December 6, 2000 ITAD RULING NO. 182-00 RP-Singapore Arts. 5 & 7 Sycip Gorres Velayo & Co.

6760 Ayala Avenue 1226 Makati City Attention: Atty. Cirilo P. Noel Tax Division Gentlemen : This refers to your letter dated November 15, 2000, on behalf of your client, Procter and Gamble (P&G), requesting confirmation of the following 1) that P&G International Operations Pte. Ltd. ("PGIOPL") is not subject to Philippine income tax and consequently to the withholding tax of 32% under the provisions of Section 28(B) of the Tax Code of 1997, pursuant to the RP-Singapore Tax Treaty; 2) that since it will not have a permanent establishment in the Philippines, PGIOPL will not be subject to Philippine income tax on the business profits or income derived on the sale of goods to customers in the Philippines; 3) that PGIOPL and/or Newco (another Philippine subsidiary which P&G will incorporate to act as a Commissionaire Agent in the Philippines) will not be subject to the creditable withholding tax on the sale of goods to customers in the Philippines, and PGIOPL will also not be required to withhold the same tax on payments to local suppliers of raw and packing materials under Section 57 of the said Tax Code of 1997. HESIcT It is represented that P&G is a corporation organized under the laws of the Philippines; that PGIOPL is a non-resident foreign corporation duly organized and existing under the laws of Singapore with its required office at 150 Beach Road, #37-00 The Gateway West Singapore; that in September 1998, P&G announced plans to implement changes to its organizational structure, work processes, culture and reward structure with the end view of accelerating the company's sales and profit growth and the return to shareholders by increasing the capability to create and build large, profitable leadership brands; that in the ASEAN, India and Australia ("AAI") region, to align the legal structure of the P&G group of companies with the organizational changes, it intends to incorporate a company to house the management teams for all product categories; that existing manufacturing entities in the region will act as toll manufacturers or this company; that also distributing entities (like a Commissionaire) to carry out the activities of the market development organization will be created in the countries where P&G is or will be operating that separate entities will be set up as shared service centers for Asia. Furthermore, PGIOPL will act as the Regional Entrepreneur for the AAI region and will make all key decisions regarding the business for the regional category management teams; that PGIOPL will be the licensee of a package of intangibles (viz. marketing rights, trademarks, patents, copyrights, technical know-how) from the parent company and will also be the legal owner of all imported and domestically sourced raw and packing materials used in the production process and all imported and domestically produced finished goods sold throughout the region; that for these purposes, the PGIOPL will assume the risk, loss and profit derived from each activity as well as the operating control of these functions for the

countries in the AAI region; that in the Philippines, Procter & Gamble Philippines, Inc. (PGPI) will act as a toll manufacturer for PGIOPL and will own the plant as well as the machinery and equipment to be used in the production/processing of raw and packing materials into finished goods; that PGPI will process raw and packing materials belonging to PGIOPL into finished goods; that for PGPI's services, PGIOPL will pay service fees on an arm's length basis; that PGIOPL will retain ownership over these finished goods until they are sold to the customers; that PGPI will have the sole discretion to make the day-to-day decisions with respect to manufacturing processes, methods, and costs, subject to the standards of manufacturing and quality required by PGIOPL in accordance with the intangible licensing agreement with the parent company; that after production, PGPI will safekeep the finished products only for such period of time necessary for PGPI to be able to conduct quality assurance (QA) and other measures required by good manufacturing practices; that thereafter, the finished goods will be withdrawn by the local market development organization, a new company ("Newco") from PGPI for delivery to customers. SIcEHD It is further represented that P&G will incorporate another Philippine subsidiary, Newco, a corporation organized under the laws of the Philippines with its registered office at 6750 Ayala Avenue Office Tower, Ayala Center, Makati City to act as a Commissionaire in the Philippines; that Newco will be responsible for selling and distributing the products in the Philippines and will have the sole discretion to determine its own strategies for the distribution of the products; that for Newco's services, PGIOPL will pay service fees on an arm's length basis; that in addition to the foregoing, Newco will sell the goods in its capacity as a consignee-independent agent and will invoice the customers in its own name; that Newco will deal with the Philippine customers in its own name and hence, act as a principal in the transaction covering the sale of goods to customers; that Newco will not have legal title over the goods of PGIOPL which are sold to the customers; that Newco will not have the power to contractually bind PGIOPL in any manner; that the Philippine customers will effectively transact with Newco and will have legal recourse to Newco only and not to PGIOPL in respect of the goods that they purchase; that Newco will receive sales revenue from the customers but will have to account for this revenue to PGIOPL and Newco will also be entitled to sell products of other P&G affiliates or other unrelated companies, or to undertake any other form of business activity for commercial reward; that Newco will be the importer/consignee of record, either directly or via a third party, of all raw materials and finished goods into the Philippines for processing and/or sale to customers, respectively; that as the importer/consignee of record, Newco will settle all customs duties and VAT payable upon importation; that it will deliver all imported raw materials to PGPI and the finished goods to the customers; that all negotiation and strategic decisions relating to the purchase of raw and packing materials will remain with PGIOPL and that Newco will also be the exporter of record, either directly or via a third party, of all finished goods destined for customers outside the Philippines In reply, please be informed that Article 5 (Permanent Establishment), paragraphs 4 and 5 of the RP-Singapore Tax Treaty provides that "(4) A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom paragraph 5 applies, shall be deemed to be a permanent establishment in the first-mentioned Contracting

State if a) he has and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that enterprise unless the exercise of such authority is limited to the purchase of goods or merchandise for that enterprise; or IDSaEA b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. (5) An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other Contracting State through a broker, general commission agent or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise. he shall not be considered an agent of independent status within the meaning of this paragraph if the transactions between the agent and the enterprise were not made under arm's length conditions." Moreover, Article 7 (Business Profits), paragraph 1 of the same treaty provides: "Article 7 1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." ISAaTH Under the aforequoted provisions, business profits of PGIOPL shall only be taxable in the Philippines if it has a permanent establishment situated therein For purposes of paragraph 4(a) of Article 5, neither PGPI nor Newco has the authority to conclude contracts in the name of PGIOPL. As a toll manufacturer, PGPI will process raw and packing materials belonging to PGIOPL. However, it is PGIOPL rather than PGPI, which will be responsible for the negotiation and the strategic purchases of the raw and packing materials. On the other hand, a critical feature of Newco is its inability to contractually bind PGIOPL. Newco will sell the goods in its capacity as consignee-independent agent and will invoice the customers in its own name pursuant to its status as an independent agent. It will have no ability to conclude contracts with customers in the name of, or on behalf of, PGIOPL. Neither PGPI nor Newco, both in the Philippines, habitually maintains a stock of goods or merchandise from which either PGPI or Newco may regularly deliver goods or merchandise on behalf of PGIOPL pursuant to Article 5(4)(b). STaAcC Furthermore, nothing in the foregoing facts as represented will show that PGIOPL will establish a permanent establishment in the Philippines. If a permanent establishment will be established in the Philippines, the profits of the Singapore entity like PGIOPL may be taxed in the Philippines but only so much of them as are attributable to the permanent establishment. While PGIOPL will enter into an agreement relating to the provision of toll processing and other services with PGPI and will also enter into a commissionaire agreement

with Newco, they will not constitute a permanent establishment since PGPI and Newco will have a separate and distinct personality from PGIOPL and their activities will not be devoted wholly or almost wholly to PGIOPL and will be done in the ordinary course of their business under arm's length conditions. For purposes of Article 5 (5), PGPI and Newco are not dependent agents of PGIOPL. Rather, they are independent entities that merely provide services to PGIOPL in return for arm's length consideration, acting in the ordinary course of their trades or businesses for which PGPI and Newco cannot be considered as a permanent establishment of PGIOPL. PGPI has the freedom and autonomy to carry out its business operations without any immediate interference or control from PGIOPL. Also, the processing arrangement of PGPI with PGIOPL is non-exclusive. PGPI remains free to contract with other P&G affiliates and/or unrelated parties as long as it does not transmit or use the technology, formulas, processes, standards or know-how for the processing of goods owned by it (PGPI) or third parties. The same holds true for Newco as it will independently undertake its operations in the manner it determines and will be able to provide similar services to third parties and engage in other activities for financial gain. The independent status of PGPI and Newco is likewise supported by the fact as represented that their respective transactions with PGIOPL will be compensated on arm's length basis. With the payment of arm's length service fees, PGPI and Newco cannot be considered a permanent establishment of PGIOPL. For this purpose, P&G will commission dependent experts to undertake transfer pricing studies to identify the market rates paid for comparable services by independent parties dealing at arm's length, in the context of the same facts and circumstances. IAETSC Moreover, if PGIOPL will have no permanent establishment in the Philippines, then the business profits to be derived by PGIOPL, in particular, the income from the sale of goods to customers in the Philippines, should not be subject to Philippine income tax and should be subject to tax only in Singapore. However, all income derived from the Philippines by PGPI and Newco will be subject to Philippine income tax. Under Section 57 of the Tax Code, the income tax imposed under the Tax Code shall be withheld by the payor-corporation and/or person. Implementing this provision, Revenue Regulations (RR) No. 2-98 dated April 17, 1998, provides, among others, that income payments made by any of the top five thousand (5,000) corporations, as determined by the Commissioner, to their local supplier of goods shall be subject to a 1% creditable withholding tax. (Sec. 2.57.2(M) of RR No. 2-98) However, Sec. 2.57.5(B) of the same Regulations provides that the withholding of creditable withholding tax prescribed therein shall not apply to income payments made to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. Since PGIOPL does not have a permanent establishment in the Philippines and will not be subject to tax on the business profits it derives from the sale of goods to the customers in the Philippines, it follows that the payments to PGIOPL should not be subject to any withholding tax under Section 57 of the Tax Code, including the 1% creditable tax to be withheld on income payments made by any of the top 5,000 corporations to their local supplier of goods. (BIR Ruling No. DA-062-99 dated February 5, 1999; 136-98 dated September 24, 1998).

For the same reason that it does not have a permanent establishment in the Philippines, PGIOPL should not be required to withhold the same tax (1% creditable withholding tax) when making payments to local suppliers of raw and packing materials. Likewise, Newco should not be subject to the creditable withholding tax on the sale of goods belonging to PGIOPL because it merely sells as an independent agent. SDHITE In fine, your opinion that PGIOPL will not have a permanent establishment in the Philippines pursuant to Arts. 5 and 7 of the RP-Singapore Tax Treaty and will not be subject to Philippine income tax on the business profits or income to be derived on the sale of goods to customers in the Philippines and that PGIOPL will not be subject to the 1% creditable withholding tax on the sale of goods to customers in the Philippines, and PGIOPL will also not be required to withhold the same tax on payments to local suppliers of raw and packing materials, is hereby confirmed. This ruling is issued on the basis of the 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. SDEHCc Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue