Aranas Consunji & Barleta Law Office

December 10, 2008 BIR RULING [DA-(VAT-052) 514-08] Sec. 108 (B); RMC No. 44-05; VAT Ruling No. 025-02; BIR Ruling No. DA-168-98 Aranas Consunji & Barleta Law Office Unit 106 G/F Le Metropole Condominium Tordesillas Corner Dela Costa Streets, Salcedo Village, Makati City Attention: Atty. Ma. Louella M. Aranas This refers to your letter dated 3 October 2008, on behalf of your client, Philippines Epson Optical Inc. ("PEO") requesting for confirmation of your opinion as follows: 1. Payments made by PEZA-registered enterprises such as the members of the Epson GROUP for royalties to a non-resident foreign corporation, including payments made to Altera, shall be exempt from value-added tax (VAT) imposed under the Tax Code. 2. The payments for royalties made by the EPSON GROUP to Altera, a US-based company, shall be subject to the preferential tax treaty rate not exceeding 25% of the gross amount of the royalties pursuant to Article 13 (2) (b) of the RP-US Tax Treaty. 3. The payments for royalties made to nonresident licensors made by the EPSON GROUP shall be subject to the applicable withholding tax rate on royalties provided under the respective tax treaties of these countries with the Philippines. Otherwise, the applicable tax rate shall be the final withholding tax imposed under Section 28 (B) (1) of the Tax Code as implemented under Section 7 (B) (2) of RMC No. 44-05 on royalty payments. It is represented that in the course of the conduct of its business, the various EPSON companies in the Philippines namely: Philippines Epson Optical Inc. with business address at Special Export Processing Zone, Gateway Business Park, Javalera, General Trias, Cavite, enjoying the Income Tax Holiday (ITH) and registered as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-011; Epson Precision (Philippines), Inc., with business address at Special Economic Zone, Lima Technology Center, Lipa City, Batangas enjoying both the ITH and 5% gross preferential income tax for its Laguna and Lipa plants respectively and registered as an Ecozone Export Enterprise under Philippine Economic Zone Authority (PEZA) Certificate of Registration No. 95-18; Sanyo Epson Imaging Devices (Phils.) Inc., with business address at Integrated Microelectronics Inc., 2nd Floor Bldg. I, North Science Avenue, Special Economic Processing Zone, Laguna Technopark, Bian, Laguna enjoying the ITH and registered as an Ecozone Export Enterprise under PEZA Certificate of Registration No. 05-07; Epson Software Engineering (Phils.) Inc., with business address at Module 7A, E-Office Asiatown I.T. Park, Apas, Cebu City enjoying the ITH and registered as an Ecozone I.T. Enterprise under PEZA Certificate of Registration No. 06-09-IT, entered into several license agreements with various nonresident foreign licensors; that one of such nonresident foreign licensor is a US-based company known as Altera Corporation (Altera) with business address at 101 Innovation Drive, San Jose, California 95134, USA; that the EPSON GROUP entered into an Altera Program License Subscription Agreement whereby Altera being the licensor has granted a non-exclusive license to the EPSON GROUP to use its licensed programs in its business activity; that as consideration for such license, the EPSON GROUP shall pay Altera with the required license fee for the program purchased. In reply thereto, please be informed that the Philippine VAT System adopts the destination principle wherein imports are taxed while exports are given total immunity. This system of taxation, when applied to goods crossing borders, is designed to make our local products competitive in the foreign market. In line with this principle, the royalties paid by EPSON GROUP to Altera and other non-resident foreign corporations are exempted from the value added tax, whether at the time it enjoys income tax holiday or at the time that it is subject to the 5% commutation tax. The foregoing position is in consonance with VAT Ruling 025-02, dated April 25, 2002, where the BIR ruled that: "In reply thereto, please be informed that the Philippine VAT System adopts the destination principle wherein imports are taxed while exports are given total immunity. This system of taxation, when applied to goods crossing borders, is designed to make our local products competitive in the foreign market. In line with this principle which is the backbone of the Philippine VAT System, the royalty payments by TIEPI to Toshiba are exempt from VAT whether at the time it enjoys income tax holiday or at the time that it is subject to the 5% commutation tax. Otherwise, TIEPI will be required to shoulder the VAT on inputs, which will be added-up to the export cost of its products. As a matter of fact, the local sale of VAT suppliers to PEZA registered enterprises were declared zero-rated to afford full immunity to the export producer. (RMC 74-99) It is on this principle that the royalty payments by TIEPI to Toshiba shall be exempt from VAT so that the PEZA locator would be truly relieved from the burden of indirect tax consonant with the "Cross Border Doctrine" thereby ensuring that the export price of the commodities has no VAT component. (VAT Ruling No. 63-2001)." (emphasis supplied). Accordingly, payments for royalties made by the EPSON GROUP to Altera and other non-resident foreign licensors from the various license agreements shall be VAT exempt. The VAT exemption notwithstanding, the royalties paid by the EPSON GROUP to Altera shall be subject to the preferential tax rate as appearing in the RP-US Tax Treaty shall apply, viz. : "Article 13 Royalties 2. However, the tax imposed by that Contracting State shall not exceed: a. In the case of the United States, 15 per cent of the gross amount of the royalties, and b. In the case of the Philippines, the least of: i. 25 per cent of the gross amount of the royalties; ii. 15 per cent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and iii. the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State." Considering that the members of the EPSON GROUP are not registered with the Board of Investments, the preferential tax rate of 25% of the gross amount of the royalty payment must be applied in the royalty payments made to Altera pursuant to the RP-US Tax treaty. HESAIT As for the payments made to other nonresident foreign licensors, the applicable tax rate shall be that imposed under Section 28 (B) (1) of the Tax Code as implemented under Section 7 (B) (2) of RMC No. 44-05 on royalty payments. However, if there is an existing tax treaty between the Philippines and the country of residence of such foreign licensor, then the preferential tax rate contained in therein shall be applied provided that the conditions prescribed in the tax treaty are complied with. 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 as represented are different, then this ruling shall be considered null and void. AIaSTE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service