ITAD BIR Ruling No. 007-14

January 17, 2014 ITAD BIR RULING NO. 007-14 Article 12 (Royalties), Philippines-Singapore tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty application ("TTRA") filed on June 28, 2013, requesting confirmation that royalties paid by Nalco Philippines, Inc. ("Nalco") to ECOLAB SG 2 PTE., LTD. ("ECOLAB") are subject to income tax at the rate of 25% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of Republic of Singapore with respect to Taxes on Income, ("Philippine-Singapore tax treaty"). It is represented that Ecolab is a corporation organized and existing under the laws of Singapore with principal address at 7 Fourth Lok Yang Road, Singapore and is a resident thereof within the meaning of Philippines-Singapore tax treaty based on a Certificate of Residence issued on February 28, 2013 by the Assistant Commissioner Corporate Tax Division for Comptroller of Income Tax; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated June 27, 2013; and that, on the other hand, Nalco is a corporation organized and existing under the laws of the Philippines with principal address at 21st Floor, Insular Life Building, Filinvest Corporate City, Alabang, Muntinlupa City. It is also represented that Ecolab entered into a Non-exclusive License Agreement (Agreement) with Nalco whereby Ecolab grants to Nalco the license to use all packaging, marketing strategies and other marketing information; and the license to make, use, sell, offer, import, perform, display, reproduce and distribute the Ecolab Products 1 within the Philippines. It is further agreed that, as part of the licenses granted, Ecolab shall provide Nalco with the necessary assistance to ensure Nalco's proper use of the licenses in the Philippines, including training of Nalco's personnel and technical assistance in developing Nalco's understanding of the Intellectual Property Rights granted under the Agreement; that in consideration for the licenses granted under this Agreement, Nalco shall pay royalty to Ecolab which is four and one-half percent (4.5%) of Nalco's net revenue; and that on September 25, 2013 Nalco, through the Bank of the Philippine Islands (BPI) Makati-Main Branch, paid Ecolab the amount of PHP3,258,289.16 per certification issued by BPI on October 4, 2013. HAICcD It is finally represented, per sworn statement issued by the Financial Controller of Nalco on June 24, 2013, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to royalties derived in the Philippines by a nonresident foreign corporation. It 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). (Emphasis supplied) xxx xxx xxx" However, said income derived by a nonresident foreign corporation may be exempt or partially exempt from income tax pursuant to a treaty obligation to which the Philippine government is bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as amended provides, viz. : "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." With respect to a treaty that may be invoked by Ecolab and other residents of Singapore, there is the Philippines-Singapore tax treaty. Article 12 of the said treaty provides: cCSHET 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 law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 per cent of the gross amount of the royalties. 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 or tapes for television or 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. Based on the above-quoted provisions, the Philippines may tax the royalties paid by a resident thereof to a company which is a resident of Singapore at a rate not exceeding 15 percent if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities and in respect of the use of or the right to use cinematographic films or tapes for radio and television broadcasting; and in all other cases, 25 percent of the gross amount of royalties. In view thereof and considering that the royalties paid by Nalco to Ecolab do not fall under paragraphs 2 (a) and 2 (b) of Article 12 of the Philippines-Singapore tax treaty but represent consideration for the non-exclusive use of trademarks, trade names, service marks, information concerning industrial commercial or scientific experience, whether of technical, manufacturing, marketing or other nature among others within the Philippines, this Office is of the opinion and so holds that such royalty fees are subject to 25 percent final withholding tax rate pursuant to Article 12 (2) (c) of the Philippines-Singapore tax treaty. SECAHa As regards the imposition of the VAT on royalties paid to Ecolab, please be informed further that Section 108 of the Tax Code of 1997, as amended, provides as follows: "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 the gross receipts derived from the sale or exchange of services, including the use or lease of properties: 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: xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . . . 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; (2) The supply of scientific, technical or commercial knowledge information; . . ." Accordingly, Nalco, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12 percent final VAT on such royalty before making any payment to Ecolab. In remitting the VAT withheld, Nalco shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Nalco upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Nalco is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, Nalco is required to issue the Certificate of Final Income Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Ecolab upon its request and the fourth copy to be retained by Nalco as its file copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07)]. This ruling is issued on the basis of the foregoing 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. STECDc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Article 1, Section 1.9 of the Agreement include water, hygiene, energy technologies, chemical compounds, products, equipment and process improvement technologies, as well as any related innovations that incorporate or are made in accordance with the Licensor Intellectual Property Rights, in whole or in part.