form of domain names (e.g.,
bir.gov.ph). A domain name is actually associated with a unique IP
address so that if an e-mail is addressed to a particular domain name, the
Internet servers look at a "virtual directory" that links it to an IP address.
For example, if an e-mail is addressed to bir.gov.ph, the Internet server
looks at a "virtual directory" that reveals that the IP address for
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 2
 bir.gov.ph is 123.456.789.012 — the message is then sent to that IP
address. A domain name service company therefore, such as the DPI, is
tasked with the maintenance, updating and operation of the "virtual
directory."

8. DPI, as a domain name service company, acts as an interface between a

domain name and a domain name registry, is responsible for providing
registration and other value-added services, or from the standpoint of its
customers, performs the functions of a "Registrar" or one who performs
the following services: (a) registration function — collects the
registration information from the customer and creates an entry in the
"virtual directory" in behalf of the customer; and (b) maintenance of
"virtual directory" — ensures that the "virtual directory" operates
continuously so that all messages intended for a certain domain name
are sent to the correct computer on the Internet.

You now request for a ruling confirming your opinion on the following issues:

a) DPI, as a domain name service company, is engaged in the sale of

services, not goods; ITcCaS

b) DPI, as a non-resident foreign corporation, particularly a domain name

service company performing domain name services outside of the
Philippines for domain name holders located inside of, as well as
outside of the Philippines, is not subject to Philippine taxation on fees
collected in the Philippines for such services performed outside of the
Philippines; and

c) DMSI, the Philippine collecting agent of DPI is likewise not subject to

Philippine taxation on fees collected by such agent in the Philippines,
considering that such fees are merely collected by such agent for and in
behalf of DPI to be ultimately delivered to the latter.

In reply, please be informed as follows:

1. DPI, as a domain name service company is engaged in the sale of services, not
goods.

In order to determine whether a certain transaction is a service transaction or a

property transaction, it is imperative that a characterization of the same shall be made.

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 3
 A distinction between transactions in goods and transactions in services is important
for purposes of characterization of the revenue/income derived from a particular
transaction.

The basic distinction between a transaction in goods versus a transaction in

services is whether the customer acquires property from the provider. Implicit in the
concept of services income is the notion that the value conferred on the purchaser
does not take the form of a cognizable property interest. Therefore, generally
speaking, if the seller transfers possession of property rights to the purchaser, the
transaction should be characterized as a transfer of property rather than the provision
of a service. On the other hand, if the customer does not receive an interest in
property, then the revenue should be characterized as revenue or income from
services. (Taylor S. Reid, ESQ., Tax Characterization of Electronic Commerce
Revenue, E-Commerce Tax Report, Vol. 1, No. 5, BNA Tax, 2000) HDAaIS

Thus, when a customer receives property in connection with the rendition of

services by the vendor, it will often be necessary to determine whether the income
from the transaction should be characterized as services income or income from the
sale of goods. If the customer owns the property after the transaction, but beneficial
ownership of the property was not transferred from the vendor to the customer, then
the transaction generally should be treated as a services transaction. For example, if
the customer engages the vendor to create an item of property that the customer will
own from the moment of its creation, then no property will have been transferred from
the vendor to the customer, and the transaction should be characterized as the
provision of services (Boulez v. Commissioner, 83 T.C. 584 (1984).

In this regard and since DPI, being a domain name service company, merely
renders administrative functions that do not involve any transfer of technology,
equipment or property to its subscribers, nor does its rendition of services to its
subscribers effectively transfer ownership of the technology it used in the transaction,
DPI, therefore, is classified to be engaged in the sale of services, not of goods.

If, however, the customer receives a valuable report or other property that was
not created specifically for that customer, then the transaction could give rise to
income from the sale of goods. (Taylor S. Reid, ESQ., Tax Characterization of
Electronic Commerce Revenue, E-Commerce Tax Report, Vol. 1, No. 5, BNA Tax,
2000)

2. DPI as a non-resident foreign corporation, particularly a domain name

service company performing domain name services outside of the Philippines
Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 4
 for domain name holders located inside of, as well as outside of the
Philippines, is not subject to Philippine taxation on fees collected in the
Philippines for such services performed outside of the Philippines by DPI.

DPI is a corporation registered under the laws of the British Virgin Islands, and
not being registered to do business in the Philippines, it is, therefore, classified for
purposes of Philippine taxation as a non-resident foreign corporation, or a foreign
corporation not engaged in trade or business in the Philippines. Pursuant to Section 23
(F) of the Tax Code of 1997, a foreign corporation, whether or not engaged in trade or
business in the Philippines, is taxable only on income derived from sources within the
Philippines. Conversely, income derived by such non-resident foreign corporation
from sources outside of the Philippines is not taxable under Philippine laws.

The rule in this jurisdiction regarding tax situs is that the source of income is
the property, activity or service that produced the income; the test of taxability is the
"source" and the source of income is that activity which produced the income (CIR v.
British Overseas Airways Corporation, G.R. Nos. 65773-74, April 30, 1987). With
regard to compensation for labor or personal services, services performed within the
Philippines, regardless of the residence of the payor, or of the place in which the
contract for services was made, or of the place of payment, is gross income from
sources within the Philippines (Section 155, Revenue Regulations No. 2). Stated
differently, the situs of the income derived from labor or personal services is
determined solely by the place where service is rendered (CIR v. Japan Air Lines, Inc.,
G.R. No. 60714, October 4, 1991). Compensation from services performed abroad is
considered income from sources without the Philippines. (BIR Ruling No. 464-93
dated November 19, 1993) ADETca

In this particular case, the sources of DPI's income are the contracts between
DPI and the various resellers. Under these contracts, DPI has contracted outside of the
Philippines with various resellers located inside, as well as outside, of the Philippines
for the latter to offer for sale PH domain name services to be performed by DPI
outside of the Philippines for potential PH domain name holders located inside, as
well as outside, of the Philippines. Considering that the services that produce the
income (i.e., registration and maintenance of PH domain names) are performed
outside of the Philippines, it follows that the income derived from the performance of
such services is not taxable in the Philippines.

3. DMSI, the Philippine collecting agent of DPI is likewise not subject to

Philippine taxation on fees collected by such agent in the Philippines,

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 5
 considering that such fees are merely collected by such agent for and in behalf
of DPI and to be ultimately delivered to the latter.

Gross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not redound to
the taxpayer's benefit; and it is not necessary that there must be a law or regulation
which would exempt such monies and receipts within the meaning of gross receipts
under the Tax Code. (CIR v. Tours Specialists, Inc., G.R. No. 66416, March 21, 1990)

The PH domain name service fees collected in the Philippines by DMSI as

agent for and in behalf of DPI, therefore, do not constitute income of DMSI and are,
in fine, not subject to any form of Philippine taxation. However, the gross commission
earned by DMSI from said services is subject to the regular corporate income tax at
the rate of thirty-two percent (32%) pursuant to Section 27 (A) of the Tax Code of
1997. Moreover, the services rendered by DMSI is subject to the ten percent (10%)
value-added tax imposed under Section 108 of the same Code. Furthermore, DMSI
shall maintain a separate book of accounts, and shall not issue its own official
receipts, for the service fees it collects for and in behalf of DPI.

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. CaHAcT

Very truly yours,

(SGD.) JOSE MARIO C. BUÑAG

OIC, Commissioner
Bureau of Internal Revenue

Copyright 2017 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia (2017.1) 6