Zambrano & Gruba

July 23, 2008 BIR RULING [DA-(C-014) 074-08] BIR Ruling No. DA-127-04 & DA-ITAD-26-04 Zambrano & Gruba 27th Floor, 88 Corporate Center Sedeo corner Valero Streets Salcedo Village, Makati City Attention: Atty. Patrick F. Advincula Atty. Michael Geronimo G. Martin Gentlemen : This refers to your letter dated May 20, 2008 requesting on behalf of Apo Cement Corporation ("APO") and Solid Cement Corporation ("SOLID") for a ruling confirming the continuing applicability of BIR Ruling DA-ITAD-015-06 dated 28 February 2006 in that: cEATSI (a) the royalty payments of APO and SOLID to Cemex Research Group AG ("CRG"), a non-resident Swiss corporation, are subject to a 15% final withholding tax, based on the gross amount of the royalties, pursuant to Article 12 (2) of the Philippine-Switzerland Tax Treaty; and (b) the same royalty payments are subject to the [now 12%] Value-Added Tax ("VAT") pursuant to Section 106 of the 1997 Tax Code, as amended. As represented, BIR Ruling DA-ITAD-015-06 previously ruled that royalty payments by APO and SOLID to CEMEX, a non-resident Swiss corporation, are subject to (i) a 15% final withholding tax pursuant to Article 12 (2) of the RP-Switzerland Tax Treaty and (ii) [then 10%] VAT. In the present case, the only difference is that CEMEX has assigned all its royalty rights to its subsidiary, CRG who thus became the recipient of the royalty payments. Since the present request is based on substantially similar factual setting in BIR ITAD Ruling No. 015-06 with the minor modification brought about by the assignment of rights, you now request for a confirmation on the continuing applicability of the tax consequences outlined in BIR Ruling DA-ITAD-015-06. Statement of Facts under BIR ITAD Ruling No. 015-06 In BIR Ruling DA-ITAD-015-06, it was represented that Cemex Trademarks Worldwide, Ltd. ("CEMEX") is a nonresident foreign corporation duly organized and existing under the laws of Switzerland with office address located at Romerstrasse 13, 2555 Brugg, Switzerland. CEMEX is not registered either as a corporation or as a partnership in the Philippines as shown by its Certificate of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission ("SEC") on July 28, 2005. On the other hand, APO and SOLID are domestic corporations duly organized and existing under the laws of the Philippines both having business addresses at the 25th Floor, Petron Mega Plaza, 358 Sen. Gil Puyat Avenue, Makati City. On July 1, 2004, CEMEX separately entered and executed Licensing Agreements with APO and SOLID (the "Agreements"), granting the latter a non-exclusive right to use, exploit and enjoy in the Philippines its trademarks and other intangible assets. These Agreements were certified compliant with the relevant provisions of the Intellectual Property Code as evidenced by Certificates of Compliance issued by the Intellectual Property Office on October 11, 2004. In consideration of the right granted under the Agreements, APO and SOLID agreed to pay royalties to CEMEX based on certain percentages of the following amounts: (1) the historic annual third party net sales of APO's and SOLID's cement and ready-mix products (for the use of trademarks); and (2) the historic annual net sales of goods and services made by APO and SOLID (for the use of intangible assets). In view of this, APO and SOLID sought a confirmatory ruling that the royalty payments made by APO and SOLID are subject to the 15% preferential tax rate under Article 12 (2) of the Philippine-Switzerland Tax Treaty. BIR Ruling DA-ITAD-015-06 confirmed that the 15% preferential rate applies to the royalties paid by APO and SOLID to CEMEX. The ruling further stated that both APO and SOLID shall be responsible for withholding the 15% income tax on the gross royalty payments as well as the 10% VAT. AHCaED Additional Statement of Facts Under The Present Request As a result of a corporate restructuring implemented in Switzerland, CEMEX assigned and transferred all of its rights and obligations under the Agreements to its new wholly owned Swiss subsidiary, Cemex Research Group AG ("CRG"). CRG, the assignee, is a non-resident foreign corporation duly organized and existing under the laws of Switzerland with office address at Romerstrasse 13, 2555 Brugg bei Biel, Switzerland. CRG is neither registered as a corporation or a partnership in the Philippines. In reply, please be informed that in a previous ruling, the taxpayer requested for a clarificatory ruling on whether or not BIR Ruling No. 033-00 issued on September 5, 2000 to Technoserve International Co. (Technoserve), based on substantially similar factual setting as presented in the aforecited ruling though with minor modifications, will still apply to JGC Philippines, Inc. (JPHIL), formerly, Technoserve. This Office held that the tax consequences attendant to a Secondment Agreement continue to apply considering that no substantial change was effected with respect to the rendition of the services outside the Philippines despite minor modifications such as the issuance of an Overseas Employment Certificate, change of office site abroad and revision of overseas compensation, among others, viz. : "In reply, please be informed that this Office would like to confirm BIR Ruling No. 033-2000 dated September 5, 2000 is still applicable to JPHIL since the minor modifications in the current work contracts of the overseas assignees are almost the same as the conditions in the former Secondment Agreement and no substantial change is effected with respect to the rendition of the services outside the Philippines." (BIR Ruling No. DA-127-04 dated 24 March 2004). In another case, this Office applied the Philippine-Switzerland Tax Treaty to an assignee which is a non-resident Swiss corporation, notwithstanding that the assignor is a non-resident Danish corporation. This Office ruled that DECcAS ". . . interest arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a preferential rate not exceeding ten percent (10%) of the gross amount of the interest if the recipient is the beneficial owner thereof. Considering that CTOF acquired all of the undivided rights and interest of CTDX in the Malampaya loans 1 and 2, by virtue of the Assignment Agreement dated October 20, 2004, CTOF is deemed the beneficial owner of the interest arising from the said loans. Such being the case, this Office is of the opinion and so holds that the interest payments by CTM LLC-Phil to CTOF from October 20, 2004 are subject to a preferential rate of ten percent (10%) pursuant to Article 11 of the Philippines-Switzerland tax treaty." (BIR Ruling DA-ITAD-052-05 dated 9 June 2005 citing BIR Ruling DA-ITAD-26-04 dated March 19, 2004) In assignment of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertains. The assignee is deemed subrogated to the rights and obligations of its assignor and is bound exactly by the same conditions as those which bound the assignor. ( Koa vs. Court of Appeals, G.R. No. 84847 dated 05 March 1993 and BIR Ruling No. DA-379-03 dated October 20, 2003) Applying the above principle and rulings, it is the opinion of this Office that BIR Ruling DA-ITAD-015-06 continues to apply to APO and SOLID since CRG merely stepped into the shoes of CEMEX such that the present request is based on a substantially similar factual setting earlier presented albeit with a minor modification. The assignment and transfer of rights from CEMEX to CRG constitutes merely a minor modification. The payors of the royalties continue to be APO and SOLID. The royalty payments continue to be based on the same Agreements. Although there was a change in the recipient from CEMEX to CRG, this should not have a bearing on the tax consequences of royalty payments since CEMEX and CRG are both nonresident foreign corporations belonging to the same group of companies based in Switzerland. In fact, CRG is a wholly owned subsidiary of CEMEX and the transfer of rights and obligations under the Agreement was merely a result of a corporate restructuring implemented in Switzerland. Accordingly, the royalty payments should be covered by the Philippine-Switzerland Tax Treaty. In view of the foregoing, this Office confirms your opinion that the applicable tax rates are the same as enunciated in BIR Ruling DA-ITAD-015-06, i.e. , EAICTS (a) the royalty payments of APO and SOLID to CRG (as the assignee of CEMEX) are subject to a 15% final withholding tax, based on the gross amount of the royalties, pursuant to Article 12 (2) of the Philippine-Switzerland Tax Treaty; and (b) the royalty payments are subject to the [now 12%] VAT pursuant to Section 106 of the 1997 Tax Code, as amended. 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 as null and void. IDaEHC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service