Robinsons Convenience Stores, Inc. (RCSI)

December 23, 2009 BIR RULING [DA-(C-346) 833-09] DA115-06; DA(C-101)311-2008 Robinsons Convenience Stores, Inc. (RCSI) 110 E. Rodriguez, Jr. Avenue Libis, Quezon City Attention: Atty. Betty Salvador and Mr. Johnson Robert Go, Jr. Gentlemen : This refers to your letter dated November 18, 2009 stating that RCSI is a domestic corporation organized and existing under the laws of the Philippines, having as its primary purpose, to engage in the business of acquiring and franchising licenses, and/or rights to proprietary marks, trademarks, trade names, patents, copyrights, know-how, technology, processes, methods, techniques, devices, systems and the like to franchisee, sub-franchisees, licenses, or sub-licenses; that RCSI is contemplating a franchising business covering the establishment and operation of combo-stores (stores combining a convenience store and fast food outlet in one establishment), using the Franchiser's Ministop System; that some of the more important features of the draft franchise agreement are as follows: The Franchiser grants to the Franchisee a license to operate the Ministop Store using the facilities, furniture and equipment for selling activities which may be leased by the Franchiser as well as the Ministop System, under the terms and conditions of the Agreement. The Franchiser shall grant to the Franchisee the following rights for operation of the Ministop Store, which rights shall accrue as of the Business Commencement Date: i. Right to lease and use the manuals, materials and forms consisting of the Ministop System; ii. Right to be provided and use the business know-how and various management information with respect to the Ministop Store; iii. Right to lease, and use the specified facilities, furniture and equipment; and iv. Right to use the Ministop's trademarks, service marks, designs and works and signs, marks, design, labels, signage related thereto and other business symbols representing the Ministop Store. that the Franchiser shall prepare an education and training system in order for the Franchisee to smoothly operate the Ministop Store; that in consideration of the license to operate the Store and rights and services authorized and/or given under this Agreement, the Franchisee shall pay the Franchiser a royalty fee computed as a certain percentage of Franchisee's Gross Sales Profit; and that the Franchisee agrees to invest the following amounts: amount equivalent to the cost of the merchandise inventories, raw materials for fast food and supplies as of the business commencement; amount for furniture and equipment and supplies as designated by the Franchiser; and cash for change for the cash registers and expenses for necessary business licenses, permits, clearances and approvals. Based on the foregoing representations, you now request for confirmation of your opinion that 1. The joining fee, royalty payments and other fees to be made to RCSI by the Franchisee/s shall be considered as active income subject to 30% corporate income tax and not as passive income subject to the 20% final withholding tax; and SDAaTC 2. The said payments are not subject to creditable withholding tax unless the payor belongs to the Top 20,000 corporations, in which case, the payment shall be subject to 2% creditable withholding tax. In reply thereto, please be informed that your opinion is hereby confirmed as follows: 1. In BIR Ruling No. 057-00 dated November 7, 2000, later reiterated in BIR Ruling No. DA518-03 dated December 17, 2003, this Office citing Section 27 (D) (1) of the Tax Code of 1997, thus ruled that "(D) Rates of tax on certain passive incomes. (1) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, that interest income derived by a domestic or a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final tax at the rate of seven and one-half percent (7 1/2%) of such interest income. . . ." As expressly denoted in the caption, to be subject to the 20% final withholding tax, the royalties must be in the nature of passive income. On the other hand, since the income derived by MKI-Phils from the distribution of the Licensed Computer Systems to Philippine banks and the performance of support services is income generated in the active pursuit and performance of its primary purpose, this Office confirms your opinion that the same is clearly NOT passive income subject to the 20% final tax. Such being the case, the payments received by MKI-Phils from the active conduct of trade or business is considered ordinary business income subject to the 33% for 1999 regular corporate income tax." In applying the above-cited rulings, it is undisputed that the royalties and other fees received by RCSI are in the nature of ordinary business income because the aforesaid income was derived or generated from activities that are in accordance with the primary purpose of RCSI which is to operate and individually franchise Ministop stores in the Philippine territory as provided in its Articles of Incorporation. SUCH BEING THE CASE, the royalty income derived by RCSI in the conduct of its business shall form part of its ordinary income subject to the 30% regular corporate income tax. 2. Generally, if the royalty income is considered as an active income, there is no duty to withhold on such payments as required under Section 57 of the Tax Code of 1997, as the royalty payments are not subject to creditable withholding tax since said income is not among those enumerated under the withholding tax regulations as subject to withholding tax. However, if RCSI's client/payor is one of the top twenty thousand (20,000) corporations designated by the BIR, the royalty shall be subject to the withholding tax of 2% which shall be creditable against the tax due on the taxable income of RCSI. 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. EHaDIC Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service