BIR Ruling No. 372-12

June 1, 2012 BIR RULING NO. 372-12 28 (B) (4) and 108 (A) of 1997 Tax Code, as amended Constantino Guadalquiver and Co. Certified Public Accountants 15th Floor, Citibank Tower 8741 Paseo de Roxas Street Salcedo Village, Makati City Attention: Casey M. Barleta Tax Services Gentlemen : This refers to your letter dated March 18, 2011 requesting confirmation that rental fees paid by Toei Animation Philippines, Inc. ("Toei Philippines") to Toei Animation Company ("Toei") are subject to income tax at the rate of 7 1/2% percent pursuant to Section 28 (B) (4) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended. Facts Toei is a foreign corporation resident of Japan based on its Articles of Incorporation, and on the information contained in the Commercial Register issued by the Tokyo Legal Affairs Bureau Nerima Branch in Japan on December 3, 2010, and on the Certificate of Status of Taxable Person issued by the Nerima-Nishi Tax Office in Japan on December 13, 2010. Toei is situated at 2-10-5, Higashi Oizumi, Nerima-ku, Tokyo, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 15, 2010. On the other hand, Toei Philippines is a domestic corporation situated at 9th Floor, Cyber One Building, Eastwood City Cyberpark, E. Rodriguez Jr. Avenue, Bagumbayan, Quezon City Philippines. It is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone IT enterprise under Certificate of Registration No. 01-012-IT issued on September 25, 2011. IHTASa On April 1, 2010, Toei Philippines and Toei entered into an Agreement where Toei agreed to lease machineries to Toei Philippines to be used by the latter in animation production from April 1, 2010 to January 31, 2014. In consideration, Toei Philippines will pay rental fees to Toei every month. The machineries and their corresponding rental fees are as follows. Machines Serial Rental Fee Period Total Number (In Yen) XW 5221927 235,300.00 April 2010- 3,529,500.00 Workstation June 2011 XW6200 5226934 590,900.00 April 2010- 8,863,500.00 Workstation June 2011 IMac 5232638 53,700.00 April 2010- 912,900.00 August 2011 XW4300 5244706 247,200.00 April 2010- 5,438,400.00 Workstation January 2012 HP XW4400 5254566 74,500.00 April 2010- 1,862,500.00 Workstation April 2012 Maya 5258210 149,300.00 April 2010- 5,822,700.00 Software June 2013 Upgrade Boujou Bullet 5260541 9,700.300 April 2010- 446,200.00 2.1 January 2014 XW4400 5262213 338,800.00 April 2010- 9,486,400.00 Workstation July 2012 XW4400 5270773 108,500.00 April 2010- 3,363,500.00 Workstation October 2012 HP XW4400 5275419 176,200.00 April 2010- 5,990,800.00 Workstation January 2013 HP XW4600 A052057 88,160.50 April 2010- 1,057,926.00 Workstation March 2011 (for IB) 33,060.25 April 2011- 396,723.00 March 2012 19,836.00 April 2012- 238,032.00 March 2013 HP XW4600 A052058 7,346.75 April 2010- 88,161.00 Workstation March 2011 (for SFX) 2,755.00 April 2011- 33,060.00 March 2012 1,652.92 April 2012- 19,835.04 March 2013 HP XW4600 A052062 210,272.00 April 2010- 2,523,264.00 Workstation March 2011 (for TP) 78,852.00 April 2011- 946,224.00 March 2012 47,311.17 April 2012- 567,734.04 March 2013 HPXW4600 A052064 234,999.00 April 2010- 2,819,988.00 Workstation March 2011 (for SFX) 88,124.67 April 2011- 1,057,496.04 March 2012 52,874.67 April 2012- 634,496.04 March 2013 Total 56,099,340.00 =========== The rental fee for a particular month will be billed by Toei within the first five days of the following month and Toei Philippines will pay the fee before the end of that month through telegraphic transfer to Toei's account at Sumitomo Mitsui Bank branch office in Oizumi, Tokyo, Japan. In reply thereto, please be informed that under Section 28 (B) (4) of the Tax Code, as amended, it is provided that rental fees paid to a foreign corporation not engaged in trade or business in the Philippines are subject to a lower tax of 7 1/2% percent, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation 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." TSAHIa Accordingly, since Toei is a foreign corporation not engaged in trade or business in the Philippines, the rental fees paid to it by Toei Philippines under the Agreement for the lease of machines used by Toei Philippines in animation production shall be subject to income tax at the rate of 7 1/2% percent pursuant to Section 28 (B) (4) of the Tax Code. With respect to value-added tax ("VAT"), such fees, being payments for the lease of property in the Philippines by a non-resident foreign person, are generally subject to VAT under Section 108 (A) of the Tax Code which provides, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of the gross receipts, derived from the sale or exchange of services, including the use or lease of properties. Provided, that the President, upon the recommendation of the Secretary of Finance, shall effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%). . ." However, since Toei Philippines, the payer, is registered with PEZA and entitled to fiscal incentives under Republic Act No. 7916, as amended, the Supreme Court, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) G.R. No. 153866 dated February 11, 2005 ,ruled that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person by the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubilex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. cTACIa Moreover, even though the VAT is not imposed in the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be assessed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." This being the case, since Toei is a nonresident lessor of property and a non-VAT registered taxpayer, the rental fees paid to it by Toei Philippines shall be exempt from VAT rather than subject to VAT at zero percent. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.