SGV & Co.

January 15, 2009 BIR RULING [DA-(C-001) 021-09] Sec. 28 (B) (4); DA-ITAD-039-04 SGV & Co. 6760 Ayala Avenue, 1226 Makati City Attention: Atty. Ma. Victoria A. Villaluz Tax Division Gentlemen : This refers to your letter dated December 6, 2007, requesting on behalf of your client, HITACHI TERMINALS MECHATRONICS PHILS. CORP. ("HTMPC"), confirmation that: EScaIT (1) The rental fees paid to OMRON Corporation Advanced Module Business Company Production Division (hereinafter referred as OMRON-AMP) by HTMPC (formerly known as OMRON MECHATRONICS OF THE PHILIPPINES CORPORATION) for the lease of dies are subject to the 7.5% withholding tax as provided in Section 28 (B) (4) of the Tax Code of 1997, as amended; and (2) The rental fees paid to SB Leasing (Singapore) PTE. Ltd. (hereinafter referred as SBLPL) by HTMPC for the lease of various equipment are likewise subject to the 7.5% withholding tax as provided in Section 28 (B) (4) of the Tax Code of 1997, as amended. It is represented that: (1) HTMPC is a Subic-registered enterprise duly organized and existing under the laws of the Philippines with principal office address at Subic Techno Park, Boton Area, Subic Bay Freeport Zone, Philippines; (2) OMRON-AMP is a foreign corporation organized and existing under the laws of Japan. It is not engaged in trade or business in the Philippines; (3) SBLPL is a corporation duly organized and existing under the laws of Singapore. It is not engaged in trade or business in the Philippines; (4) HTMPC entered into a contract of lease with OMRON-AMP whereby HTMPC leases from OMRON-AMP dies/machinery used in its manufacturing activities, and in accordance with this lease agreement, HTMPC pays OMRON-AMP rental fees; (5) HTMPC also entered into lease agreements with SBLPL, whereby HTMPC leases from SBLPL various equipment used in the manufacturing operations, and pursuant to this * agreements, HTMPC pays SBLPL rental fees; Based on the above representations, it is your opinion that the said rental payments are subject to the 7.5% withholding tax imposed under Section 28 (B) (4) of the Tax Code of 1997, as amended. ASTcaE In reply, please be informed of the following Tax Treaty Provisions: Article 12 of the RP-Singapore Tax Treaty provides, viz. : "Article 12 Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; (c) in all other cases, 25 per cent of the gross amount of the royalties. 3. The term "royalties" as used in this Article means payments 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 cinematographic films or tapes for television or 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. xxx xxx xxx." On the other hand, Article 12 of the RP-Japan Tax Treaty provides, viz. : "Article 12 (1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. AIDTSE (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; (b) 25 per cent of the gross amount of the royalties in all other cases. (3) Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. (4) The term "royalties" as used in this Article means payments 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 and films or tapes 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. xxx xxx xxx." Based on the aforequoted provisions, of the RP-Singapore and the RP-Japan Tax treaties, rental payments are covered by the term "royalties", and as such are subject to the preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties. However, Section 28 (B) (4) of the Tax Code of 1997, as amended, provides, viz. : "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporations. xxx xxx xxx (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees." It is a well-settled principle in international law that tax treaties cannot impose a more burdensome tax rate than the tax rate provided for under the internal laws of the Contracting States. Thus, where the internal laws of the Contracting State which is the country of residence of the payor of the rentals, provide a lower tax rate on the said rental payment, the payor must apply the said lower tax rate imposed by its internal laws. Considering that the Philippine Tax Code of 1997, as amended, provides for a lower tax rate on rentals of machinery and equipment paid to nonresident foreign corporations, compared to the tax treaty rates, the said lower rate provided in the said Tax Code must be applied. In view thereof, this Office is of the opinion and so holds that the rental payments of HTMPC to OMRON-AMP and to SBLPL are subject to the seven and one-half percent (7 1/2%) tax rate on gross rentals imposed under Section 28 (B) (4) of the Tax Code of 1997, as amended, the same not having exceeded the 25% rate imposed on the gross amount of royalties under the RP-Singapore tax treaty and RP-Japan Tax Treaty. (BIR Ruling No. DA-ITAD 039-04 dated April 28, 2004), ITAD Ruling 150-02 dated August 26, 2002; ITAD Ruling 33-01 dated March 31, 2001; ITAD Ruling 149-00 dated October 23, 2000). HAaDTI On the other hand, with respect to value-added tax (VAT), as a general rule, gross receipts derived from the sale or exchange of services shall be subject to VAT at the rate of 12%. The phrase 'sale or exchange of services' includes the lease or the use of, or the right to use of any industrial, commercial or scientific equipment. However, Section 109 of the Tax Code, as amended by Section 7 of R.A. 9337, provides those transactions exempt from VAT, one of which is paragraph (K) worded as follows: "(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" (Emphasis supplied) Republic Act 7227 also known as the "Bases Conversion and Development Act of 1992, as amended is a special law which exempts SBMA-registered enterprises from paying VAT. Section 12 of the said law provides: "SEC. 12. Subic Special Economic Zone. xxx xxx xxx (c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to the base areas." (Emphasis supplied) In ITAD Ruling No. 150-02, dated August 26, 2002, the BIR applied the foregoing exemption. This ruling involves SB Leasing (SBL), which is a non-resident foreign corporation organized under the laws of Singapore. It is not licensed to engage in business in the Philippines. SDPI, on the other hand, is a Subic-registered enterprise organized under the laws of the Philippines primarily engaged in the manufacture and exportation of precision motors for computer cooling. In a Contract of Lease entered into, SDPI leases from SBL certain machinery for the use of which SDPI pays SBL rental fees. The BIR ruled, and we quote: "As regards the issue on VAT, Section 108 of the Tax Code of 1997 states that, the lease or use of property or property rights is embraced within the definition of "sale or exchange of services" and is subject to VAT. Under the current regulations, the sale of services to Ecozone Enterprises may be considered effectively zero-rated for VAT purposes but subject to the limitation that the sale of service is made to persons or entities who enjoy indirect tax exemption [Section 4.102-2(c), Revenue Regulations No. 7-95]. Since there is no express provision under the PEZA law granting exemption from indirect sales to Ecozone Enterprise, the recognition of zero-rated sale of services is made to rest on the Cross Border Doctrine or Destination Principle of the VAT system, viz. : "the country taxes all value-added, at home and abroad, for goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable . . ." (VAT Ruling No. 009-99 dated January 21, 1999) ECSHID The same principle is applicable to the case at hand. It should be noted that the lease of machineries is in connection with the manufacture of products for export . However, instead of the zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109 of the Tax Code of 1997 which provides VAT exemption for transactions which are exempt under special laws , e.g. , Republic Act 7227 or Bases Conversion and Development Act of 1992, is particularly applicable to the instant case. In the case of payment for lease or royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rest on the payor. However, since Subic Special Economic and Freeport Zone (SSEFZ)-registered export enterprise may not be passed on with nor claim input VAT, then its payment of royalties to a non-resident lessor, such as SBL should be, as it is hereby confirmed to be, exempt from VAT . (VAT Ruling No. 095-99 dated September 14, 1999)" (Emphasis & italics supplied) As explained above, the lease payments by SDPI, an SBMA-registered company, to a nonresident lessor/owner of machineries for the leased machineries which are used in relation to the payor's SBMA-registered activity is exempt from VAT. Considering that HTMPC is also an SBMA-registered company which pays rentals for the lease of machinery and/or dies from a nonresident lessor/owner, in relation to the Company's SBMA-registered activity, its rental payments to OMRON Corporation Advanced Module Business Company Production Division and to SB Leasing (Singapore) PTE. Ltd. are likewise exempt from VAT. (ITAD Ruling No. 150-02, BIR RULING No. DA-037-07). Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service