DA ITAD BIR Ruling No. 049-08

July 9, 2008 DA ITAD BIR RULING NO. 049-08 Article 11 of the Philippines-United Kingdom of Great Britain tax treaty; BIR Ruling No. 046-80; BIR Ruling No. 126-98 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated 9 January 2007 which was filed on behalf of Associated British Foods plc. (AB-UK), requesting confirmation of your opinion that the payments of royalty by AB Food and Beverages Philippines, Incorporated (AB Phil.) to AB-UK are subject to (1) the preferential tax rate of 25% pursuant to Article 11 (2) (b) of the Philippines-United Kingdom of Great Britain tax treaty, 1 and (2) to Value-added Tax (VAT) pursuant to Section 108 of the National Internal Revenue Code of 1997, as amended (Tax Code of 1997). It is represented that AB-UK is a foreign corporation duly organized and existing under the laws of the United Kingdom, with office address at Weston Center, 10 Grosvenor St., London 4QY; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated 28 April 2006; that AB-Phil. is a domestic corporation principally engaged in manufacturing, canning, packing, and trading businesses, with business address at 105 E. Rodriguez Jr. Avenue Pasig City, Metro Manila; and that it is registered with this Bureau a VAT taxpayer. It is further represented that on January 1, 2003, AB-UK and AB-Phil. entered into a Trademark and Know-how License Agreement (Agreement) wherein AB-UK grants AB-Phil. an exclusive royalty-bearing right to manufacture the products identified with the Trademarks (herein referred to as the "Products") or have the Products manufactured by a third party in accordance with the formulae, manufacturing procedures, quality standards and quality control methods (herein referred together as "Know-how") owned by AB-UK and to market and sell them in the Territory (Philippines) by using the Trademarks; that the said Agreement was subsequently amended 2 to include Indonesia (as an additional Territory) and to expand the coverage of the Trademarks (registered in Taiwan) owned by AB-UK, and Trademarks (registered in Taiwan) owned by a certain R. Twining and Co., Ltd., namely: "Twinings" with registration number no. T155639, and "Twinings Twinings in Chinese" with registration no. T475411; that during the term of the Agreement, AB-Phil. shall pay AB-UK for the Trademark, Know-how licenses and benefits granted in accordance with the Agreement, a royalty of 5% (five percent) on the net sales achieved with the sale of all Products using the Trademarks; that the said Agreement shall remain in force for a five (5)-year period and shall automatically be renewed for the same period, unless terminated at any time by either party giving to other party at least six (6) months prior written notice of its intention to terminate; and that the transaction subject of this request for ruling is not subject of an investigation, audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. CacISA In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337 (Tax Code of 1997, as amended), provides as follows, viz.: "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 . . . royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". However, Section 32 (B) (5) of the same 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 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". In this particular case, the treaty being invoked is the Philippines-United Kingdom tax treaty which, in its Article 11, provides as follows, viz.: "Article 11 ROYALTIES 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. HDTSIE 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. (b) in all other case, 25 per cent of the gross amount of the royalties. 3. The term 'royalties' as used in this Article means payment 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 cinematograph films, and films or tapes for radio or television 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 experience. xxx xxx xxx" Based on the above provision, royalties paid to, and beneficially owned by, a resident of the United Kingdom 4 will be taxed at a preferential rate of 15%, if the payor is a BOI-registered enterprise and engaged in preferred areas of investments and if it is paid in respect of cinematograph films or tapes for television or radio broadcasting, and in all other cases, 25% of the gross amount of the royalties. Considering that AB-UK is a resident of United Kingdom and that AB-Phil. is not a BOI-registered enterprise engaged in pioneer areas of investment, and that the royalties paid are not in respect of cinematograph films or tapes for television or radio broadcasting, the royalties which are beneficially owned by AB-UK are subject to the preferential tax rate of 25% of the gross amount of the royalties pursuant to Article 11 (2) (b) of the Philippines-United Kingdom of Great Britain tax treaty. (BIR Ruling No. 046-80 dated May 8, 1980) cAHDES It should be emphasized however, that royalties pertaining to Trademarks (registered in Taiwan) owned by R. Twining and Co., Ltd., namely: "Twinings" with registration no. T155639, and "Twinings Twinings in Chinese" with registration no. T475411 which are owned by R. Twining and Co., Ltd., are subject to the regular income tax rate of 35% under Section 28 (B) (1) of the Tax Code of 1997, as amended. (BIR Ruling No. 126-98 dated September 8, 1998) Furthermore, the royalty fees paid by AB-Phil. are subject to the 10% 5 value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337. Accordingly, AB-Phil, being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of AB-UK by filing a separate VAT return for and on behalf of the AB-UK using BIR Form No. 1600 (Monthly Remittance Return of Value-Added tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from AB-Phil, if it is a VAT-registered taxpayer. In addition, AB-Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to AB-UK upon its request, and the fourth copy to be retained by AB-Phil as its file copy. [Section 4.110-3 (b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2 (b), RR No. 16-05); Section 4.114 (D), RR No. 2-98, as last amended by RR No. 28-03] 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, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Formally known as the CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS. HScAEC 2. Denominated as "TRADEMARK AND KNOW HOW LICENSE AGREEMENT Amendment-Additional Territory. 3. TITLE II TAX ON INCOME. 4. A resident of the United Kingdom is "any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other similar criterion of a similar nature. " (Article 4, Philippines-United Kingdom tax treaty) 5. Effective February 1, 2006, the rate is increased to 12%.