ITAD BIR Ruling No. 002-13

January 15, 2013 ITAD BIR RULING NO. 002-13 Article 12, Philippines-Korea tax treaty SGV & Co. 6750 Ayala Avenue 1226 Makati City Philippines Attention: Fidela I. Reyes Partner, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on October 6, 2011 requesting confirmation that the royalties paid by Creative Resto Concept, Inc. ("CRCI") to ET & Zeus, Inc. ("ET&Z") are subject to the 15 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . It is represented that ET&Z is a foreign corporation organized and existing under the laws of Korea with principal address at No. 401, Geumgwan, Seoul Auto Gallery, 217, Yangjae-dong, Seocho-gu, Seoul, Korea based on the Certification for Business Registration issued by the Head of Seocho District Tax Office dated September 5, 2011; that ET&Z is not registered as a corporation or partnership in the Philippines based on a Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on September 22, 2011; and that, on the other hand, CRCI is a domestic corporation situated at 3rd Floor, Technoluz Building, 2176 Primo Rivera Street, La Paz, Makati, Philippines. It is also represented that on May 3, 2011, ET&Z and CRCI entered into an International License Agreement (Agreement) whereby the former granted the latter an exclusive, non-transferable and non-sublicensible right, license, and privilege to use the System 1 and the Intellectual Property Rights 2 of ET&Z; that CRCI undertakes the obligation to develop and operate BB Restaurant and to use solely in connection therewith the Marks 3 and the System, as they may be changed, improved, and further developed from time to time, only at the Premises 4 within the Territory; 5 that the License granted herein is strictly for the sole purpose of developing and operating BB Restaurant and shall not be construed to give any rights, obligations and privilege beyond those specified in the Agreement; and that in consideration of the right, license and privilege granted by ET&Z, CRCI undertakes to pay the former a non-refundable royalty of 4.71 percent of BB Restaurant's Net Sales Revenue for each BB Restaurant on or before the 15th day following the end of each month. cEaCAH In reply, please be informed that the royalties to be paid to ET&Z, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997 , as amended, provides: "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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, such royalties may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: 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. IaAScD xxx xxx xxx" Thus, you invoked Article 12 (2) of the Philippines-Korea tax treaty which provides: "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 if such resident is the beneficial owner of the royalties. 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 recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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 right to use, any copyright of literary, artistic or scientific work, any patent, trademark, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting. . . ." cSIADH Based on the foregoing provisions, royalty payments to a non-resident Korean corporation may be taxed at a preferential tax rate of 10 percent if the payor is registered with the Board of Investments (BOI) and engaged in preferred pioneer areas of investment, and 15 percent of the gross amount of royalties in all other cases. Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010, published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO. " (Emphasis Supplied) In view thereof, this Office hereby DENIES relief on all royalty payments under the Agreement made on or before October 6, 2011 in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the payment of royalties. Accordingly, said payments shall be subject to tax at the rate provided for in Section 28 of the above-cited Tax Code of 1997, as amended. caHIAS However, relief is hereby GRANTED to all payments made after October 6, 2011 . Hence, such royalties to be paid by CRCI to ET&Z pursuant to the Agreement, being essentially royalties for the use or the right to use the know-how of ET&Z are subject to the income tax at the preferential rate of 15 percent of the gross amount thereof, pursuant to the same tax treaty. Finally, as regards value-added tax (VAT), the royalties to be paid by CRCI to ET&Z are subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997, as amended, to wit: "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. . . . The phrase 'sale or exchange of services' shall likewise include: (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; . . ." With regard to the procedures for the withholding and payment of the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that CRCI shall be responsible for the withholding of the VAT on the royalties before remitting them to ET&Z. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, CRCI shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and 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 CRCI if it is a VAT-registered taxpayer. In case CRCI 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, CRCI is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for ET&Z and the fourth copy for CRCI as its file copy. CHEIcS 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "System" shall mean the policies and procedures, Confidential Information and a distinctive and comprehensive system, which includes menu, food preparation, business formats, methods, designs, decorations, layouts and color scheme, equipment, furnishings and materials, manual, signage, standards, rules and all other specifications for the promotion, operation, and identification of BB restaurants developed and provided by ET&Z in order to maintain high and consistent quality that is critical to attracting and keeping customers for BB Restaurants, as the foregoing may be further developed by ET&Z. 2. "International Property Rights" shall mean the Marks and any and all rights and interests pertaining to or arising from technologies, technical information, know-how, patents, patent applications, invention, copyrights, software, trade secrets, design, trademarks, service marks, trade and business names, logos and any other similar proprietary rights constituting an element of the System, owned, authorized to be used by or available to ET&Z. 3. "Marks" shall mean the trademarks, service marks, other commercial symbols, character, domain names, and/or other properties now and/or in the future owned by, or licensed to Licensor and which Licensor designate, from time to time, to be used to identify the services and/or products offered by BB Restaurants. 4. "Premises" shall mean wide variety of Korean-style food and certain other products including but not limited to the interior materials for operation the BB Restaurant, which are provided to Licensee or specified by Licensor under this Agreement. 5. "Territory" shall mean the geographical limits of the Great Manila Area, the Republic of the Philippines.