DA ITAD BIR Ruling No. 062-08

August 29, 2008 DA ITAD BIR RULING NO. 062-08 Art. 12 of the Philippines-France tax treaty; BIR Ruling No. DA-ITAD-92-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: L.P. Ferrer Partner, Tax Services Gentlemen : This refers to your letter dated 15 January 2007, which was filed on behalf of your client, L'Oreal Philippines, Inc., (L'Oreal Phil.), requesting confirmation of your opinion that the royalty payments made by L'Oreal Phil. to its French licensor, L'Oreal (L'Oreal France), are subject to the preferential final withholding tax rate of 15% pursuant to Article 12 (2) of the Convention between the Government of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-France tax treaty), as amended by the Protocol thereto. HDCAaS It is represented that L'Oreal France is a non-resident corporation organized and existing under the laws of France, with principal address at 14 rue Royale, 75008 Paris, France; 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 1 August 2006; and that L'Oreal Phil. is a domestic corporation with principal address at 23rd Flr., Robinson's Equitable Tower, No. 4 ADB Ave., Ortigas Center, Pasig City, whose primary purpose is to engage in, conduct, and carry on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description; to enter into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial. It is further represented that on July 30, 2002, L'Oreal Phil. and L'Oreal France has executed a License Agreement wherein L'Oreal Phil. was granted an exclusive right and license to exploit L'Oreal France Licensed Products 1 the Philippines; that the said license is limited to: 1. the exclusive right to manufacture the licensed products to be marketed in the Philippines, therefore to use: a) the Technology and b) the Licensed Trademarks as well as 2. the exclusive right to import and distribute and sell the licensed products in the Philippines, and exceptionally outside the Philippines to L'Oreal France's subsidiaries who have specific short-term needs. L'Oreal Phil. may also distribute the licensed products in other territories except in countries where exclusive right to exploit the licensed patents. that the right to manufacture the licensed products according to the technology includes the exclusive right to exploit the licensed patents; that pursuant to the Agreement, L'Oreal Phil. pays L'Oreal France a monthly royalty fee at the rate of five percent (5%) for the right to use the technology and one percent (1%) for the right to use the licensed trademarks and the designs based on the total net sales of licensed products; that the Agreement is effective as from 1 January 2000, and shall continue until 31 December 2002; that after the latter date, the Agreement shall be tacitly renewed for successive periods of one year each, unless either party objects to such renewal by registered letter sent to the other party at least six months prior to the expiration of the then current period; and that the transaction subject of the 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337, provides as follows, viz. : IAETDc "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporations. (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 ( i.e. , TITLE II-TAX ON INCOME): 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 provisions of the Philippines-France tax treaty are being invoked. Article 12 of this, as amended by its Protocol, provides as follows, viz. : "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 be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15 percent of the gross amount of the royalties. aTCADc xxx xxx xxx 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 and works recorded for broadcasting or television, 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" Such being the case, this Office is of the opinion and so holds that the royalty payments by L'Oreal to L'Oreal France are subject to the preferential tax rate of 15 percent pursuant to Article 12 (2) of the Philippines-France tax treaty. (BIR Ruling No. DA-ITAD-92-02 dated May 16, 2007) Furthermore, the fees paid by L'Oreal Phil are subject to the 10% 2 value-added tax (VAT) pursuant to Section 108 of the tax Code of 1997, as amended by Republic Act No. 9337. Accordingly, L'Oreal Phil, being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of L'Oreal France by filing a separate VAT return for and on behalf of L'Oreal France 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 L'Oreal Phil, if it is a VAT-registered taxpayer. In case L'Oreal Phil. is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, L'Oreal 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 L'Oreal France upon its request, and the fourth copy to be retained by L'Oreal 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. Licensed Products shall mean cosmetic, hygiene and toiletry products manufactured in accordance with the Technology (as hereafter defined) and that the parties have agreed to market in the Territory under the Licensed Trademarks. 2. Effective February 1, 2006 rate is 12%.