DA ITAD BIR Ruling No. 075-08

October 29, 2008 DA ITAD BIR RULING NO. 075-08 Article 10; RP-United Kingdom Tax Treaty; BIR Ruling No. 286-82; BIR Ruling No. DA-ITAD-013-97 Punongbayan & Araullo 20TH Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue 1220 Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated December 10, 2007 requesting confirmation that (1) payments of royalties to Castrol Ltd. (Castrol) by BP Philippines, Inc. (BPPI) arising from a Lubricant Intellectual Property and Technology Licence Agreement is subject to the 25% preferential treaty rate and (2) dividends paid or to be paid by BPPI to Castrol are subject to the preferential tax rate of 15%, respectively, pursuant to Article XI (2) (b), and Article IX (1) (b), respectively of the Philippines-United Kingdom tax treaty. cEHITA It is represented that Castrol is a nonresident foreign corporation organized and existing under the laws of United Kingdom as confirmed by a Certificate of Residence dated October 1, 2007, issued by Mr. ID Hack, Oil Tax Inspector of the HM Revenue & Customs, with principal office address at Wakefield House, Pipers Way, Swindon, Wiltshire, SN3 1RE, United Kingdom; that Castrol is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on October 1, 2007; that Castrol is engaged in the research, development, manufacture, promotion, distribution and sale of lubricants and related services and ancillaries, and possesses certain valuable commercial and technical know-how relating thereto; that BPPI, formerly Burmah Castrol Philippines, Inc. is a corporation duly organized and existing under the laws of the Philippines with principal address located at 30th Floor, LKG Tower, 6801 Ayala Avenue, Makati City. It is further represented that on December 23, 2004, BPPI and Castrol entered into a Lubricant Intellectual Property and Technology License Agreement whereby Castrol grants BPPI the following: a. Grant of License: An exclusive, 1 non-transferable licence to use the intellectual property rights 2 in connection with the use, manufacture, promotion, distribution, provision and sale of the exclusive products in the territory; 3 b. Provision of know-how and technical assistance Castrol shall disclose to BPPI such Know-how 4 as shall be necessary to enable BPPI to use, manufacture, promote, distribute, provide and sell the exclusive products 5 and the non exclusive products in the territory. c. Undertaking to Procure Castrol shall, where necessary, use its best endeavor to procure from one or a number of associated companies, 6 a further licence to the benefit of BPPI, to use certain other registered trade marks, trade names, services marks, service names, patents, registered designs or design rights as deemed appropriate by Castrol for the purpose of the use, manufacture, promotion, distribution, provision and sale of the exclusive products and non-exclusive products covered by this agreement in the territory. HCDAac that in consideration thereof, BPPI shall pay Castrol the royalty calculated as a percentage of the net sales value as follows: Products Royalty Rates Castrol Products 5% of the net sales value BP Products 3% of the net sales value Industrial Products 1.75% of the net sales value Marine Products 0.5% of the net sales value Veedol Products 5% of the net sales value Duckham Products 3% of the net sales value that the Agreement is deemed to commence on the Effective Date 7 and subject as hereinafter provided shall continue for an initial period of five (5) years and shall continue thereafter unless terminated by either party giving to the other not less than three (3) months notice of termination in writing; that the Agreement shall terminate automatically in the event that the License shall cease to be an associated company. It is also represented that as of December 31, 2007, Castrol owns 99.99% of the issued shares of BPPI based on corporate records as of December 31, 2007 as evidenced by Secretary's Certificate dated December 31, 2007; that during the Special Meeting held December 21, 2007, the Board of Directors of BPPI declared cash dividend in the amount of One Hundred Forty Million Pesos (P140,000,000.00) corresponding to One Million Fifty Thousand (1,050,000) issued and outstanding shares out of the surplus profits of BPPI to be distributed to the stockholders of record as of December 31, 2007, in proportion to their respective shareholdings as evidenced by BPPI Secretary's Certificate dated December 31, 2007 as follows: Name of No. of Shares at Subscribed Capital Paid Up Capital Stockholder P100 par (PhP) (PhP) value/share Castrol Ltd. (British) 1,049,995 104,999,500 104,999,500 Marcelo F. Sota Jr. 1 100 100 Ernie G. Gutierrez 1 100 100 Hue Siew Meng 1 100 100 Pauline Lim 1 100 100 Rosemarie M. 1 100 100 Sicangtco TOTAL 1,050,000 105,000,000 105,000,000 ========= ========= ========= and that the issues or transaction subject of the instant 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. TAcDHS In reply, please be informed that as regards royalties and dividend income of nonresident foreign corporations Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies 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 interest, dividends, rents, royalties, . . .: 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 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. DaCTcA xxx xxx xxx" On Royalties In relation to Section 32 (B) (5) of the Tax Code of 1997, Article 11 of the Philippines-United Kingdom tax treaty may be applied to the royalty payments by BPPI to Castrol. It provides: "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. 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 cases, 25 percent 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 equipment, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Articles 7 or 13, as the case may be, shall apply. cETDIA xxx xxx xxx" This means that in order for Castrol to claim the 25% preferential tax rate, the following requisites must be proven to occur: 1. Castrol is resident of the United Kingdom; 2. Castrol is not carrying on trade or business in the Philippines through a permanent establishment situated in the Philippines; 3. BPPI is not registered with the Philippine Board of Investments and engaged in preferred areas of activity; 4. BPPI is not receiving royalty payments in respect of cinematograph films or tapes for television or radio broadcasting. Based on the representations herein, it appears that all four requisites are present and that Castrol is entitled to avail the 25% preferential tax rate on royalties provided under Article 11 (2) b of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 286-82 dated October 20, 1982) Moreover, as provided in Section 108 of the National Internal Revenue Code of 1997, the said royalty payments are subject to value-added tax (VAT) as follows: "SEC. 108. 8 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%) 9 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (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" With regard to the procedures for withholding and paying the VAT, BPPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to Castrol. In remitting the VAT withheld, BPPI 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 BPPI if it is a VAT-registered taxpayer. In case BPPI is a non-VAT-registered taxpayer, 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, BPPI is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Castrol and the fourth copy for BPPI as its file copy. On Dividends Article 9 of the Philippines-United Kingdom tax treaty provides: "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. aCSDIc xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. xxx xxx xxx" Based on the foregoing, dividends paid to a company which is a resident of UK and which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding fifteen percent (15%) of the gross amount of dividends if the recipient is a company which owns at least ten percent (10%) of the voting power in the company paying the dividends, and a rate not exceeding twenty five percent (25%) of the gross amount of the dividends in all other cases. This being the case and since Castrol is a resident of United Kingdom owning 99.99% of the issued shares of BPPI, dividends paid by BPPI is subject to tax at the rate of 15%, based on the gross amount of dividends. (BIR Ruling No. 013-97 dated February 5, 1997) 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. "Exclusive" shall mean in respect of the right granted under the Lubricant Intellectual Property, and Technology Licence Agreement (this agreement) that the Licensor may not itself exercise that right. DCIAST 2. "Intellectual Property Rights" shall mean the trade marks, designs, patents, know-how, improvements and copyright together with any other intellectual property rights owned by the Licensor which are necessary to work this agreement. 3. "The Territory" shall mean the countries and territories specified in schedule 5 together with such other or others as may be agreed in writing between the parties from time to time. 4. "Know-how" shall mean any and all technical, commercial and or marketing information, advice, data, knowledge, drawings, information, recipes, specifications and other technology that is owned by the Licensor, or that the Licensor is at liberty to disclose to the licensee relating to or useful in connection with the exclusive products and the non-exclusive products, their use, manufacture, promotion, distribution, provision and sale. 5. "The Exclusive Products" shall mean the products and services referred to in schedule I.I thereto as amended from time to time by written agreement between the parties. 6. "Associated Companies" shall mean any company in which all or at least 50% of its equity share capital or, voting rights or assets upon liquidation is owned or controlled by BP p.l.c. 7. "Effective Date" shall mean the 1st day of January 2003. 8. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 And 288 of the National Internal Revenue Code of 1997, As Amended, and for Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base or 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 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. 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%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%). EHSADc xxx xxx xxx 9. 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.