DA ITAD BIR Ruling No. 043-09

March 30, 2009 DA ITAD BIR RULING NO. 043-09 Articles 5, 7 and 12, Philippines-Singapore tax treaty Sections 32 and 108, Tax Code of 1997, as amended; BIR Ruling No. ITAD-24-00; BIR Ruling No. ITAD-182-00 Dainippon Ink & Chemicals (Philippines), Inc. No. 26 1st Avenue, Bo. Bagumbayan, Tanyag, Taguig, Metro Manila Attention: Mr. Yasuo Suzuki President Gentlemen : This refers to your application for relief from double taxation dated 15 March 2008, on the royalties and management fees paid to DIC ASIA PACIFIC PTE LTD. by DAINIPPON INK & CHEMICALS (PHILIPPINES), INC., pursuant to the provisions of the Philippines-Singapore tax treaty. 1 From the documents submitted, it is represented that DIC ASIA PACIFIC PTE LTD. (hereinafter referred to as 'DIC Asia Pacific' ) is a resident of Singapore for income tax purposes for the Year of Assessment 2008, as evidenced by a Certificate of Residence issued by the Assistant Commissioner, Corporate Tax Division for Comptroller of Income Tax, Inland Revenue Authority of Singapore, with principal office address at 78 Shenton Way #16-01, Singapore 079120; that DIC Asia Pacific is not registered either as a corporation or as a partnership in the Philippines as supported by the Certification of Non-Registration of Corporation/Partnership issued by the Philippines' Securities and Exchange Commission on 31 March 2008; that, on the other hand, DAINIPPON INK & CHEMICALS (PHILIPPINES), INC. (formerly 'Dicmark Chemicals Corporation' and hereinafter referred to as 'DIC Philippines' ) is a corporation duly organized and existing under the laws of the Philippines, with office address at No. 26 1st Avenue, Bo. Bagumbayan, Tanyag, Taguig, Metro Manila; Moreover, it is represented that on 01 April 2002, a Technical License Agreement (License Agreement) was entered into by and between DIC Asia Pacific Pte LD and Dicmark Chemicals Corporation (now, DIC Philippines ), whereby the former granted the latter a nonexclusive right to use technical information for the manufacture and sale certain products 2 in the Philippines; that in consideration for the right and license granted to DIC Philippines by DIC Asia Pacific under the License Agreement, DIC Philippines shall pay to DIC Asia Pacific the following running royalty: DHITSc a) One point five percent (1.5%) of Net Sales Value of News Inks sold during the term of this License Agreement; and b) Three percent (3.0%) of Net Sales Value of products other than news inks sold during the term of the License Agreement; that the License Agreement shall remain in force until 31 December 2004, unless either party notify the other party in writing six (6) months prior to the last date of the original term or any extension, the term of the License Agreement shall then be automatically extended for a further period of one (1) year each up to the total term of ten (10) years. It is further represented that on 01 July 2005, a Consulting Service Agreement (Service Agreement) was entered into by and between DIC Asia Pacific and DIC Philippines whereby DIC Philippines agrees to retain DIC Asia Pacific and the latter agrees to provide the former with the following consulting services subject to terms and conditions contained in the Service Agreement: a) To give training and advice to DIC Philippines' staff members in charge of logistics; b) To make suggestions and give guidance for DIC Philippines' logistic operation system and logistic management system and the betterment of such systems; c) To make suggestions and give guidance for DIC Philippines' operations of export and import, storage and delivery and the betterment of such operations; and d) To provide other services incidental to the abovementioned items. that in consideration of the services rendered by DIC Asia Pacific for DIC Philippines , DIC Philippines shall pay to DIC Asia Pacific a monthly fee of Singapore Dollars Nine Hundred Eighty-eight and Twenty-four cents (S$988.24); that the Service Agreement is effective 01 July 2005 and shall remain in force until 30 June 2006, unless earlier terminated; that the Service Agreement shall be automatically renewed for successive renewal period of one (1) year, unless either party provides the other with written notice of termination one (1) month prior to the expiration of the then-effective term. ITCcAD Finally, as supported by a submitted Certification issued by the President of DIC Philippines on 14 March 2008, it is represented that "there is no actual rendition of service performed by any representative of DIC Asia Pacific here in the Philippines and that transactions are being made through exchange of electronic mails and telephone conversations and consultations"; and that the transactions subject of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. In reply, please be informed that business profits and royalty income derived by a nonresident foreign corporation are generally governed by Section 28, paragraph B, sub-paragraph 1 of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended by Republic Act No. 9337. It provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." xxx xxx xxx However, Section 32 (B) (5) of the same Tax Code provides as follows, to wit: "SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: 3 aSECAD xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." As to royalty income Accordingly, as to the royalties paid to DIC Asia Pacific by DIC Philippines , the provisions of the Philippines-Singapore tax treaty apply. Its Article 12 provides: "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. (Emphasis supplied) Based on the above provision, royalties derived in the Philippines by a resident of Singapore shall be taxed at a rate not exceeding 15 percent, if the payee domestic corporation is an enterprise registered with the Board of Investments (BOI) engaged in preferred areas of activities, or if the royalties are paid in respect of cinematographic films or tapes for television or broadcasting; exempt from tax if royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore; and not exceeding 25 percent of the gross amount of the royalties, in all other cases. HAIaEc The royalty payment of DIC Philippines to DIC Asia Pacific neither qualifies for the 15% preferential rate since DIC Philippines is not BOI-registered, nor does it qualify to be exempt from tax under the provisions of the above tax treaty. Hence, the 25% preferential tax on the gross amount of the royalties applies. It is important to note, however, that under Section 108 of the Tax Code of 1997, as amended, royalty payments are subject to the twelve percent (12%) value-added tax (VAT). It provides: "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 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, raise the rate of value-added tax to twelve percent (12%), 4 after any of the following conditions has been satisfied: xxx xxx xxx The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" In connection thereto, Sec. 4.108-3 (a) of Revenue Regulations No. 16-2005 dated September 1, 2005 should also be taken into consideration. It provides: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner in the manner prescribed in Sec. 4.114-2(b) hereof." EIDTAa In view thereof, this Office is of the opinion and so holds that the royalties paid by DIC Philippines to DIC Asia Pacific under the subject Technical License Agreement is subject to tax at a preferential rate of 25% of the gross amount of the royalties, pursuant to the Philippines-Singapore tax treaty, and to VAT at 12% of the gross amount thereof, pursuant to Section 108 (A) (1) of the Tax Code 1997, as amended. (BIR Ruling No. ITAD-24-00 dated 28 January 2000) With regard to the procedures for withholding and paying the VAT, DIC Philippines , being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such royalties before making any payment to DIC Asia Pacific . In remitting the VAT withheld, DIC Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from DIC Philippines if a VAT-registered taxpayer. If non-VAT-registered, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, DIC Philippines is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for DIC Asia Pacific and the fourth copy for DIC Philippines' file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) As to income from management fees On the other hand, as to the income derived by DIC Asia Pacific from the management fees paid to it by DIC Philippines, Articles 7 and 5 of the same Philippines-Singapore tax treaty provide: "Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. aHSAIT 2. The term "permanent establishment" includes specially but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." Based on the foregoing, business profits arising from the Philippines and paid to a resident of Singapore shall be taxed in Singapore unless it has a fixed place of business in the Philippines, or, where the rendition of services by its employees in the Philippines continue for a period or periods aggregating more than 183 days. In the instant case, there is no showing that DIC Asia Pacific has a fixed place of business in the Philippines. Moreover, a certification is submitted to the effect that no actual service was performed in the Philippines by any representatives of DIC Asia Pacific. Such being the case, no permanent establishment of DIC Asia Pacific in the Philippines is deemed constituted. aEIADT In view of the foregoing, this Office is of the opinion and so holds that the profits of DIC Asia Pacific derived from the management fees it receives from DIC Philippines under the subject Service Agreement is not subject to income tax, pursuant to Article 7, in relation to Article 5 of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-182-00 dated 06 December 2000) This ruling is issued on the basis of the foregoing 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. Formally known as the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ESCcaT 2. 1) Offset Inks Sheetfed Inks Conventional Waterless Radiation Curable Web Offset Inks Conventional Waterless 2) News Inks 3) Varnishes for Offset Inks (using hard resins as a raw material) 4) Gravure Inks and Reducers 5) Flexo Inks including Water-based Flexo Inks for corrugated board 6) Overprint Varnish and Coatings: Conventional Solvent and Water-based Radiation Curable 7) Adhesives for Flexible Packaging 8) Special Coatings for Flexible Packaging 9) Screen Inks 10) Other special Inks and Printing Accessory Solutions. aCITEH 3. TITLE II TAX ON INCOME. 4. The VAT rate was increased to 12% on 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.