DA ITAD BIR Ruling No. 060-09

May 28, 2009 DA ITAD BIR RULING NO. 060-09 Article 12, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-082-06 Mitsuba Philippines Corporation Lot 1, Block 14, Phase II First Cavite Industrial Estate Brgy. Langkaan, Dasmarias, Cavite Attention: Ms. Marlene L. Besa AM-Accounting & Finance Gentlemen : This refers to your letter dated August 1, 2006, requesting the availment of the 25% preferential tax rate for royalty payments made by Mitsuba Philippines Corporation (Mitsuba Philippines) to Mitsuba Corporation Japan (Mitsuba Japan), pursuant to Article 12 of the Philippines-Japan tax treaty. It is represented that Mitsuba Japan, with office address at 1-2681 Hirosawa Cho, Kiryu City, Gunma 376, Japan, is a registered taxable person, with Tax Reference No. 620157, for purposes of the Philippines-Japan tax treaty, as certified by the District Director of Tax Office on June 2, 2006; 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 June 13, 2006; that Mitsuba Philippines is a domestic corporation registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise with Registration Certificate No. 96-107 dated January 1998, with office address at Lot 1, Block 14, Phase II, First Cavite Industrial Estate, Brgy. Langkaan, Dasmarias Cavite 4126, Philippines. It is further represented that Mitsuba Philippines and Mitsuba Japan are engaged in the manufacture and sale of electric products for two wheels motor vehicle and/or automobile components; that Mitsuba Japan possesses valuable technical information of the design, manufacture and use of Licensed Products; that on January 1, 2002 and June 22, 2006, Mitsuba Philippines and Mitsuba Japan entered into a Technical Assistance Agreement 1 concerning the grant by Mitsuba Japan to Mitsuba Philippines of an indivisible, non-transferable and non-exclusive right to manufacture, assemble and sell "Licensed Products" 2 with "Know-How" 3 and "IPR" 4 in the "Territory"; 5 and that the issue/s or transaction subject of the above request for ruling is 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 taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997 as amended, applies to royalty income of non-resident foreign corporations, in general. It provides: "Section 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%). SIcEHD xxx xxx xxx However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 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: 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. xxx xxx xxx" In accordance with the foregoing, Article 12 of the Philippines-Japan tax treaty provides as follows: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 25 percent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. 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 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 equipment, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the above provision, royalty payments will be taxed at a preferential rate of ten percent (10%) if the payor is a BOI-registered enterprise and engaged in preferred areas of investment under the investment incentives laws of the Philippines; fifteen percent (15%) if the royalty payments are in respect of the use of or right to use cinematograph films and films or tapes for radio or television broadcasting; and in all other cases, twenty-five (25%) of the gross amount of the royalties. AEcTCD Considering that Mitsuba Philippines is not a BOI-registered enterprise engaged in preferred pioneer areas of investment and that the subject royalties are not payments in respect of the use or right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the said payments by Mitsuba Philippines to Mitsuba Japan under the Technical Assistance Agreement are royalty payments in consideration for information concerning industrial, commercial or scientific experience which are subject to the preferential tax rate of 25% of the gross amount thereof, pursuant to Article 12 (2) (b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-82-06 dated July 28, 2006) As regards the imposition of VAT on royalties, Section 106 of the Tax Code of 1997, provides that: "SEC. 106. 6 Value-added Tax on Sale of Goods or Properties. "(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. "(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: xxx xxx xxx "(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz. : "Special laws may certainly exempt transactions from the VAT. 7 However, the Tax Code provides that those falling under P.D. 66 are not. P.D. 66 is the precursor of R.A. 7916 the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. xxx xxx xxx Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both P.D. 66 and R.A. 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the national territory except specifically declared areas to an ecozone. xxx xxx xxx Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. ETHCDS 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 but 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. Ubi lex 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: . . ., R.A. 7916 states that 'no taxes, local and national, shall be imposed on business establishments 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. Moreover, even though the VAT is not imposed on 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 R.A. 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly. xxx xxx xxx" Based on the foregoing, transactions exempt from VAT by reason of P.D. 66 and R.A. 7916 are effectively zero-rated. However, instead of zero-rating which is not available to non-resident suppliers, the provision for exempt transactions under Section 109 (q) (now Section 109 (K)] of the Tax Code of 1997 which provides VAT exemption for transactions that are exempt under specials laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly applicable to the instant case. Such being the case, the royalty payment of Mitsuba Philippines, being a PEZA-registered enterprise, to Mitsuba Japan under the subject Agreement is hereby confirmed to be, exempt from VAT. 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. Amended on June 22, 2006. 2. "Licensed Products" means the products including the spare/repair/replacement parts for both motorcycles and automobile vehicles defined as per Annex I of the Technical Assistance Agreement. 3. "Know-How" means following technical informations and data with respect to "Licensed Products", and other materials and documents which "MCJ" admit necessary to "MPC" for manufacture, quality control, sales and purchasing. 4. "IPR" is abbreviation of Intellectual and Industrial Property Rights, which means any and all patents, trademark, designs, copyright, and any other legally intellectual and industrial property rights relating to Licensed Products, which "MJC" now or shall hereafter possess and with respect to which "MJC" is now or shall hereafter be entitled to grant licenses to "MPC". 5. "Territory" shall mean Philippine and other countries which may be determined by mutual written agreement between both parties hereto in the future. SCIcTD 6. Amended by Republic Act No. 9331, effective November 1, 2005. 7. Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section 109 (K), as amended by R.A. No. 9337].