BIR Ruling [DA-630-04]

December 14, 2004 BIR RULING [DA-630-04] V.C. Mamalateo & Associates Unit 6C 20 Lansbergh Plaza 170 Morato Street Quezon City Attention: Atty. Carmencita P. Victorino Gentlemen : This refers to your letter dated September 28, 2004 stating that your client, Wrigley Philippines, Inc. (Wrigley Philippines) is a domestic corporation with principal office address at Marcos Highway, Sitio Puting Bato, Barangay Inarawan, Antipolo City; that on the other hand, WM. Wrigley, Jr. Co. (Wrigley) is a non-resident foreign corporation organized and existing under the laws of the State of Delaware with offices at No. 410 North Michigan Avenue, Chicago, Illinois, USA; that under a License Agreement between Wrigley and Wrigley Philippines dated July 1, 1993, Wrigley granted to Wrigley Philippines the following rights: (a) license and exclusive right to manufacture and sell chewing gum within the Philippines under the trademarks owned by Wrigley; (b) to be informed of all developments or improvements relating to the manufacture of chewing gum; and (c) to provide technical assistance and information relating to techniques as may be developed by Wrigley in the field of marketing, selling, advertising, manufacturing and packaging of chewing gum; that in consideration of the rights granted and for the benefits received, Wrigley Philippines agreed to pay Wrigley, in respect of all chewing gum manufactured and sold by the former during the period July 1, 1993 to June 30, 2003, a fee of five percent (5%) based on net sales plus two percent (2%) based on net foreign exchange earnings; that Wrigley agreed to assist Wrigley Philippines in the export of the chewing gum manufactured; that the aforesaid License Agreement between Wrigley Philippines and Wrigley is registered with the Bureau of Patents, Trademarks and Technology Transfer (now Intellectual Property Office) on July 23, 1993; that thereafter, the License Agreement between Wrigley Philippines and Wrigley dated July 1, 1993, was renewed for a period of ten (10) years effective July 1, 2003 or until June 30, 2013; that the said Renewal Agreement was later registered with the Intellectual Property Office; that based on the License Agreement, Wrigley Philippines remitted in 2004 the following royalties to Wrigley, and paid 15% of final withholding taxes for the months of January to June 2004 to the BIR through e-payment with RCBC as follows: Month Royalties 15% FWT Payment Date Payment Trans. No. January P3,049,246.66 P457,387.00 02/10/04 116540 February 4,250,080.00 637,512.00 03/10/04 130822 March 1,460,726.67 219,109.00 04/14/04 13972 April 0.00 0.00 May 3,257,286.67 488,593.00 06/11/04 155620 June 3,027,433.33 454,115.00 07/13/04 165486 Total P15,044,773.33 P2,256,716.00 that for the months of July to August 2004, Wrigley Philippines paid the 10% final withholding taxes pursuant to the provisions of the Philippines-United States Tax Treaty, in relation to the provisions of the Philippines-China Tax Treaty, to the BIR through e-payment with RCBC as follows: Month Royalties 10% FWT Payment Date Payment Trans. No. July P3,819,420.00 P381,942.00 08/10/04 000198419 August 4,012,260.00 401,226.00 09/13/04 000251682 Total P7,813,680.00 P783,168.00 that in BIR Revenue Memorandum Order No. 1-00 dated November 25, 1999, Wrigley Philippines filed on February 28, 2003 with the International Tax Affairs Division (ITAD), a written request for a ruling confirming that Wrigley Philippines' technical service fee or royalty payments to Wrigley are subject to the 10% withholding tax rate pursuant to the "most favored nation clause" under the Philippines-US Tax Treaty, in relation to the provisions of the Philippines-China Tax Treaty, with a claim for refund or issuance of a tax credit certificate for overpaid withholding taxes made by Wrigley Philippines for calendar year 2002; that in BIR Ruling No. DA-ITAD 142-03 dated September 23, 2003, it was ruled that "(r)oyalty payments of Wrigley Philippines to Wrigley under the License Agreement are subject to final withholding tax at the rate of 10% pursuant to the "most favored nation" provision of the RP-US Tax Treaty in relation to the RP-China Tax Treaty effective January 1, 2002. [Revenue Memorandum Circular No. 46-2002 dated September 2, 2002; BIR Ruling No. DA-ITAD-101-03 dated July 24, 2003] Wrigley Philippines shall deduct and withhold the tax at the time the royalty income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, and whichever comes first." that however, notwithstanding the effectivity on January 1, 2002 of the Philippines-China Tax Treaty, imposing only ten percent (10%) withholding tax rate on royalty payments arising from the use of, or the right to use, any patent, trademark design or model, plan, secret formula or process, or from the use of, or the right to use industrial, commercial, or scientific equipment or for information concerning industrial, commercial or scientific experience and the issuance of RMC No. 46-2002 dated September 2, 2002 and the aforesaid ruling, Wrigley Philippines had withheld and remitted to the BIR, income tax equivalent to 15% of the fees due under the License Agreement dated July 1, 1993 based on the "most favored nation clause" in the Philippine-US Tax Treaty in relation to the pertinent provisions of the Philippines-Russia, Philippines-Denmark or Philippines-Sweden Tax Treaties; and that the excess of the 15% withholding taxes paid for the months of January to June 2004 are clearly erroneously paid. Based on the foregoing representations, you now request for an opinion as to whether or not the 5% (15% less 10%) final withholding taxes erroneously paid for the periods from January to June 2004 may be directly credited against the final withholding taxes for the succeeding months of 2004. In reply thereto, please be informed that Section 6(A) of the Tax Code of 1997 provides that "Sec. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. "(A) Examination of Returns and Determination of Tax Due. xxx xxx xxx "Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn: Provided , That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided, further , That no notice for audit or investigation of such return, statement or declaration has, in the meantime, been actually served upon the taxpayer." Corollarily, Section 76 of the same Code provides that in case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore. Finally, in Section 229 of the Code provides that . . . the Commissioner may, even without a written claim therefore, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. CHcESa It is clear from the above-cited sections that the filing of the amended tax returns are allowed, provided that the amendment is made within three (3) years from the date of filing of such returns and no notice for audit or investigation of such return has been actually served upon the taxpayer. Moreover, if the tax payments made during the taxable year exceeds the corporate income tax due, the corporations are allowed to carry over the excess credit or be credited or refunded with the excess amount paid, as the case may be. In such case, if the corporation is entitled to a tax credit or refund of the excess income taxes paid, the excess amount on its final return may be carried over and credited against the income tax liabilities for the taxable quarters of the succeeding taxable years. Furthermore, it is the policy of the government to return to the taxpayer in an expeditious manner whatever amount of tax that was clearly erroneously paid, thereby avoid having to process claims for tax credits or refunds by allowing taxpayers to file within the prescribed period amended tax returns. Considering that the amendment of the withholding tax returns for the months of January to June 2004 were made in August 2004, which is well within the three (3) year period from the date of filing of such returns, and considering that there is no notice for audit or investigation of such return has been served upon Wrigley Philippines, the latter can therefore file the amended withholding tax returns and credit the overpayments for the months of January to June 2004 against the succeeding payments of withholding taxes for the months of July to December 2004. SUCH BEING THE CASE, this Office holds that the overpayments of final withholding tax for the preceding months of 2004 i.e., January to June can be automatically credited against the final withholding taxes for the succeeding months of 2004 or from July to December 2004. 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. SIcEHD Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group