DA ITAD BIR Ruling No. 103-07

October 24, 2007 DA ITAD BIR RULING NO. 103-07 Article 13 Philippines-United Tax Treaty; Article 12 Philippines-China Tax Treaty; Section 108 National Internal Revenue Code of 1997; BIR Ruling No. DA-ITAD-163-05 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati, Philippines Attention: Tranquil G. Salvador III and Jayson L. Fernandez Gentlemen : This refers to your letter dated February 28, 2007 on behalf of your client Coors Global Properties, Inc . (hereinafter referred to as "CGPI") requesting confirmation that the royalties to be paid by Asia Brewery, Inc . (hereinafter referred to as "ABI") to CGPI pursuant to their Exclusive Manufacturing and Distribution Licensing Agreement are subject to a withholding tax rate of ten percent (10%) pursuant to the "most favored-nation" clause of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (hereinafter referred to as the "Philippines-United States tax treaty") in relation to the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to the Taxes on Income (hereinafter referred to as the "Philippines-China tax treaty"). It is represented that CGPI is a corporation organized and existing under the laws of the State of Colorado, United States of America with principal office address at Union tower, Suite 170, 165 South Union Blvd., Lakewood Colorado 80228 as supported by the Articles of Amendment to Articles of Incorporation certified as filed with the Colorado Secretary of State on January 14, 2003 by Patti Zenk Beacom, General Counsel for Coors Global Properties, Inc.; that CGPI 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 Securities and Exchange Commission on February 14, 2007; that ABI is a corporation organized and existing under the laws of the Philippines with principal office at Allied Banking Center, Ayala Avenue, Makati City. It is further represented that CGPI and ABI entered into an Exclusive Manufacturing and Distribution Licensing Agreement (hereinafter referred to as "Agreement") whereby CGPI grants to ABI a license to produce, package, distribute and sell Coors Light and Coors Banquet (hereinafter referred to as "Products") in the form of cans and bottles in the Philippines; that in consideration for the grant of license, ABI shall pay to CGPI quarterly royalty fee per hectoliter of the Products produced by ABI; and, that the Agreement shall be effective November 16, 2006 for an initial term of ten (10) years unless terminated at an earlier date pursuant to the provisions of the Agreement; that the Agreement was registered with the Philippine Intellectual Property Office on December 15, 2006 under Certificate of Compliance No. 5-2006-00116; and that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. DASCIc In reply, please be informed that Article 13 of the Philippines-United States tax treaty provide: "Article 13 ROYALTIES (1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. (2) However, the tax imposed by the Contracting State shall not exceed (a) In the case of the United States, 15 percent of the gross amount of the royalties, and (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered by the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. (3) The term "royalties" as used in this articles 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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." Pursuant to the "most-favored-nation" clause in Article 13 (2) (b) (iii) of the Philippines-United States tax treaty, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. In this light, Article 12 of the Philippines-China tax treaty provides, 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 also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: IaSCTE a) 15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. 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 cinematography films, or 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" Under Article 12 (2) (b) of the Philippines-China tax treaty, a tax rate not exceeding 10 percent of the gross amount is charged on royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals , G.R. No. 127105, promulgated on June 25, 1999, the Supreme Court interpreted the "most-favored-nation" clause, particularly the phrase "paid under similar circumstances", as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. [BIR Ruling No. DA-ITAD-52-03 dated April 8, 2003] In this regard, Article 23 of the Philippines-United States tax treaty provides, viz : "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall avoided in the following manner: In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . ." ESTAIH On the other hand, Article 23 of the Philippines-China tax treaty provides, viz : "Article 23 METHODS FOR THE ELIMINATION OF DOUBLE TAXATION 1. In China, double taxation shall be eliminated as follows: Where a resident of China derives income from the Philippines the amount of tax on that income payable in the Philippines in accordance with the provisions of this Agreement, may be credited against the Chinese tax imposed on that resident. The amount of the credit, however, shall not exceed the amount of the Chinese tax on that income computed in accordance with the taxation laws and regulations of China. xxx xxx xxx" Article 23 of the Philippines-United States tax treaty and Article 23 of the Philippines-China tax treaty, through differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of the United States and China is paid under similar circumstances, i.e ., the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. United States residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, . . . , or for information concerning industrial, commercial or scientific experience" under the Philippines-China tax treaty, pursuant to the "most-favored-nation" clause of the Philippines-United States tax treaty. Such being the case, this Office is of the opinion and so holds that the royalty payments of ABI to CGPI under the subject Agreement are subject to final withholding tax at the rate of 10% pursuant to the "most-favored-nation" provision of the Philippines-United States tax treaty in relation to the Philippines-China tax treaty. [Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002; BIR Ruling No. DA-ITAD-101-03 dated July 24, 2003] Accordingly, ABI shall deduct and withhold the tax at the time the royalty income payment is paid or payable, or the income payment is accrued or recorded as an expense or as an asset, whichever is applicable, and whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable, or legally enforceable. [ Section 4 Time of Withholding, Revenue Regulations No. 12-2002; BIR Ruling No. DA-ITAD-163-05 dated December 20, 2005 ] 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): "Sec. 108. 1 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%) 2 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; DHaECI xxx xxx xxx" With regard to the procedures for withholding and paying the VAT, ABI, 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 CGPI. In remitting the VAT withheld, ABI 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 ABI if it is a VAT-registered taxpayer. In case ABI 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, ABI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for CGPI and the fourth copy for ABI as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. AaDSTH Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. 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, read as: "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 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 transferee: 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: HTIEaS (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%). xxx xxx xxx 2. 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.